The European Commission needs to make the bloc more competitive and sustainable, while maintaining its soft power, writes Marcio Viegas
Much has been speculated about the EU sustainability 'Omnibus' proposal, especially after a draft document was partially leaked recently.
For most of us working for over decades with command-and-control regulation and then softer – but smarter – reporting regulation, it is shocking to see all the latter work being dismantled without due process, including proper consultation and impact assessment. Not to mention the constant leaks!
Yes, Europe needs to become more competitive, and regulations should evolve. But it is not by flip flopping over its own regulation that suddenly exports will grow, or unicorns will materialize at the Champs-Élysées or at the greener Platz der Republik.
The "Brussels effect" is not new and it is probably one the best EU exports in sectors such as chemicals, food and automotive:
- First, companies comply with the EU regulations and standards to access the vast EU market.
- Then they extend their requirements across their global operations to reduce the cost of managing multiple compliance frameworks.
- Finally, some rules are formally adopted by international organizations and even become legislation in other jurisdictions, sometimes literally copying the EU regulations.
The concept was first coined in 2012 by Professor Anu Bradford, at Columbia University, who then wrote the book "The Brussels Effect: How the European Union Rules the World".
"Let's hope the European Commission focuses on simplification only, or at least takes a pause to better listen and assess the direct and indirect impacts of any changes, including on its "Brussels effect"
At that time, familiar arguments that Europe was becoming too bureaucratic, irrelevant and less competitive fueled Brexit, for instance. Brexit was never replicated, and, except for some now-powerful extremists, Europe – and its robust regulatory system – are perceived a key assets by most political and business leaders.
As Prof. Bradford explained in 2012, "few Americans are aware that EU regulations determine the makeup they apply in the morning, the cereal they eat for breakfast, the software they use on their computer, and the privacy settings they adjust on their Facebook page."
However, not many Europeans know – or instinctively see – the competitive benefits of setting and applying such rules first and then globally.
Since then, the EU grew and stayed firm on "ruling the world". The EU's General Data Protection Regulation (GDPR) for instance, are now the global standards for privacy and data governance.
The EU Green Deal inspired, in a way, the now-partially-defunct US Inflation Reduction Act.
More specifically, the EU Taxonomy for Sustainable Activities is now the basis for sustainability taxonomies in dozens of jurisdictions.
What is also interesting is that this "ruling" does not happen because of lengthy global consensus or less elegant but fast coercion, but because of the EU's soft power, market globalization or legal "migration".
Obviously, some corporations, namely some powerful US technology and German companies, do not like these "rulings". But, in general, European and non-European investors, banks, businesses, society and the environment benefit from legal harmonization, predictability and some ambition, based on science or expert knowledge.
Nevertheless, it is also true that Europe needs to become more competitive, as the Draghi Report rightly insists. It did not stop obscure lobbies and more open political ideologues – some of them openly from outside the EU – spreading more radical changes and misinformation.
In any case, regulatory simplification is obviously welcome, but only when it follows a due process and, more importantly, does not imply in deregulation, for at least two reasons:
- First, to "keep your word", provide regulatory stability and, thanks to the "Brussels effect", give advantage to the EU companies and inspiration for all, and;
- Second, because regulation is needed, as experts, proactive investors, governments and businesses are asking, namely on climate action and due diligence, to create a level playing field, and because it is less expensive to prevent, than to remediate, climate disasters and human rights abuses.
Despite not being the fastest growing economy in the world, since its foundation Europe is now a more united, cleaner, safer, equal and inclusive place to live. A lot more needs to be done and Europeans should not take their welfare state and even their climate for granted.
Sustainability, the ecological and just transition are a daunting (and often underestimated) societal, environmental and technological effort, as discussed – almost annoyingly – by Professor Vaclav Smil in his book "How the World Really Works".
The EU Green Deal and its legal framework, namely the CSRD, the EU Taxonomy, the CSDDD and – out of scope of the current Omnibus – the SFDR were not meant to be easy or simple. Much less perfect!
Those of us dealing, normally under-resourced, with these directives and regulations are the first ones to complain about the "bureaucracy" and ask for "metrics, reporting and verification to be simplified and standardized – globally if possible – and go beyond paperwork", as I wrote on Environmental Finance in 2021. But not deregulation.
Voluntary reporting, for instance, has been around for 25 years and it is still a mess, with each company reporting the way they want, and investors and others struggling to decipher actual performance.
The good news, to my surprise, is that the accountants and others at the European Financial Reporting Advisory Group, set up a sustainability board, even "rebranded" themselves as simply EFRAG and, more importantly, did a decent job while developing specific European Sustainability Reporting Standards (ESRS), despite the standards were already watered down by the European Commission.
The ESRS are so detailed, not necessarily prescriptive, that they are now falsely used as an argument against the CSRD.
A common myth is that companies need to report "more than 1,000" datapoints.
On the other hand, a sustainability activist or investor could still ask: Where is the EU Social Taxonomy? What happened to the ESRS on Tax Disclosures? How come a company can say that their employees are not "material"? Why were the sector-specific standards never published? What is going on with the digital tagging?
However, it is not time for reopening Pandora boxes: 2025 looks like 1989, or even 1968. Europe is at crossroads.
Or, as the HEC Professor Alberto Alemanno puts it: "The bloc now faces a stark choice: it can either continue to set global standards, or it can dismantle its regulatory backbone and diminish its influence on the world stage, while dramatically undercutting the commitment to the rule of law upon which the entire EU edifice lies."
Let's hope the European Commission focuses on simplification only, or at least takes a pause to better listen and assess the direct and indirect impacts of any changes, including on its "Brussels effect".
Marcio Viegas is the founder and managing director of SUST4IN, lecturer at different universities and lead researcher.