S3 - E6: The Ominous Omnibus with Andreas Rasche

And also consumers, they do not have the power in order to change companies and also are not willing to necessarily pay extra for these kind of products. Innovations in Sustainable Finance A University of St. Gallen podcast by Julian Kölbel. Hello and welcome to another episode of Innovations in Sustainable Finance. Today I speak with Andreas Russia, Professor of Business in Society at Copenhagen Business School. Andreas is an internationally recognized expert on corporate sustainability and sustainable finance. He has served on the UN Global Compact Steering Committee and has recently been active in commenting on European sustainability regulations. Notably, the so-called omnibus package that we will talk about. As this is an important matter in the Sustainable Finance world, I'm very happy to have him on the podcast today. Welcome Andreas. Thank you very much. Delighted to be here. Wonderful. So you've followed this sort of question a long time. What are companies doing? What should they disclose about what they're doing? What works? What doesn't work? And today we want to do a deep dive into the European Union's omnibus package, which is very current, it's currently debated. We'll try to give details right and left where we're needed, but that I think really is the focus. And I would ask you to kick us off with just what is this omnibus package all about? Thank you. I think it is a great question. And as you say, I mean, it is something that recently really has hit the headlines quite a bit. So the omnibus package basically is an attempt by the European Union to simplify, as they call it, some of the regulation around sustainability reporting and due diligence. It is called an omnibus because what they aim to do is they aim to amend at the same time for different legislations. First is the so-called CSRD, the Corporate Sustainability Reporting Directive, then the CS Triple D, the Intelligence Directive, the Carbon Border Adjustment Mechanism and the EU Taxonomy. So this kind of is called an omnibus because these four legislations, they are supposed to be amended at the same time through one process. So it is a kind of an efficiency mandate that the EU has here, so they try to really push for an official process to make these different regulations more streamlined and also as they call it, simplify them. Thank you. So that explains the name. They are all potentially trying to get on the same bus, these four different regulations. So that explains that. And why is this being proposed now? What is the political and economic context of this? I think it is a bit of a long story, but let me try to maybe lay out some milestones. I think it was at the end of 23, that for the first time the commission kind of talked about the need to cut red tape, the need to simplify. And then of course there were the European elections last year. And it was a topic actually in the campaigns and many members of parliament, they also spoke out, they said we need kind of fewer regulations, we need to simplify things, there's too much of a burden on businesses. So then we had the elections last year, the Parliament, the European Parliament, swinging a little bit more or actually significantly more towards the right, the EPP, the conservatives get stronger, also the right wing parties get stronger. And now Ursula von der Leyen last year, then in November kind of set for the first time that they are looking into these simplifications. And then in February they proposed it. Why do they do this? I think basically they believe that European businesses are losing out against others in the world economy, particularly the US and China. So they argue costs are too high here, we need to to slash compliance costs, this will make businesses more competitive. And you need to see this of course also in the context of the Ukraine war, Raj, which has put pressure on businesses. And then also the inauguration of Trump, I think put additional pressure on all of this with the tariffs as America first agenda. So I think the Europeans now that they try to regain some ground here. And a lot of the debate also refers to last year's report by Maria Draghi, former central banker. And he basically also made the case for simplification. So that's the context. Right. So it seems in the big picture, whereas sustainability has been a real focus of European legislation in the past five years I would say, lately it's competitiveness that's taken the main stage. And that I think also in my reading explains why they are trying to change what's been regulated so far. So we will not be able in the podcast to cover all these legislations in detail because they are indeed and that's part also of the debate, quite long texts and pretty complex in their details. So we'll have to make do with the abbreviations CSRDCS triple D taxonomy and carbon border adjustment tax. But from a high level, what specific changes or what sort of general changes are proposed regarding scope, liability, and so forth. I think for the reporting to diligence and taxonomy, I think one clear change is a wrong scope. So they try to move quite a bit of companies actually out of the scope of the of these regulations, particularly on the reporting side, it is about 80% of the companies that are being moved out of scope. So that I think is the bigger item. And then there are a number of other items and what they try to do is they try to limit the information that bigger companies can ask of value chain partners. So if you are a bigger company, you will be limited in terms of what information you can ask for instance, your suppliers in terms of reporting. And then you also just set it on the due diligence side, what is being proposed right now is a focus more on tier one. So the first tier of the supply chain and not to go through the entire supply chain with due diligence monitoring or only in exceptional cases. And last but not least probably another big item is that they will remove for the due diligence directive the EU-wide civil liability. So it will be more difficult actually to take companies to court based on negligence and non-compliance with the direct. Right. So do you see this omnibus package as a necessary simplification or more a dangerous rollback of ambition? How would you characterize it? You know what you're doing? I'm a bit split too on this. I cannot, I always have difficulties making up my mind. I agree with the commission that simplification is necessary. Let's put it that way. I agree and you also said that these regulations are complex. They are maybe more complex than they have to be. And so there is some need for simplifying things, aligning things. So I agree on that end where I think I disagree is the extent of the changes that are being proposed. Because quite honestly if you remove 80 percent of companies from a reporting directive, I don't see how this simplifies anything. And this is kind of the goal at the end. This is what the commission says what they want to do to simplify all of this. So I agree with the basic intention and the rational. I disagree with what is on the table and what is suggested. Because to be quite frank with you, I think it reaches more in the direction of deal regulation. And it probably fulfills some political agendas of certain parties. But I do not see really how this is making companies more competitive or how it is simplifying. I see. Well, it also seems if you say 80 percent of companies will basically be taken out of the regulation, it sort of begs the question, why not then just repeal it and start from scratch or do something. Or as you say, do something simpler that applies to the whole economy. It seems sort of halfway. You're right. It seems halfway. And I was also a bit surprised that they suggest these drastic measures for directives, which actually they had just passed in the last term. So the CES are de-passed in 2022. The CS triple D, the due diligence directive actually just passed last year. So we are emending directives which are essentially not being, which so far had not really been implemented. We have no real experience with them. And the politicians tell us in 2025 that what they did in 2022 and 2024 actually was wrong. And this is where I really have a bit of a time to wrap my head around it because I think why didn't you correct these mistakes back then, right? I mean, there was sufficient time actually to do that. Right. Speaking of experience, you were involved in a survey of firms on their views of the CSRD and the omnibus. So not just the economic and political context, but firms specifically. And what did you learn there? Well, we surveyed and a number of people were involved there. I was one of the academic kind of voices being part of it. But the main drivers were an organization called We Are Europe and I should say Paris. They were the main drivers of this. So we surveyed around or over a thousand companies throughout Europe. Quite a lot of them admitted we come from Germany and France. But other European economies are also represented in the survey. What we learned actually was that businesses were actually not really satisfied with the omnibus. A lot of businesses looked at the omnibus rather critically. They felt it is overdoing things and they were also expressing quite a high level of satisfaction actually with the CSRD. They were also saying, I mean, there are things that need to be improved. But the sentiment was not necessarily, you know, that they said, oh, all of this is just an unnecessary burden. So please get rid of it. But what we heard from them, and there was also a qualitative part of the survey where we asked businesses to respond. We heard quite a bit of, please correct some of the technical mistakes that were made, kind of reduce the number of data points, align some of the data points more, make life easier for us. But please don't altogether kind of change these regulations completely because a lot of companies also said we just invested into compliance. So, you know, we just had these investments and now you come around the corner and tell us the exact opposite. So this of course is also for businesses, not very fair. I often hear that this is what business is actually dislike most if sort of the sort of general direction of policy changes that because that creates a whole lot of uncertainty. So I see that. At the same time, I do, I didn't do a survey, but sort of from hearsay, I heard quite a few people just being frustrated with the regulation, especially people who were working, maybe in a sustainability function at a company, tell me, well, they are now spending just a lot of time on complying with the regulation and much less time on thinking what would actually be a useful thing to do at a more strategic level. I agree. I also heard these stories and I think we need to consider here that the CSRD was implemented for the first time in 24. So a lot of the companies that kind of went for this kind of very first implementation experience. And I mean, we all know that whenever you implement something for the first time, it's a bumpy road, right? I mean, there are hiccups. It's not necessarily the most fun thing to do. You don't have routines yet. So I think part of the dissatisfaction is also due to this. And then of course, compliance plays a big role, but I always challenge also the businesses here in Denmark and say, of course, this can be about compliance, but you can also flip it around. You can also say, what additional information do we gain here, risk-based information, for instance, additional information to improve capital allocation for sustainability? So what additional information do we have in order to make life easier for us? So I think it's also a little bit about the mindset that companies have. And unfortunately, some companies have a pure compliance mindset. Taking a step back, so my own reading of the regulation that the European Union has brought on in this regard, really taking a step back in time when we've published this paper titled Aggregate Confusion, the Diversions of ESG ratings, and sort of in the conversations that follow that paper that showed that if you ask different writers, you get different opinions about companies. And especially corporates didn't like that. And they said, this is annoying and confusing for us. We would like to have a standard so that we know what we're dealing with, we know what the market wants from us. And so I was in that time, I was very much in favor of introducing a mandatory reporting standard, not voluntary mandatory applied to all companies. What I had in mind was something like 10 indicators that everybody could reasonably measure. And then I thought everybody could, you know, you can always go beyond that and have better indicators or then analysts can interpret the 10 indicators and say, well, in this industry, that's actually not, you know, it's not very meaningful. So we have to, you know, adjust it, things like that. But I think there was a lot of support for something like that among corporates. And now the way it has come out is more 1000 indicators that companies can determine themselves. What is material? So I think you end up not with some sort of consistent data about European companies. But again, quite, you know, quite something confusing. And I think there, I just wish it had been regulated in a different way. And I think we wouldn't be talking about the omnibus. Do you agree? Yes, I think the development of the actual standards, which are called ESRS or the European Sustainability Reporting Standards, I agree with you. I think it's 1000 data points is too much. I think this probably was due to when these standards were developed, I think they, they looked at many different potential users. So they did not necessarily just the investors of mine, but they they looked at, you know, NGOs, academics, governments, and so on. And they tried to do it as fine-grained as possible. And this is maybe I always think, you know, this is a bit of a European attitude, you know, do it really fine-grained, you know, try to try to do the fine-grained measurements. And this has resulted in this in this very comprehensive framework. I agree with you. We need to reduce the data points. We also need more mandatory data points. However, I also see ESG as a quite contextual undertaking. So I think we still need these materiality assessments, because at the end of the day, you know, 10 indicators won't cut it. I think we need a little more than that in order to judge companies across ESG, because it includes a number of topics. And so I think we probably need a larger set of mandatory indicators as possible quantitative, but we also need to remain open to kind of some additional indicators that are added based on materiality, because sectors are so different. Right. So yeah, I guess the sense of direction we agree. Sort of rather, I would say 10, the regulation has 1,000. If it's somewhere in the, I mean, it's a big gap. What about the costs of this compliance? So I've looked at different estimates. So I think Efrak has put the cost of compliance at roughly 4 billion euros per year, including assurance. So half of that is supposed to be assurance. And so in essence, the estimate that a large companies will have two full-time employees working on CSRD compliance. Now, the omnibus package has promised savings of 4.4 billion. They've quantified that quite boldly. And I'm not quite sure what to, I mean, what's the margin of error around these numbers? What's your impression? Are we talking billions? Is it much more, much less? It's very difficult to say, but I think the margin of error is high here, because we talked about it a little bit before. We do not have much implementation experience with the CSRD. So essentially, we are tapping in the dark. It would, it would have been more useful to kind of do this entire exercise, maybe two years down the road when we really had good data and we could measure these things nicely. So, so far, I think these are estimates and it depends quite a bit on the assumptions. What you rightly pointed out quite a bit of the cost, our children's costs of course, which also backs the question, why are these costs so high? And can we reduce this somehow? Then Mark, there was a big discussion about how limited, because it has limited assurance that the CSRD demands, how limited really is this assurance can, you know, aren't ordered us over doing things. But I think the number, I haven't really made up my mind to kind of say, you know, the commission is warm on this. Let me just say it comes with a lot of different assumptions that are being put up here and you can also certainly come up with with other numbers. What what I found a bit irritating, unfortunately, is that the commission only looked at costs. And I always wondered, you know, what about the value side? What about the benefit side? And so, if you look into the proposal document, I only see a cost calculation. And then there was actually interesting hearing in the European Parliament, where also a professor spoke out and he also made exactly that argument. And he said, what about the value, you know, what about the benefits increased understanding of risks, more transparency, more accountability. So, so these kind of things, they are difficult to quantify, but they still exist. But they have to kind of push aside, I think, by the commission. Yeah, I think that would have been a really good exercise, ex ante, to do, you know, you're, of course, you're right. If you wait for a few years, then then you have much better data. But, but this is an important political decision that concerns 400 million people. So, so you might want to have a little bit of an estimate of the costs and benefits, I completely agree. And I think, so on the benefits, I'm also skeptical, honestly, because I have the sense that it was a bit of a foul compromise to say, okay, we're not really going to, you know, regulate the real economy, because we've realized with the yellow vests in France, like if the price of gasoline goes up, we are, we're out of, out of the government. So, so let's do something on disclosure, you know, it's uncontroversial business have to, you know, file some reports. But it's also, I mean, the theory of change of that dramatically changing what is happening in an economy, I also don't quite see. And on the front of, you know, is this vastly superior in terms of understanding certain risks that companies have? If that's the case, then I think the omnibus is a really dangerous thing to do. But I'm not so sure the Commission believe that itself, especially in the way the regulation came out with these thousand indicators. I don't think it's really, or what, I mean, what is your sense of the positive impact that it, maybe it does have as it stands or it could have if it were designed differently? Let me start by saying, I think I agree with you. I mean, I would also like to have more substantive regulation on this, on the, on the sustainability aspects, right? Because then you can really create also, also impact. But politically speaking, I mean, even in the last term, I think it was simply not possible to get this, to get this through the Parliament and the Council. I mean, look, even at the long discussions that we had on the due diligence directive, which was almost killed actually in 2024. So even these more softer directives, which aim at reporting due diligence and so on, even they were very, very controversial. And the few substantive regulations that we had, the nature conservation law, for instance, I mean, they were highly contested and were significantly watered down. So I think it was also a bit of a compromise to kind of say, let's start here. I agree with you in so far as the value of reporting, probably it's not easy to measure. But you know, for me, I'm always telling myself because sometimes my students ask me exactly the same question. And I tell them, look, if you're a company, let's say you're a midsize company, you commit to reducing your carbon footprint because your buyer asks you to do it. If you don't measure these things, if you don't measure your carbon footprint in 23 and 24, you don't understand what progress you're making. So I think, in a sense, in a sense, at least measurement is important. Whether this needs to result in reporting, of course, is a different question, right? But I think the measurement is important for companies internally. And I think the value of reporting, at least for me, anecdotal evidence here coming out of my conversations with Danish companies, companies, some companies find it useful. They, for them, it's a reflection exercise, you know, that makes them aware of potential risks, new opportunities. It is also important, I think, for employees. We see this, I'm not sure about other countries, but here in Denmark, this is a big discussion. A lot of employees demand this in terms of what that they demand, the data data, but they want their companies to do things on sustainability. And of course, the report is usually one communication needs here. So I think, I think there is value in sustainability reporting, but it also depends a little bit on company's willingness to tease out this value. But we need to be, and let me close by this, because it's been the wrong answer, to kind of say, but we need to be right in terms of being proportionate in terms of company size and what we require of companies in the end. So I think the cardinal mistake of the CIS adi was that they try to push out rules that apply to all businesses, regardless of whether you're a medium-sized company with 251 employees or whether you're a multinational, like here in Denmark, noble Nordisk, with many, many 10,000 of employees. So I think we need to get this proportionality, right? And then I think we get to the good stuff. Right. And I think the underlying aim and sort of having a real model in mind how what the regulation is doing is going to contribute to a larger goal, which I think is a slow and steady transition of the European economy to a more sustainable model. And I think that has been lost in figuring out the details of this disclosure regulation. So I would just want to test the proposition that I have how it lands with you. So you mentioned the carbon border adjustment tax is also part of this. So let's actually quickly talk about this, because I think this is a completely different animal, right? This is an economic tool to create the possibility to have a price on carbon within the European economy without just losing out to all other parts of the world that don't have that. That's the idea, right? Exactly. Is that, I didn't know so far that this is also potentially affected by the omnibus package. I think that should be kept out. Actually, what they did is, and you might be surprised to hear this now after all my critique. Yeah. I think what they do is actually very meaningful, because they basically said we will exempt those companies whose calculation or whose reporting based on the CBAM so the carbon border adjustment mechanism would not create many emissions savings, so to say. So in other words, they concentrate really on the big players that, for instance, import goods out of China or wherever, right? Where you really have heavy emissions that are attached towards these imports. And they leave the very small players aside. The calculations by them, by the European Commission, basically say 99% of the emissions are still covered even after the reform, so they only kind of really get rid of the burden for the very small players. And I think that makes a lot of sense. Okay, that actually sounds sensible. So sort of steel cars. Exactly. The big stuff that will basically will be subject to a tariff on import, so then to equate prices in the sense that a car produced in Germany, sort of that needs to, you know, the factors need to buy emission rights or the ETS, so that they are on a level playing field with a car produced in the US or China, with regards to CO2 emissions. Yeah. That's the idea. Okay. So I would keep that. I think politically, right? I think the CSRD is in place. As you said, companies have invested and figured out how they are going to comply. I would just let that run. And, you know, at least, you know, at least for some time to see how it works. I would probably stop the CS Triple D because it's, you know, I don't think companies have invested as much in that, and it does seem to add up. And I'm not quite sure what to do with the taxonomy, honestly. I never quite understood what it's good for next to the CSRD. Maybe you can clarify that for me. But how does that, you know, how do you think, what do you think of that suggestion? I'm critical. I think the, for me, the CS Triple D, the diligence directive still needs to happen because, I mean, there is the business side of it, right? I mean, there are often significant human rights risks, which are tied to litigation risk, reputation risks, and so on, in global supply chains. And to be quite frank with you, businesses had a very limited understanding of these risks. And I think it is good. We don't need to overdo it. But I think if you, for instance, are in the textile business, you need to understand what is happening in your supply chain in terms of labor conditions. And this brings me to the second argument. I think there is also a pure impact-related argument that we try to at least give those workers, those people that are negatively affected by corporate actions and in the supply chains that we try to give them a voice. And the diligence directive, it has this grievance mechanism attached to it. So ideally, if it works, they could kind of make their voice heard. So that's why I think we should keep it. I'm in favor of simplifying things to kind of really focus on those areas where there is likelihood of a high risk. I don't think, recently talked to a big Danish company and they said, look, we have 60,000 suppliers. What should we do? But I told them also, that's not the idea. The idea is that you really pick those kind of areas of your supply chain where you kind of think there is a high likelihood of a risk. And then you dig deep there. So that's why I would keep that in a simplified form. On the taxonomy, you're right. I mean, the taxonomy system is really a complex system. And I've been teaching it to my students, and even after two hours, sometimes we end up asking ourselves, what exactly is it about? I think it probably makes sense for large companies who really have a strong investor relations to kind of public markets. I think there, it probably makes sense. For smaller companies, I don't necessarily think this should be mandatory. And this is also what the omnibus now now says. I mean, its companies under 1,000 employees will not touch to do this. Got it. So it seems that for the CS triple D, you actually feel there is maybe even a stronger impact story. And of course, I mean, I'm sympathetic to that. I was suggesting acting it just in terms of, you know, kind of you at this point, it seems a done deal that something is going to have to go. The question is sort of what? But I'm basically you're saying there are some people in these supply chains that really suffer from the way we consume. And this is not solved through prices or through sort of consumer watchdog groups because it's just they don't, I mean, they don't understand the supply chains even less, right? This is invisible. So to create some mechanism to just, you know, force European companies to weed out the worst offenders in their supply chains, something along those lines. Okay. Exactly. Exactly. That's the argument. And I think that's that's also what we should do because, you know, we had these discussions about labor rights, human rights and global supply chains for many years starting in the early 90s, like and so on. And and what we have learned is voluntary measures will not get us there. I think we need to be as honest, you know, that we that we need to say, I mean, consumers will not be the key driver here behind the change. Okay. So I'm willing to change my mind. It seems that this is then even I may have misunderstood that that's not really a disclosure thing. That's more of a liability issue that companies need to be able to demonstrate that they've that they've looked at it, right? And and if they have not, then that's a that's a legal risk they're taking. Exactly. Okay. It's all so extended. And I guess, but that's exactly the debate, right? Sort of there is a push to remove that legal liability. And in that sense, really water it down, isn't it? Yeah. I mean, the suggestion at the moment is to remove the EU-wide civil liability, which would allow, for instance, NGOs to take companies to court if they willfully and intentionally ignore the directive. So there was this kind of EU-wide civil liability regime. And they the commission now says, we don't need this. You can use your national courts for that. You can use the national legal systems. The problem is, in Europe, we have 27 different national legal systems. And this will make it very difficult to bring such claims actually to the to the courts. And because it would also encourage some sort of legal arbitrage and some countries saying, well, if you if you set up shop in our country, you'll be fine. I could think of a few companies who might jump on that bandwagon. So that's certainly a concern I see. So I think finally, I think it really comes down to having a reasonable sense of what are really the costs of that regulation and what are concretely the benefits. And I think that's what I wish policymakers would think very carefully about. I think also the push for the omnibus is, you know, as you described, is there's a political sea change and now they're trying to turn back the clock, but it seems not a very thoughtful way of doing so. Yeah, I think it is very rushed. I think that's maybe a good way to describe it. They have really pushed this through with very high pace. Just to give you an example, usually EU legislation has a proper impact assessment. Exactly what you were saying, right? What are the costs? What are the benefits? What are the impacts? So there is for each EU legislation actually a proper assessment. The commission has not done such an assessment for the omnibus and they basically said all of this is too urgent. We don't have time to do this. Let's push it through. So there were only these very rough calculations that they offered as a justification. And when the omnibus came out, the proposal by the commission came out on 26 February. A lot of people said we are disappointed by this because the justification is simply too thin. And if you suggest such really far-reaching changes, you need to better justify why you're doing this. Right. You know, I think this is an important takeaway for me from how the course of regulation has been. It's very important to get involved because it's regulated in an unfortunate or suboptimal way that it actually creates a lot of damage. So is there still an opportunity to weigh in on the omnibus or you think everything is set and done? No. And also to the listeners, I mean, go to your members of European Parliament if you have one. I mean, if you live in a country where you have one, talk to your business associations. I think there are many channels to make yourself heard, also linked in and other social media platforms are usually good ways to discuss these things. So I think there still is time to make yourself heard because the process is still ongoing. In the EU legislation is decided by three parties. This is the Commission, the Parliament and the Council. And particularly the Parliament is supposed to represent the citizens of Europe. So I think this is what I expect also from the European Parliament and that they really take a position here which reflects also input by the citizen. Great. And then I will, this lines up perfectly. I usually end on the question of in this area of of European regulation in the realm of sustainability. What would you ideally like to see over the course of the next five years? So I mean, or you could also, since we're discussing contacting potentially your member of parliament, I mean, what would you be your line of? What would be your proposition? I think my proposition or my hope rather would be that European policy makers forms some sort of independent mindset on that and that we do not compare ourselves too much on what is happening in China and the US and other parts of the world. Europe needs to find its own way on off this and pure deregulation is not a winning strategy for Europe's future. We need to find our own way on this. Yes, we need to simplify, but we need to do it in a proportionate way that we do not forget our own ambitions which were just kind of yeah formulated a couple of years ago and I think which are important for the next five years so that we stay on course. Wonderful. So thank you very much for for discussing this with me. That's been really interesting for me and I hope for the listeners as well. Thank you very much for sharing your insights Andreas. Thank you very much for having me. Much appreciated.