Navigating Draghi’s Report on EU competitiveness: key sustainability issues

On 9 September 2024, the former European Central Bank President Mario Draghi delivered his long-awaited Report on the future of European competitiveness to the President of the European Commission. The Report comprises two parts: Part A (a competitiveness strategy for Europe) and Part B (in-depth analysis and recommendations). 

The Report calls for a “new industrial strategy for Europe”, calling on the EU to raise investments by €800 billion a year to fund radical and rapid reform and avoid "a slow agony". 

Ursula von der Leyen, who commissioned the Report about a year ago, highlighted in her statement at the joint press conference her support of the fundamental principles of the report, including the need to ensure the EU’s long-term competitiveness through shifting away from fossil fuels and towards a clean, competitive, and circular economy. She also highlighted the importance of resilience and building more robust industrial value chains, including access to critical raw materials. 

The Draghi Report is not legally binding and is meant to serve as inspiration for the work of the new European Commission, which is in the process of being assembled. Ursula von der Leyen will need to decide how much of its recommendations to pursue. However, it is expected that a substantial part of the nearly 200 policy proposals contained in the Report will be included by the Commission President in the “mission letters” for the new Commissioners. 

Here are some key sustainability issues raised in the Report. 

Reduction of sustainability reporting burden

Reducing reporting requirements on companies, especially SMEs, has been on the agenda of the European Parliament, Council and the Commission for quite a while. In the context of the Corporate Sustainability Reporting Directive (CSRD), some steps have already been taken in this direction by amending monetary size criteria for companies in the Accounting Directive (see our blog post) and allowing a two-year delay for sector-specific European Sustainability Reporting Standards (ESRS) and ESRS for non-EU companies (see our blog post). The emphasis then shifted towards streamlining the reporting standards and publishing explanations to help companies navigate new reporting requirements. In Ursula von der Leyen’s Political Guidelines for the next European Commission, she suggests that “each Commissioner will be tasked with focusing on reducing administrative burdens and simplifying implementation: less red tape and reporting, more trust, better enforcement, faster permitting” - although her guidelines do not contain any specific proposals. 

The Draghi Report raises concerns that the EU’s sustainability reporting and due diligence framework is a major source of regulatory burden, magnified by a lack of guidance and lack of clarity surrounding its interaction with other legislative acts, and that this entails a major compliance cost for companies in the EU, ranging from EUR 150,000 for non-listed companies to EUR 1 million for listed ones’. The Report singles out the CSRD, the Taxonomy Regulation, the Sustainable Finance Disclosure Regulation (SFDR), and the Corporate Sustainability Due Diligence Directive (CSDDD). The Report specifically mentions the unclear requirements for the application of the ‘do no significant harm’ (DNSH) principle in the EU Taxonomy, potentially overlapping methodologies for emissions accounting and unharmonised timelines for related reporting requirements, which are likely to translate in over-compliance (e.g. over-reporting) risks across the value chain. The Report warns that further changes in this framework, including the forthcoming sector-specific ESRS, may increase compliance costs. The Draghi Report raises specific concerns about compliance costs for SMEs, saying that systematic quantitative evidence of the cumulative burden of EU legislation on SMEs and small mid-caps is key to designing appropriate remedies and mitigation measures. It further highlights the extra burden added by national transposition and enforcement, including the risk of Member States “gold-plating” EU legislation when they transpose it into national law, as well as diverging implementing requirements and standards in different Member States. 

The Report suggests that the Commission should assess and identify relevant mitigation measures for SMEs that could be extended further, including to small mid-caps. In particular, it was suggested to raise the current SMEs definition thresholds to include small mid-caps in the context of the simplified CSRD reporting standard for listed SMEs currently under development by EFRAG and reduce the frequency of assurances. The Report focuses on the need to improve the ability of SMEs to access green financing and suggests that the EU Taxonomy should be simplified and extended to allow SMEs to participate.

Patrick de Cambourg, chair of the Sustainability Reporting Board of EFRAG (which is tasked with the development of the ESRS) argued in an interview that “standardisation is simplification, not burden” (see Environmental Finance article, subscription required). However, he refused to speculate on what the Report could mean for the future of ESRS or the broader sustainability reporting landscape in the EU.

The European Fund and Asset Management Association (EFAMA), although it backs the Draghi Report’s conclusion on the strenuous regulatory burden faced by companies, it believes that late adjustments to the EU rules could cause more problems for investors: “Lowering requirements and delaying implementation of the CSRD will make effective sustainability reporting by banks and fund managers much more challenging under the Sustainable Finance Disclosure Regulation (SFDR), undermining investor confidence”. Eurosif also said that while regulation “should be clear, coherent, usable and not overly burdensome… simplification should not result in deregulation”, noting that the CSRD was essential to ensure investors and other financial institutions have the data they need to make informed investment decisions and that the CSDDD was also key to ensuring that large companies set and implement transition plans (see Environmental Finance article, subscription required). 

Streamlining permitting procedures

The Report highlights complex requirements of the national and European environmental legislation that result in delaying the impact assessments of renewable energy projects. It suggests several measures to simplify and streamline the permitting process, including transposing and implementing existing legislation on acceleration of renewables permitting and digitalising national permitting processes across the EU. 

The Draghi Report suggests that the EU should replace individual environmental assessments per project with renewable acceleration areas (RAAs) and strategic environmental assessments for renewables expansions. Other suggestions include: (i) developing legislation so that when a macro- environmental assessment in a specific region in the EU is made, all projects applying in the region would be green-lighted in a shorter time span (except in Natura 2000 regions); and (ii) providing limited (in time and perimeter) exemptions in EU environmental directives (e.g., the Habitats Directive, the Birds Directive) until climate neutrality is achieved, under certain conditions (e.g. installations do not endanger the population and mitigation measures are implemented). 

Increased investment in decarbonisation and a technology-neutral approach

One of the main messages in the Report is that decarbonisation must be accelerated, and the Report calls for an “unprecedented” amount of private and public investment. 

The Report also suggests the need to leverage all available technologies and solutions (e.g., renewables, nuclear, hydrogen, batteries, demand response, infrastructure roll-out, energy efficiency, and carbon capture, utilisation and storage (CCUS) technologies) by adopting a technology-neutral approach and developing an overall cost-efficient system. 

Along with other measures, the Report suggests maintaining nuclear supply and accelerating development of ‘new nuclear’ (including the domestic supply chain). The Draghi Report suggests a cost-efficient approach to the extension of nuclear assets and the development of EU industrial value chains for the cost-efficient deployment of established nuclear technologies and ‘new nuclear’ (small modular reactors (SMRs) and advanced modular reactors (AMRs)). It also suggests allocating additional financial support to research and innovation in new nuclear technologies like SMRs, including from the EIB. 

The promotion of CCUS technologies is regarded as one of the tools for accelerating the EU’s green transition. The Report suggests that Emissions Trading System (ETS) revenues could help to support the development of CCUS solutions in those sectors under the scope of the ETS, including power generation. ETS revenues could be used to provide capital support or premium payments to fill the current competitiveness gap vis-à-vis the market price without deploying CCUS. 

Critical raw materials

The Report highlights that Europe needs a coordinated strategy covering the entire value chain, from raw materials to final products. Through the recently approved Critical Raw Materials Act (CRMA) (see our previous briefing), the EU has introduced significant measures, and it is now vital to ensure its rapid and full implementation.

Suggested measures include: (i) developing a comprehensive strategy at the EU level from mining to recycling; (ii) developing financial solutions supporting the critical raw materials value chain, including participation from the EIB and EBRD; (iii) creating a true Single Market for waste and recycling in Europe; and (iv) developing strategic stockpiles for selected critical minerals in the EU. 

The Report stresses that accelerating the opening of domestic mines could enable the EU to meet its entire demand for some critical minerals, alongside reducing dependencies in combination with increased recycling and sourcing from trade partners.

CBAM

The Draghi Report highlights that to remain competitive with international players facing no price on carbon or a lower imposition, the success of regulatory measures including the EU Carbon Border Adjustment Mechanism (CBAM) (see our previous briefing) is key. Nevertheless, the Report views the success of CBAM as uncertain because its design is complex, its implementation by Member States is fragmented, and it relies on robust international cooperation.

The Report highlights that CBAM implies a heavy administrative burden in terms of reporting and calculating carbon footprints, is potentially easy to circumvent, and there is a risk of downstream carbon leakage. 

The Report suggests closely monitoring and improving the design of CBAM during the transition phase and evaluating whether to postpone the reduction of free ETS allowances if CBAM's implementation is ineffective. The Report also contains several suggested measures to help reduce the administrative burden, improve effectiveness and attenuate the trade-off between product coverage (downstream leakage) and administrative feasibility (data needs). 

Expanding sustainable finance rules to include defence

The Report admits that the EU’s defence sector faces structural weaknesses in terms of overall public spending, industrial footprint, coordination and product standardisation, international dependency, innovation, and governance. Public defence spending by EU Member States is insufficient in the current geopolitical environment. 

The Draghi Report concludes that besides public funding, access to private financing remains a key challenge for the EU’s defence industry. This is particularly true for SMEs and mid-caps, which form the backbone of supply chains and are key innovation actors. 

The Report highlights that “access to finance is often hindered by the interpretation given by financial institutions to the EU’s Sustainable Finance Frameworks and ESG frameworks.” One of the suggestions for improving the access of the defence sector to financing is “clarification” of the EU sustainable finance and ESG frameworks on the financing of defence products. This presumably could mean the inclusion of defence activities in the Taxonomy Regulation, in the same way as was done for certain nuclear and gas projects (which was challenged not only by NGOs but also by some Member States – see our previous briefing here).