Europe’s efforts to simplify its sustainability disclosures regime for companies could slightly shift banks’ attention away from identifying sustainable loans on their balance sheets and from the necessity to originate new sustainable loans.
The Omnibus I package proposed by the European Commission in February this year reduces the disclosure scope of the Corporate Sustainability Reporting Directive (CSRD) to large companies with more than a thousand employees (instead of 250) and a net turnover of €50m or €25m in total assets. It also provides for an opt-in clause for Taxonomy disclosures for companies with less than €450m turnover. The European Parliament’s legal affairs committee recently reached a compromise advocating a scope reduction to 1000 employees and a €450m turnover, also applicable to Taxonomy disclosures.
The reduced disclosure scope raises the bar for banks to gather ESG information from clients, facilitating the identification of loans as sustainable on their balance sheet. On top of that, the Omnibus I package results in a two-year postponement in the CSRD disclosure requirements for non-listed large companies and listed SMEs, while the revisions to the European Sustainability Reporting Standards (ESRS) will significantly lower the future disclosures to be made.
Besides, smaller-sized credit institutions will fall outside the disclosure scope themselves. Unless they opt in to provide voluntary disclosures, they will have less incentive to identify, for instance, taxonomy-aligned loans on their balance sheet. The impact thereof on ESG bond issuance should be modest, though. The balance sheet size of most of these institutions was probably already too small to set aside sufficient sustainable assets for the issuance of green or social bonds.
Despite the simplification efforts on the ESG side, it is important to bear in mind that most large institutions will remain within the CSRD reporting scope and have set net-zero pathways, committing them to a further greening of their balance sheet. The same will also apply to banks that may fall out of scope in the future, but have already made all the preparatory efforts for the CSRD disclosures.
Implemented regulatory changes in the field of the Energy Performance of Buildings Directive (EPBD) will also support an ongoing focus on the renovation and greening of the building stock in the decades to come. In addition, the European Commission is set to publish its first European Affordable Housing Plan later this year, which may provide future impetus for the origination of affordable housing loans.