Politics, the EU Omnibus, and Our Approach to Long-Term Risk

In the turbulent world of European Union politics, sustainability regulation has become a battlefield. Politicians from every side of the political spectrum are either digging in to protect the EU Green Deal or sharpening their knives to cut it into fragments.

Professor Andreas Rasche's research on corporate sustainability with a focus on ESG, governance, and sustainable finance gives him an excellent foundation to cut through the chaos. A professor and associate dean at the Copenhagen Business School, with seven books and over 60 peer-reviewed articles in international journals, his current work focuses on Green Deal regulations such as the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD).

While the European Commission is set to unveil its omnibus proposal on 26 February 2025, the ingredients for the revision have been simmering for a while.

“The first discussions around simplifying sustainability regulations date back to before the European elections in 2024,” said Rasche. “Then we saw the Draghi report, which outlined the need for increased competitiveness and the need to cut red tape. Then another milestone was the so-called Budapest Declaration, which calls for a 25% reduction of the reporting burden for corporations. The commission has agreed to that, so now they're under pressure.”

For Rasche, the lack of data behind some of the proposals is causing frustration for sustainability experts. “My big fatigue of the 25% reduction in reporting is why is it 25%?” he asked. “Nobody can really give any good answer why it is 25% and not 30%, 20%, or 15%. This was never justified sufficiently.”

Rasche also pointed out that despite the way the media have tried to explain the omnibus, it is not a merger.

“In the media, it has been portrayed as a merger of the CSRD, the CSDDD, and the Taxonomy,” said Rasche. “But an omnibus does not merge. It amends these regulations at the same time as a kind of efficiency instrument instead of opening up each regulation and having a legal process for each one. In a sense, it's a time saver.” We might, for example, see CSRD and the Taxonomy placed under the same regulatory act, he said, but that doesn't “merge” the regulations.

The highly politicized environment in the EU parliament makes it difficult to predict what might come next, Rasche emphasized.

“I think some people really want genuine simplifications and efficiency,” said Rasche. “If they want that, I'm fully on board. But I think there is a risk that this entire process is politically captured. All of this changes the dynamic, so I think there is a risk that this entire omnibus process is also captured by those who have an interest in making substantive changes to the regulations that reach much beyond simplifications and efficiency.”

Jumping the Gun: Revising Directives Before They're Implemented

For those who want to preserve the sustainability directives, the best evidence to defend them would be to demonstrate their benefits and the value they produce. However, as Rasche pointed out, it's still too early to do that.

“From a purely scientific perspective, it's difficult to study benefits because the regulations are not even fully rolled out,” said Rasche. “The CSDDD is not even fully transposed into national law, so it is difficult to systematically study the costs and benefits of these regulations. In that sense, I think the omnibus package comes much too early and is based on a lot of political bargaining and a lot of strong opinions, which, from a scientific perspective, are not fully justified at this point.”

Before undertaking the sort of extensive revision the EU is looking at with the omnibus, Rasche believes it needs more data and better long-term thinking.

“People tell us anecdotally that the cost of implementation is huge,” said Rasche. “But you need to consider that whenever you set up a new system, the first year is obviously costly. It was also costly when you set up your financial system for the first time. So, we need to look at short-term and long-term costs as well as long-term benefits.”

Rasche also pointed out that sustainability regulations frequently become the low-hanging fruit for politicians talking about efficiency.

“Whenever we talk about reducing the reporting burden, people here in Europe always end up with sustainability,” he said. “But why not look at GDPR (General Data Protection Regulation)? There are many other areas where you could cut red tape. I think the problem is similar to the U.S. in that the entire sustainability field contains a lot of ideologies, and some people would like to take the opportunity these discussions present and make substantive changes to regulations they otherwise would only get in a more difficult way.”

While many critics see the EU itself as a monolithic bureaucracy that acts as a source of nearly infinite red tape, Rasche emphasized that this is not necessarily the case.

“A lot depends on where a company is registered because a lot of that bureaucracy results from national, regional, or even local regulations they need to comply with,” said Rasche. “In Europe, we always act as if all bureaucracy comes out of Brussels, but this is simply not true. Nation states and regions produce a lot of acts that make companies report certain things.”

Changing How Business Thinks About Risk

Environmental risks like climate change often have long-term impacts extending over decades and even centuries. As a result, businesses that are used to thinking about risk in two-to-five-year cycles often find it difficult to justify investing in sustainability measures that might only pay off long after their current stakeholders are gone. Rasche believes this approach makes it difficult for businesses to understand how dangerous long-term threats can be.

“We have not built corporate structures that are really emphasizing the long term,” he said. “If you are a manager for a company, you know that climate may be a real risk in 10 or 20 years, but you often have no incentive to consider that because you know you will not be there anymore. In some cases, the lifespan of companies is so short that they will have disappeared.”

Rasche also believes the nature of sustainability risk is difficult for businesses to grasp.

“A lot of sustainability risks need to be quantified,” he said. “When you talk about long-term climate risk, you have a lot of uncertainty in the calculations, and if you show these calculations to companies, the uncertainty might simply be too big for them to act on it. It also has something to do with the biases that we face as humans. Why do we drink alcohol and smoke even though we know it is a risk and that it is bad for us?”

Germany: Political Conflict and Missed Opportunities

Germany's political intrigues and beleaguered auto industry are important catalysts to the current debates about EU sustainability and the omnibus. In January, Chancellor Olaf Scholz sent a letter to EU President Ursula von der Leyen pushing for substantive changes to the CSRD that are far more significant than mere simplifications, including postponing implementation for two years.

“It has a lot to do with political bargaining,” said Rasche. “For the last three or four years, the German government has had a coalition where the smallest partner in the coalition government, the Liberals, were at the forefront of pushing back on some of these regulations, whereas the other coalition parties - the Social Democrats and the Greens - were actually more in favor of them, so it has a lot to do with national politics and the shifting reality there.”

Germany's powerful auto industry, under pressure from the electric vehicle industry, is also an important factor.

“As Germany loses competitiveness in some sectors, like the auto industry, people blame it on sustainability,” said Rasche. “But it's difficult to make the argument that the car industry is less competitive because of sustainability regulations. It's more that the car manufacturers were sleeping for 10 years, and they were not able to put a competitive electric car on the international market, whereas Tesla and the Chinese did exactly that. Germany's car makers have had lots of innovations in the past, but they have not pushed towards these bold moves with electric vehicles because they doubted it would be the technology of the future. Suddenly EVs just took over, and this created a situation where the German car manufacturers couldn't catch up.”

*** Photo courtesy of Copenhagen Business School.

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