Regulatory ambiguity finds relief with EBA's fresh guidelines
The European Union is taking significant steps to simplify sustainability reporting requirements, aiming to make the process more practical and less resource-intensive for companies while maintaining data integrity to support the climate transition trajectory.
The EU's upcoming omnibus regulation, set to be published at the end of February, intends to cut mandatory datapoints by 57% and reduce the length of the European Sustainability Reporting Standards (ESRS) by over 55%. This move is expected to remove around 80% of companies from the original Corporate Sustainability Reporting Directive (CSRD) scope, focusing mandatory reporting on larger companies with the biggest sustainability impacts.
Smaller companies will have the option for voluntary sustainability reporting, supported by new voluntary standards to protect them from excessive information demands from value chain partners. The regulation also includes extended deadlines and phased implementation, providing a two-year extension for reporting deadlines for companies not yet started with sustainability reporting.
The omnibus package also targets broader environmental regulatory burdens, aiming to reduce fragmentation, harmonize rules such as extended producer responsibility (EPR), and facilitate digitalized and streamlined reporting processes. This streamlining is crucial for better data quality and consistency necessary for climate tracking.
In the banking sector, large banks starting in 2026 will need to fully integrate ESG risks across their traditional risk management frameworks, develop holistic transition planning processes, and prepare CRD-based transition plans for prudential supervisors. The European Banking Authority (EBA) has published guidelines on ESG risk management, allowing for 'less sophisticated processes' for non-large banks.
The EBA's guidelines aim to orient banks' financial flows towards real economy transition needs and argue that risk management should be sufficiently forward-looking, supported by credible scenario analysis to measure (mis)alignment with national and European climate objectives. The guidelines also advocate for engagement as an effective risk mitigation tool for clients' vulnerability to climate and transition risks.
However, the absence of minimum thresholds in the guidelines could potentially compromise the ambition and robustness of materiality assessments. It is unclear whether banks could face supervisory actions or penalties under the assessment.
The guidelines represent the risk-based, but forward-looking overview of a bank's resilience to ESG risks and preparedness for the low-carbon transition. They encourage banks to develop a single, comprehensive strategic planning process for the transition. A client's dependency on fossil fuels is a useful indicator of vulnerability to transition risks, and banks should proactively engage with firms to source sufficiently granular data concerning their preparedness for the transition.
The EU's regulatory effort reflects extensive stakeholder input emphasizing the need for accessible yet reliable sustainability reporting to support the EU’s climate goals while addressing real-world business challenges. The European Commission's Competitive Compass promises to deliver 'far-reaching simplification' in sustainability reporting obligations for smaller firms, including SMEs.
As debates continue, the focus remains on striking a balance between simplification to ease compliance and maintain robust, high-quality data critical for tracking and advancing the EU’s climate and sustainability ambitions.
In the context of the EU's regulatory effort, environmental science principles will be crucial in enabling smaller companies to understand and address climate-change concerns effectively, as they prepare for voluntary sustainability reporting. The financial sector, especially large banks, will need to integrate environmental, social, and governance (ESG) risks into their traditional risk management frameworks, thanks to new guidelines from the European Banking Authority (EBA). This integration will be instrumental in orienting banks' financial flows towards the real economy's transition needs and preparing for the low-carbon climate transition.
