This is Tom Rowland's Reese and you're listening to Switched on the podcast brought to you by BNF, and today we're here to talk about sustainable finance policy. Having spent years in development. In February of this year, the European Union took an act to its sustainable reporting regulations, in the process limiting investors access to climate data and potentially limiting their ability to push capital towards the energy transition.
Widely considered the leader for sustainable finance policy, the watering down of these key regulations has thrown the EU's position into question. Part of the pressure behind the shift has been concerned over competitiveness, exacerbated by the new Trump administration in the United States, which has continued to take aim
at climate regulations. But as Europe stumbles, could a new leader be found in the form of the Asia Pacific Region, which during the second half of twenty twenty four introduced
twenty one new sustainable finance policies. To discuss this and more, today, am joined by b and EF sustainable finance analysts Maya Messenger and Jamison McLennan, who share findings from their recently released research notes titled EU weaken sustainable leadership with rule rollback and Sustainable Finance Marketing Outlook one twenty twenty five, which B and EF clients can find. BNF go on
the Bloomberg terminal or on BNF dot com. All right, let's get to talking about sustainable finance policy.
Welcome to the podcast, Meyer, thank you, thank you Don for having.
Me, and welcome Jameson.
Yeah, thanks great to be here.
When we last spoke about sustainable finance policy on the Switched On podcast, Europe was leading the way. Can you remind everyone why we were saying that and whether the policies and frameworks that were behind that are still on course.
So that you has three significant sustainable of finance reporting policies. The Corporate Sustainability Reporting Directive, which requires companies to report at a range of environmental social sustainability metrics, The Corporate Sustainability Due Diligence Directive, which requires companies to report on
the sustainability impacts of their value chain. And the EU Taxonomy, which works as effectively a classification systems for which economic activities are considered green within the European Union.
So how often do they have to report this and who do they have to report it to.
So the reporting timelines vary between the regulations, but they're typically reporting to each of the specific governments within the European Union that have transposed these regulations into their national law. These three sort of significant sustainability reporting regulations have been
weakened over the past couple months. So in February February twenty six, twenty twenty five, the European Union passed their Sustainability onminnion bus which effectively work to limit the scope of some of this reporting regulation by reducing the number of companies that are required to report. For example, under the CSRD, under the original draft, any company with more than two hundred and fifty employees within the European Union would have to report on a range of sustain nobility metrics.
They've now bumped up that requirement so companies with more than a thousand employees only have to report, So they've limited that scope by around eighty percent.
There's just a couple of kind of clarification questions I have on all of this, because so from what I understand, the way it works is the EU has a directive and then national governments transposed that directive into their own laws. Is there anything to stop national governments from saying, actually, we like these rules the way that they were or does this change in the directive require them all to scale back their requirements?
It requires them all to scale back their requirements. The European Commission has gone in and edited the specific directives for the CSOD and the cs Triple D, and so member states will have to go back and retranspose the new regulation.
So it's not just it's no longer pushing national governments to put in place a law, it's actually preventing them from doing so if they wanted to.
The utexonomy also is a regulation, so it's going to be like implemented and supervised at the European level. The two others are there, but I think they can still like amend. There is a scale back, so it means that when a directive is then implemented at national level, members that have some flexibility with regards to the implementation. But indeed they could strengthen the scope. I don't think we're going to see it because a lot of this has happened because of a push from member states to
basically scale back on these directives and regulations. So I don't think we're going to say so.
My question is kind of moot in a way that there isn't a government that wants to go further than the eregulations.
I mean, to our knowledge, not really. Actually, just today Member states have agreed to stop the clock rule on the omnibus, So it means that basically one of the amendments on these directives was to delay their implementation for the ces or the end of cs repody in particular, and members they have just voted on that. So it feels that there is still a consensus around this topic.
There is not like a one key country that is being particularly like vocal about not scaling back these policy and let's just be clear also about something is that the CSRD, the CES reply and the U Taxonomy had been passed, and the CSRD and the U Taxonomy they were already reporting happening against them. It's been two years. That two years, yeah, two years for the taxonomy, and
this year is the first reporting. The reporting has been phased in depending on the size of the company, so the biggest companies have started reporting against the CSRD from this year onwards. That being said, while it may change for the taxonomy, most of the company that have started reporting this year on the CSRD will have to report in the future, but it might be a question of they might have to report on less indicators.
So I mean this kind of leads to the next question. You know, as you say that, like, the EU was one place two years ago and two years later it's changed tack and it seems to be a fairly universal feeling around it. So what led to this rollback?
There have been criticisms around sustainable finance regulatory agenda in the you being overly burdensome, So that was coming from companies, certain companies, but there also has been an important report in the in the EU, which is the More Dog Drugs Report on competitiveness of companies how to bring back competitiveness from companies in the EU, and one of his key advice to European regulators was to scale down the
sustainable finance regulatory agenda. In particular, these regulations were targeting for the first time small and medium enterprises, so SMEs there were also having a big extra territorial impact, so a lot of like non EU companies that were trading in the EU or having some operations in you were
falling in scope for it. So this has all shifted the you to rethink this rollback, and it feels like it feels like there is a rollback on sustainable both finance policy because also this compliance was I always make this joke, but it's also a geeky one, but it's always like really everything everywhere or at once, because they were targeting everyone at the same time, some policies were coming into places that were not really finished, which is
the case of the CSRD. The taxonomy also has been messy, so I think it was it was quite expensive for companies to implement it, but it's also it feels like a shifting strategy. So the same day that the EU has published this omnibus regulation, its proposal to scale back everything, they've also published a Clean Industrial Deal, which basically brings more subsidies to the energy transition, reassert greenhouse gas emission reduction,
stuff like that. So it feels like it's almost they moved away from a stick regulation to introduce carrot regulations and move away from reporting compliance to basically creating real economy incentives. So it's almost like a change in philosophical approach, like political approach.
Yeah, I mean you could also term it as a change from private sector led transition to public sector led transition.
True.
I'd also just add that this is all happening in the context of the pushback against sustainability reporting in the US as well. And so we've seen the Securities and Exchange Commissions sustainability of reporting regulation get rolled back. You've seen the Trump administration take a pretty aggressive stance actually against CSRD and cs triple D, and so this this rollback is kind of happening in context of that as well.
And it also brings into a question about European companies competing against maybe American companies that aren't held to the same reporting standard as well.
I mean, I mean, this was kind of going to be my next question, and you've kind of already answered it to some extent. But apart from it, you know, the sort of the optics of it. The US has a new administration, it's a lot less friendly towards things we would broadly term ESG. You kind of mentioned what sound like they actually have leverage on what the EU does. What can you just explain a little bit more what you mean there.
I don't know if it's specifically leverage, but more a relative competitive advantage potentially if the American companies aren't required to report this range of sustainability metrics, whereas European companies maybe are, and so European companies may be undercut by by businesses not just in the US as well. I think that's part of goes back to the original competitiveness concerns that stems from the DRAG Report.
A question I have around this competitiveness concern is because you know, we hear it BNF, we look at the energy transition and in most areas we say it's a competitive advantage to be more sustainable in various ways, you know,
in mitigating risk for the future. Is it that that is just simply wrong at this moment in time or is it literally the regulatory burden that was on these companies was the issue, Like just the amount they had to invest in doing the paperwork, Like what is the thinking behind it being less competitive having this requirement on you?
Yeah, so we definitely it's definitely more of a regulatory burden rather than sustainability being uncompetitive. In some cases, these companies under the CSRD would be required to report over one thousand data points, which for smaller medium enterprise can
be incredibly overwhelming. And our view on the Sustainable Finance team at PNF is that rather than potentially limiting the scope of companies that are required to report under these regulations, which is what has happened, the change in regulations could have focused on limiting the number of metrics that are required to report to just the key ones that investors.
Are much so it is like maybe over complex.
Yeah, yes, and I think like the backlash we're seeing this regulatory push and everything. I completely agree with everything Jameson is saying. But on top of this, and I think we agree with Jameson on that is like there is going to be, in any case, a heightened urge from companies to prove that the sustainability choices that they make companies and financial institutions are being financially profitable, that they are being made for the competitiveness of the business.
And in particular in the US, I think there's going to be more and more of an urge to prove that sustainability is actually the good financial decision for companies.
And that's probably also why we're seeing this situation where the US saying, Okay, you know what, we're moving away from reporting, and we were talking to corporations that hired or now use dozens and dozens of people just to do a CSRD report, for instance, and to say, Okay, maybe this is money that could go to actually investing in the energy transition or developing the technology we need for it. And so I think that's why we're seeing this shift on the U side. On the US side,
there is still a lot to be discussed. We're probably not the best ones to answer the question around like subsidies to clean energy and the rest of these technologies. But on the sustainable finance front, I think also one of the things is that this necessity to prove profitability and competitiveness is going to become extremely serious in the coming years.
So I want to move on to talking about what impact this might have on investment. And I'm going to
use an analogy here. So I'm vegan, and so when you're vegan, you sometimes go into a restaurant or into the grocery store and there's little v signs that tell you that there are things that are good for you, and you don't have to do the work to figure out whether something is you know, legit for you to invest your veganism in and sometimes that isn't there, and then you have to, like if you're in the grocery store, like read the list of ingredients, or if you're in
a restaurant, you have to ask lots of annoying questions. So the existence of the little green VS. The impact of it is it shifts the emphasis on you having to do the homework to the providers of the food to do the homework. Now, there isn't a government requirement for little vs. Everywhere, and there are actually third party
organizations that have created these frameworks. The reason't they use this analogy is this, This hasn't changed whether or not I'm going to be vegan, but it certainly streamlines my veganism. So I hope the analogy where I'm going with this is clear is some of these requirements is like a requirement for the equivalent of a little V next to certain companies, to certain investments, for investors that have an
appetite to put money into green causes. So I guess a couple of questions, is it going to actually change the appetite for this investment or is it just going to make it a little bit harder and put the onus onto the burden of the work on the investors. And then second question is their scope for as is the case with vegan and vegetarian labels, that actually there's third parties that might come in and have their own assessments, you know, whether it's NGOs or someone else.
I think the goal with these sustainability reporting policies kind of what you're kind of saying. I think it helps to investors streamline their decisions. It provides a raft of standardized data points that they can specifically point to and
evaluate for their sustainability and climate performance. I do think think the reporting does lower barriers to entry for investors that may have interesting sustainability or some sort of sustainability concerns without having the resources to actually go through and
perform this due diligence themselves. There's forms of voluntary reporting and third party reporting, but the fact that it's coming from sort of government regulation side, I think ensures that kind of the universe is as standardized as possible.
As well, I agree with jameson there is that angle the standardized way, the fact is like government stabled and all of that. But I would want to add on two points. Indeed, We don't think that slashing down reporting will re question the whole investment in clean energy and in the transition. I agree with everything Jameson has said, but indeed remove the barrier to entry to have these regulations and not having them might make it more difficult.
That being said, I think that there are some indicators that are becoming increasingly necessary to make the right decision. And in particular, the taxonomy was answering the question of, Okay, how much a company is investing in the transition by reporting green capex, how much the company has already transitioned to low carbon economy by looking at the percentage of
green revenues. These are key indicators that also force companies to disclose revenue segmentation, that are key to any decision maker, whether you are an impact investment fund, an ESG fund, which is a fund that takes into account environmental, social and governance factors, or just a random fund that tries
to mitigate their explosure to climate risk. And instead of reworking the taxonomy, which is heavily flowed because it's a massive it's a massive piece of work and I know because I've worked on it in the past, instead of
reworking it, aligning it with accounting standard. The EU has decided to just cut down the number of companies that are reporting against it and make it voluntary, and we know that voluntary taxonomy most companies don't report against them, so that could actually impact beyond the investment to clean energy, at least the capacity from investors and lenders to mitigate
their exposure to climate risk. And the second thing is Jamison has talked about the anti ESG backlash we're seeing in the US through the lens of regulation, and amongst all the anti ESG lows we're seeing at US state level, we are seeing a lot of boycott laws or laws and anti esglows that boycott prevents certain financial transitions from making business in a certain state because they are too
heavily involved in sustainability. And antire ESG to take into account any factor that is not pecuniary, so it needs a factor that is not financially material in their decision making process. This can affect not the energy transition that is already profitable, not the wind, the solar, the evs.
It's going to affect the clean technology that are not necessarily financially profitable, but that still people want to see in their investment fund if they are interested in sustainability, so carbon capture and storage, hydrogen investment, these emerging technologies. So in this sense, I think we really need to
nuance this. In this sense, I completely agree with Jameson's point, and I would add on top of this, So revamping the EU taxonomy was a necessity because it was burdensome, but it could have been done differently to drive a better impact. Second one is the nuance that we need to see in the US because it might dempen a certain sort of investment, but not all of them, and also not the whole energy transition investment is at stake just because of this backlash, I.
Really want to understand, you know, because I just want to pick up on one thing you said, which was that now companies aren't getting the information they actually need, which going back to my metaphor about veganism, it's not just that the little v's are being taken away. Are you saying that actually the ingredient list on the back of the packet is getting taken away? Is that even if companies want to invest the effort to up they actually don't have the information they need.
Well in the EU right now, there's going to be so, as I said today, one of the amendment has gone through the Council because you know, like the EU legislative process is very complicated. Even after like five or six years in this just doing research about it, it's still quite complicated to me. But basically all these amendments so that omnibus package will have to go through Council and Parliament.
One of the amendment, which was to delay reporting, has gone through Council already today, so it has to go through Parliament. Is going to go through Parliament on the first of April. There has been like urge to get this through the delay bit because otherwise some companies were well in scope as early as next year for reporting, and you know you don't prepare reporting on in December
or April. So that's the first thing. The other thing is there is intense consultation with a lot of like industrial societies representing civilians, companies and stuff like that, which is one of the big criticism that has been made to the EU, which is the fact that it built all these regulation a bit too much behind closed doors rather than involving everyone. So that might help as well.
And then I think Tom, there could be questions around will this shift and strategy continue, you know, like maybe we'll see a scale back on regulatory front around disclosure, but we might see more incentives around real economy incentives and investing in all of that and strengthening being more like a closer to the economy rather than just around the reporting.
Got it. So, if the EU isn't going to be taking the same leadership role on this front that it has done in the past, does that create an opportunity for another region of the world or another country to step up and seize the initiative.
The EU putting the brakes on some of it sustainability reporting regulation. There's a concern here that it pulls momentum from sustainability reporting regular globally. CS Triple D is still the first of its kind in terms of regulation, and we don't really see a comparable version globally yet. However, as they potentially step back, we start to see regulation in Asia Pacific region, specifically in China as well, start to become closer to comparable to the EU's regulatory framework.
With twenty one sustainable finance policy developments in the second half of twenty twenty four, and it was definitely the busiest region globally, so we're starting to see some strong policy growth there as well. I'd also point to Brazil and the UK are both looking to potentially develop a mandatory taxonomy after the EU's mandatory taxonomy, and if the EU continues to weaken or weakens there reporting against their taxonomy, either of these markets might end up leading in that sense.
What is the outlook overall? I mean, we've seen scaling back in the EU, We've seen progress maybe happening in Asia, the UK and Brazil, as you've just mentioned, maybe moving forward with certain things as a bit of a question of where leadership will come from. But what is the future in your view and say the next five years or so of this type of framework for supporting investment in the energy transition.
Well, I mean the first thing to say is that if we had been asked this question just six months ago, we would have never predicted the omnibus. The EU had spent so much money, effort time into developing the Sustainable Finance Agenda, and it feels that they were convinced they were fighting the right fight. So I think it's that's one of the things that financial institutions and companies are effectively criticizing and being vocal about is to say, unfortunately,
the policy agenda is too uncertain, too inconsistent. They need clearer guidance, clearer roadmaps about what's going to happen in the coming years. Because companies hire sustainability teams to do the reporting and then get told that actually they might not even have to do it in the future. They get asked for reporting, and then investors say that it is not necessarily what they want, they want something else.
So I think clarity is going to be really important in the coming years, like having these clear agenda both in EMEA, Europe and APEC. And the second thing is we haven't tooked at all about the International Sustainability Standards Board, the iss B framework, and we think that it's going to be one of the key framework that's going to impose itself around the globe.
I'd agree with everything that you've said so far. I will just add a little bit of the US perspective and that with the Trump administration, we've started to see some more antiesg policies being passed at the state level and federal level. Sustainability reporting, either through the SEC rules or the adoption of the International Sustainability Standards Board standards
are not particularly likely as well. We do see some positive state developments, but while we've unfortunately seen a bit of a rollback in the EU, the US is definitely very far behind on the sustainability of reporting front.
Well, one thing I was going to ask is you know, to your point that you has invested so much time and effort into this and then supposedly rolled it back. Is there maybe an argument that they're just putting it on ice for now and that all of that work and everything that has been learned is still there ready to be taken back off the shelf.
That's an amazing question, thank you. Yeah. No, I think it's a really good question because I think they are hoping that it might be picked up as a voluntary standard. So they might think that because it's the more companies are going to use it, or that it may influence other regions in the world and stuff like that. That being said, I still think that there is a need for a revamp of some of these regulations. Jameson explained it.
The CSRD requires with a caveat, you need to prove that it's fine, like its material to your business and whatever. But like it lists on two hundred indicators quantitative and qualitative. This is too much. This is too many. And the taxonomy is also a lot of work to do a taxonomy reporting. So there could be work to be done
on the essence of these laws. And I'm not saying this as the x filos of her that I was, but like there is something to be done about the core of these policies and maybe they could use it in the future. Maybe it's just a question of timing.
Maybe to borrow from your language, Maya. Maybe it's not adieux, but it's au revoir.
Oh yes, yes, exactly. Maybe it's just amaya.
Thank you so much for joining us today.
Thanks Domin, thanks for allowing us to bring a lot of nuance to this topic.
And Jamison, thank you also. Thanks.
There is great to be here.
Today's episode of Switched On was produced by cam Gray with production assistance from Kamala Shelling.
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