EU Mounts Major Retreat From ESG Agenda After Intense Criticism

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(Bloomberg) — The European Union is about to walk back significant chunks of planned ESG regulations, amid a barrage of complaints that such rules are becoming a dead weight hampering EU efforts to compete with the US and Asia.

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The European Commission, the EU’s executive arm, has proposed that regulations covering everything from ESG reporting requirements to supply-chain management be watered down to protect business interests in the bloc, according to documents seen by Bloomberg. The final proposal is set to be made public on Wednesday.

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The move follows intense pressure both from within and outside Europe to rein in environmental, social and governance legislation. The development has major implications for the future of ESG globally, with Europe accounting for well over 80% of the world’s ESG fund assets. 

Germany and France, the EU’s two largest economies, have been lobbying hard for smaller and mid-sized companies to be excluded from the full scope of reporting requirements, as both countries react to faltering economic productivity. In France, a government spokesperson went so far as to characterize ESG corporate reporting rules as “hell” for the companies expected to comply.

Europe’s decision to scale back its ESG agenda comes as American companies enter a new age of deregulation under President Donald Trump. The 78-year-old has taken a sledgehammer to the green agenda of his predecessor, Joe Biden, and has made tariffs a cornerstone of US trade policy.

The EU has also faced more direct pressure from the US to rein in the scope of its ESG regulations. Newly confirmed US commerce secretary, Howard Lutnick, told Republican senators last month that he was willing to consider deploying “trade tools” to ensure American companies exposed to the EU market aren’t expected to comply with CSDDD.

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The European Commission is now recommending that the Corporate Sustainability Due Diligence Directive, which was designed to expose companies to legal liability if their value chains were found to contain ESG breaches, be reined in considerably. That includes lower potential fines and a reduced obligation to monitor the ESG risks of business partners, suppliers and customers.

The Carbon Border Adjustment Mechanism, which will put a levy on EU imports of goods like steel and cement from countries with less strict climate policies, will be softened so that domestic companies face a reduced reporting requirement.

The commission is also proposing that only firms with over 1,000 employees and annual revenue exceeding €450 million ($470 million) be subject to the full scope of both the Corporate Sustainability Reporting Directive and CSDDD. Doing so would exclude an estimated 85% of the companies originally targeted in CSRD, and would be in line with German and French demands.

A spokesperson for the commission declined to comment, citing a policy of not responding to leaks.

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Lawmakers from the EU’s green bloc, meanwhile, were quick to denounce the plans. 

“It is an illusion to think that dismantling sustainability laws will solve the structural problems of the economy,” said Anna Cavazzini, a green lawmaker who’s chair of the internal market committee, in an emailed comment.

She says Europe’s competitiveness problems are instead “due to the current China shock, to a lack of innovation, to high energy prices brought by the war of aggression against Ukraine, and to insufficient investment. They are certainly not due to the EU due diligence law, which is not even in force yet.”

The commission is due to unveil its proposal for the so-called omnibus legislation on Feb. 26, when the bloc will look at CSDDD, CSRD and the Taxonomy Regulation. 

Maria Luis Albuquerque, the EU’s financial services commissioner, said in an interview last month that there’s room for adjustments to ESG rules, but cautioned against expecting outright deregulation.

It’s about “adjusting the pace,” while “maintaining the anchor,” she said then.

But civil society groups are now questioning that characterization.

The proposal is already drawing criticism from civil society groups that had been lobbying for the EU to stick to the original principles of CSDDD.  

The planned rollback looks “reckless,” said Maria van der Heide, head of EU policy at nonprofit ShareAction. “Sustainability laws designed to tackle the most pressing crises – climate breakdown, human rights abuses, corporate exploitation – are being crossed out behind closed doors and at record speed. This is not simplification, it’s pure deregulation.”  

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