Actually if distinctive colours are going to be a problem, then I'd be more worried about borders than flags, since decal flags at least give you two colours to work with. Given that, I wouldn't think it would be wise for Civ colours to change when flags do, so it would be possible to keep track based on colour combinations. If there are just 20 colours to choose from, there will be enough potential combinations to make far, far more than enough unique-coloured flags for each nation.
I know static flags can look pretty good, but they are exceptionally hard to pull off, and the best results are generally flags that feature large amounts of flat colour, such as tricolours, and with no emblem or one right in the centre.
Other good reasons for avoiding historical flags include:
- Some flags are too similar, especially in the modern era. Ignoring rare cases like Chad and Romania, there are many flags which are very similar apart from the order of the colours used. To make it clearer, one of them has to change.
- Up until very recently, most countries outside of Europe just plain didn't use flags at all, let alone national flags. Revisionist flag-making for dead cultures kinda distracts from the point of this mod.
- Afghanistan. Enough said.
- Some flags are exceptionally distracting. I have played with a real American flag featured. It's like a corner of my screen turned into a five-year-old screaming for endless attention.
- Even though this is a world history mod, the realities of gameplay means that borders, colonial empires and international standing will not be the same as in real life. Why would, for example, Commonwealth countries feature the Union Jack in their canton if, in game, the British Empire is limited to the British Isles and part of Iceland?
- Everyone keeps turning flags on their sides so the work as hanging banners. It looks awful!
