“Drastic measure for European sustainability policy”

In view of the climate crisis, the European Union – and the world – is facing major challenges. To deal with them, we need clear legislation and consistent rules for areas like the sustainability reporting of companies. Over the past few years, the European Commission has developed and brought to implementation a comprehensive strategy to create a consistent set of rules providing orientation for all actors.

This process was actually meant to be completed. But now Brussels has called into question laws that have already been passed – some before they have even entered into force. The EU’s “Omnibus” package seeks to renegotiate sustainability reporting provisions that have already been agreed.

Why is the EU suddenly rowing back?

Ali Aslan Gümüşay: Officially, the argument is that the entire EU sustainability strategy is simply inefficient – too complex, too challenging, and too bureaucratic – and needs to be simplified. The keyword here is deregulation. But that’s presumably just half the story. A second factor is no doubt the changed political situation in Europe and the world. Sustainability is no longer a top priority everywhere.

Isn’t cutting red tape a good thing on the face of it?

Fundamentally, processes can certainly be made more efficient, that’s true. What’s questionable is the approach: The EU is suddenly intervening in a strategy that was developed over years in cooperation with various stakeholders and experts. If you raise the banner for less red tape and more efficiency, the process should not be a rush job, but sensibly thought out – with the participation of all key actors, especially the academic community.

There’s no reason why you can’t review and adapt a body of regulations after a few years. This would give you the benefit of experience before making drastic changes. Certainly, correcting individual factors that are unclearly defined or difficult to measure makes a lot of sense – and there are established procedures for doing that. What’s problematic about the Omnibus is that it came out of the blue and without a clear scholarly or strategic foundation.

What problems are caused by this volte-face?

The planned Omnibus package proposes substantial cuts. For example, it argues that only companies with over 1,000 employees should have reporting obligations – before now, the agreed limit was 500 employees. In addition, it wants to get rid of a lot of indicators, without any scholarly assessment of whether such cuts make practical sense. As such, Omnibus is a drastic measure and it is unclear whether the simplification will improve or water down sustainability policy.

On top of this, the new legislative package creates uncertainties. Many companies have already undertaken measures – invested money, hired staff, built structures – to comply with the regulations that were shortly to enter into force. And now the EU pulls back at the last minute. This actually places companies that are leading the way on sustainability at a competitive disadvantage.

What are you criticizing specifically?

There is nothing wrong with simplification in principle – it makes sense to cut superfluous indicators. But this must not jeopardize the goals of the sustainability strategy. The process should be conducted on the basis of research findings and actively involve researchers from various disciplines. Unfortunately, this has received scant consideration to date: The EU is planning to scrap lots of indicators at breakneck speed without transparent discussions or expert assessment.

And it’s also about consistency: Too many different regulations are confusing for businesses and other actors. Like many experts in my field, I call forstandardized rules across the board – when it comes to the number of employees, for example, then it should apply equally for all relevant guidelines.

Does it not make sense to ease the regulatory burden on smaller companies?

The argument is often made that smaller companies cannot afford the reporting and have only a small impact anyway. For some smaller companies, however, the alternative means fulfilling a plethora of reporting requirements from companies with which they cooperate.

In addition, a lack of reporting obligations can open loopholes in supply chains, and large companies can shift responsibilities on to smaller suppliers. Conscientious companies would then set their own standards, which would not be readily comparable, while bad actors would evade responsibility. Standardized rules create transparency and facilitate comparability.

Clear standards also help with the implementation of existing rules. Without reporting, it is difficult to verify whether companies are observing human rights or environmental standards. Transparent reporting ensures that violations can be recognized and penalized – and good behavior praised and encouraged.

Would the cuts also have consequences for researchers?

For research, the Omnibus package means a loss of evaluable data: Over 80 percent of data points could be dropped. This would make scholarly analyses considerably more difficult. Colleagues from LMU and TUM are currently analyzing what consequences this would have, and are developing tools and recommendations to draw attention to this situation.

Can good sustainability policy be an advantage for the European Union?

Through the so-called Brussels effect, the EU has the opportunity to set global standards. If European rules are clear and practical, international actors can take this successful sustainability policy as a model for themselves.

Although systematic reporting generates work and costs, it also creates value. For financial analyses, for example, standardized reports are beneficial because they replace or simplify expensive individual analyses. At the system level, this reduces costs and creates efficiency. At the same time, reporting facilitates the strategic control of transformation – say, when it comes to public contracts. States can specifically promote sustainability practices when a clear set of rules are in place.

Sustainability policy is not unnecessary bureaucracy that is a drag on the economy. Properly implemented, it is actually a lever for strategic positioning, competitiveness, and innovation.

Prof. Dr. Ali Aslan Gümüşay Professor of Innovation, Entrepreneurship & Sustainability at LMU's Innovation & Entrepreneurship Center (IEC). His professorship is based at the LMU Munich School of Management. At the same time, he heads a research group at the Humboldt Institute for Internet and Society in Berlin.

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