2025 has started with a bang. After the dramatic events of last November, we all knew it was coming. But even so, few were prepared for the scale of the disruption set in motion by a shift in the political landscape. The future is now highly uncertain for a widely admired and copied policy initiative aimed at accelerating the shift to a sustainable, low-emission economy.
No, I’m not talking about US President Donald Trump’s blizzard of Inauguration Day executive orders, focused on boosting fossil fuel production and kneecapping the Inflation Reduction Act – estimated as pumping as much as US$1 trillion into the country’s clean energy transition.
I’m referring to the momentum building behind European Commission President Ursula von der Leyen’s omnibus – and its likely impact not just on one piece of European sustainable finance legislation but three: the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD) and the Taxonomy Regulation (TR).
Large companies have moved heaven and earth to ensure they’re ready to disclose in line with CSRD’s wide-ranging European Sustainability Reporting Standards – a legally binding requirement as of January 2025. Now they find their plans thrown into disarray by the political earthquake that started when centrists and greens were rejected in last June’s elections for the European Parliament.
Should these firms press pause on their sustainability reporting efforts or plough on regardless? Should the smaller firms that are preparing for one of CSRD’s future waves also down their (reporting) tools?
Streamlining proposals
At the end of February, the European Commission is due to produce a proposal to streamline the three aforementioned rulesets, to ensure they don’t further hamper the competitiveness of an economy that has struggled to achieve growth in recent years.
There is a whole lot of uncertainty – almost as much in Brussels as in Washington. But it may not be as significant for businesses and their stakeholders as it might first appear.
The pieces of legislation that politicians are now so keen to trim initially stem from the 2018 Sustainable Finance Action Plan, Europe’s first effort to match economic growth with environmental sustainability. A direct response to the Paris Agreement, the plan was bold and groundbreaking, proposing a series of structures and measures to direct capital to projects that would reduce negative human impacts, notably greenhouse gas emissions.
Its foundation, the taxonomy, explicitly followed the science in creating a list of environmentally sustainable economic activities, with its methods now borrowed in almost 50 countries globally as they seek to recalibrate their economies.
The CSRD also broke new ground, enabling Europe to become first jurisdiction to ask firms to report on social and environmental risks and impacts – not just climate risks – the better to understand and manage the relationship between profit, people and planet. Similarly, the CSDDD gave firms a duty of care over the activities they had outsourced to their supply chains, requiring them to work with suppliers and customers to try to identify and remedy harms.
These are important landmarks, but we should remember past battles and present shortcomings. We should remember, for example, that the taxonomy left the science behind when politicians added gas and nuclear power, or that the agricultural sector is still waiting for its screening criteria.
We should also remember all three experienced a slow and rocky passage, even though European voters returned the greenest Parliament in its history in 2019, with the CSDDD barely making it across the line the end of term, despite multiple compromises.
Overly bureaucratic
President Trump was not wrong when he recently told Davos that Europe was overly bureaucratic. Europeans have been saying it for years, including former European Central Bank (ECB) President Mario Draghi, whose report on the unresolved tensions between sustainability and competitiveness led directly to von der Leyen’s call last November for new efficiencies across CSRD, CSDDD and the TR.
Being the first and the most ambitious – as Europe has been on sustainability – is always fraught with risk, and often ends in failure, or at least reform. But it doesn’t have to end in chaos.
France and Germany, both experiencing political upheaval, appear to be competing to see who can row back faster from once-championed sustainability commitments. France has called for an indefinite postponement to CSDDD, also proposing a reduction to the number of firms in scope and a rethink on transition planning. Meanwhile, Germany has targeted CSRD, suggesting a two-year delay for compliance by firms expecting to report from 2026, as well as an end to plans for sector-specific reporting obligations.
Some firms undoubtedly welcome the prospect of respite, while others are unnerved by the speed and direction of the omnibus. Firms including DP World, Nestle, Primark and Unilever have said they still back sustainability due diligence and reporting rules, calling for governments to focus on practical implementation.
“Investment and competitiveness are founded on policy certainty and legal predictability,” they added, warning that revisiting existing legislation risked undermining both.
At the political level, there is likely to be further turmoil ahead, as parties feel the force of voter frustrations over the costs of economic stagnation. Predictions would be unwise, but Europe has a recent history of rescuing itself from itself, as Draghi proved when he declared in 2012 the ECB would do “whatever it takes” to resolve the European debt crisis.
At the business level, knowing your customers and knowing your risks are fundamental to competitiveness and growth. Reporting on performance against key ESG factors provides critical information to business leaders to help them navigate the challenges they face. At the same time, it is increasingly clear that ESG risks represent risks to enterprise value in the near term, meaning measurement and monitoring cannot be put off indefinitely.
And at the compliance level, regulations have – and will always – be subject to revision and review to accommodate new realities, which is why compliance is a process, not an event.
