The European Central Bank (ECB) has responded to the European Commission’s proposals to delay and reduce sustainability standards, saying the proposals must be amended to avoid economic instability and reduction of the investment needed for EU competitiveness.
The opinion said the ECB supports the Competitiveness Compass for the EU which “sets out a concrete roadmap to support European innovation, decarbonisation and economic security.” Progress in key areas, such as developing a Savings and Investment Union and lowering barriers to the Single Market, the ECB said, is essential to this competitiveness. But the sustainability guidelines are essential to making these other plans work.
For example, the Clean Industrial Deal will require substantial investments in clean technologies, renewable energy and energy-efficient infrastructures, as well as designing incentives to support energy-intensive industries in their climate transition pathway. Without sustainability reporting it’s difficult for investors and financial institutions to put their money into such projects with confidence.
‘In particular, the availability of harmonised, standardised and reliable sustainability information contributes to the (Savings and Investment Unit) SIU’s objectives by ensuring that investors have access to sound data to inform their investment decisions. This is essential to facilitate the allocation of capital to the most rewarding projects across the Union.”
The ECB said reducing the scope of reporting under Corporate Sustainability Reporting Directive has several potential negative impacts. One is that financial stability requires consistent and comparable information, from a sufficiently broad set of firms, to understand the exposure of firms across different sectors to sustainability-related risks to accurately assess the financial risks arising from the climate and nature crises. Since 2022, ECB has had several measures aimed at incorporating climate into its monetary policy operations that depend on the sustainability framework.
“The absence of sustainability information… could give rise to systemic risks that threaten financial stability. Issues with the availability, quality and granularity of environmental, social and governance (ESG) data, as well as the lack of comparability and transparency of such data, remain a major challenge, not only for investors but also for credit and financial institutions and public authorities.”
The ECB estimates that the proposed reduction in the scope of the CSRD would mean one in eight significant institutions, and the majority of less significant institutions, no longer having sustainability requirements. This would so reduce ESG information from the banking sector it would make it difficult to guarantee comprehensive transparency to financial markets. “It is worth noting that ESG risks are not necessarily proportionate to an institution’s size.”
“Some organizations that currently report under the Non- Financial Reporting Directive’ (NFRD)—which includes organizations with 500 or more employees–will no longer have sustainability requirements,” the ECB noted. Instead, ECB suggests that they create a tier for undertakings of between 500-1,000 employees that would be subject to dedicated set of simplified sustainability reporting standards better suited to the complexity of their activities.
The ECB added, however that all “significant institutions” should be subject to sustainability reporting, even those with fewer than 500 employees. For example, all credit institutions that are significant institutions, regardless of their size, should be subject to the sustainability reporting requirements set out in that Directive.
The ECB also proposed that EC should preserve turnover thresholds with respect to third-country businesses. Otherwise, the data gaps that would ensue would create uncertainty for financial institutions’ risk management and create inequity for EU organizations that have to report.
