Europe is looking to roll back climate accounting rules

Commission officials met Wednesday and Thursday with businesses and industry groups to discuss broad changes to its sustainability legislation that will start to go into effect this year. The meeting followed a report released last week by the bloc’s executive arm in which it outlined concerns over competition and said that it needed to cut red tape while also championing decarbonisation to help the continent restore economic growth.

“The EU must urgently tackle long-standing barriers and structural weaknesses that hold it back. For over two decades, Europe hasn’t been able to keep pace with other major economies, due to a persistent gap in productivity growth," the European Commission said in its Competitiveness Compass document.

The Competitiveness Compass laid out a plan to boost the bloc’s economy and make its companies more competitive globally. Planned measures include reducing companies’  regulatory burden, lowering barriers that hurt trade and investment flows between EU member states and offering better training opportunities for workers.

To address concerns about companies’ regulatory burden, the EU plans to release a proposal later this month that is expected to pare back reporting requirements in some of the bloc’s key sustainability laws, in what is being called the “omnibus" package. This week’s meetings were to help inform those changes, according to those present.

Two key policies are under review: the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive. These directives were seen as landmark climate initiatives, impelling companies to report on their social and environmental impacts. They were among the first examples of laws forcing companies to take action on climate change and bear responsibility for their actions, albeit largely through accounting practices.

Changes are also expected to be proposed to the EU’s taxonomy, which the commission says is a “classification system that defines criteria for economic activities that are aligned with a net zero trajectory by 2050." Further changes to other EU laws could come later in the year.

Implementation of the CSRD and CSDDD was set to be phased in starting this year and next year, respectively, applying at first only to the largest European companies before expanding to include mid-sized ones. In some cases, smaller companies were excluded from certain reporting requirements. Industry groups have complained, however, that the smaller businesses could still be impacted indirectly if they are suppliers to or customers of larger companies.

Foreign companies with a significant European footprint were also required to report under the directive.

There has been significant pushback to the CSRD and CSDDD from both within and outside the continent, with some companies arguing that applying the reporting requirements adds to costs and hinders the process of doing business. France and Germany have both called on Brussels to delay or relax certain sustainability reporting rules in recent weeks.

In addition, within the European Union, vocal opposition to the measures has come from rightwing political parties, who have expressed anger at climate policies, saying they have contributed to inflation and a lack of competitiveness, leading to economic decline.

Pushback against the bloc’s regulations has already resulted in changes. In December, the EU’s deforestation regulation was delayed by a year following opposition from companies and foreign governments. The EUDR aimed to force companies who worked in sectors like cocoa and coffee farming to conduct strict due diligence to establish whether their products used raw materials that came from land that had been deforested.

The American Chamber of Commerce to the EU said the bloc’s plan to simplify some of its sustainability rules will be “the first real test" of its plans to improve the regulatory burden for companies. “Investors need a clear signal that Europe understands the severity of the economic situation and the role that the regulatory framework plays," AmCham EU Chief Executive Malte Lohan said last week.

However, some companies have expressed dismay at the prospect of changes to the regulations.

“Many companies, including large U.S. multinationals, have invested a significant amount of time and resources," said Paul Mertenskötter, an associate at law firm Covington & Burling. “Many have restructured teams and internal processes with a view to comply efficiently with new sustainability reporting and supply chain due diligence obligations. For CSRD, in particular, implementation is mature and, for some, even essentially complete as the first reports are due to be published in the coming months."

Several companies have urged the commission to keep the current rules in place. In a letter last month to European Commission President Ursula von der Leyen signed by Nestle, Mars and Unilever among others, the companies described investment and competitiveness as “founded on policy certainty and legal predictability." The letter added: “The announcement that the European Commission will bring forward an ‘omnibus’ initiative that could include revisiting existing legislation risks undermining both of these."

A group representing $6.8 trillion worth of investors also called on the EU not to bend to pressure, and keep the higher reporting requirements. The Institutional Investors Group on Climate Change, the European Sustainable Investment Forum and the Principles for Responsible Investment said the current rules help investors “manage risks, identify opportunities, and ultimately reorient capital towards a more competitive, equitable, and prosperous net-zero economy."

The European Green Deal was seen as one of the key achievements of von der Leyen’s first term in office. Now, as she enters her second term as the commission’s president, that achievement is coming under scrutiny.

Asked if the bloc had gone too far in pursuing its sustainability goals, von der Leyen said last week that the green transition has “never been done before" and the EU needs to be flexible and pragmatic in its approach.

“Europe is staying the course," she said.

Write to Yusuf Khan at yusuf.khan@wsj.com and Kim Mackrael at kim.mackrael@wsj.com