Following calls to reduce the regulatory burden imposed on businesses, the European Union is poised to reform a series of laws passed under the EU Green Deal that required businesses to address climate change. With a goal of reducing reporting requirements, the Omnibus Simplification Package will look at the EU Taxonomy, Corporate Sustainability Reporting Directive, and the Corporate Sustainability Due Diligence Directive. After months of speculation, on February 26, the European Commission officially adopted its proposal. Here are eight key takeaways.
Background
As part of the European Green Deal, a series of directives were passed by the EU to force businesses to address climate change and report carbon emissions. The goal is to comply with the climate initiates of the Paris Agreement, an international treaty signed in 2015 to prevent climate change. The agreement included a goal of reducing greenhouse gas emissions to net zero by 2050. The EU addressed this through three key legislative actions.
In 2020, the EU adopted the EU Taxonomy for Sustainable Activities. The Taxonomy created a classification system for business and investors to know what activities are considered green or climate friendly.
Then followed the Corporate Sustainability Reporting Directive in 2023. The CSRD created requirements for businesses to report GHG emissions and other environmental, social, and governance actions. For large companies, general reporting begins in 2025 for fiscal year 2024. Small and medium sized companies, non-EU based companies, and companies in high emission sectors will see reporting requirements being drafted and released over the next year.
The final piece, the Corporate Sustainability Due Diligence Directive, was adopted in May 2024. The CSDDD, or CS3D, created additional reporting requirements, as well as legal liability, for companies in relation to their supply chain. The intent is to not only regulate the direct actions of a company, but also assure their suppliers comply with climate and human rights goals. However, the CSDDD faced significant push back during the final stages. Only finding approval after significant changes that reduced the scope.
Following an informal meeting of Council leadership in mid-November, Ursula von der Leyen, president of the European Commission, announced her intention to revamp sustainability regulations to reduce the burden on businesses. She stated the Council and Commission will have an omnibus bill that will take “a huge approach to reduce in one step, in all the different fields, what is agreed is too much today. We will look at the triangle Taxonomy, CSRD, CSDDD.”
After months of speculation and leaks, the European Commission officially adopted the proposal on February 26. The proposal now goes through the legislative process before the European Parliament and Council of the European Union, before getting final approval.
Corporate Sustainability Reporting Directive
1. Sustainability Reporting Limited To Large Companies
The current reporting requirements for the CSRD are being phased in over the next few years. Eventually, all companies based in the EU that meet two of the following three qualification will be required to report: €50-plus million in net turnover, €25-plus million in assets, or 250-plus employees. However, the proposal significantly reduces the number of businesses impacted.
The proposal amends Article19a(1) to raise the standard to only include companies with over 1,000 employees and €450-plus million in annual net turnover. It also amends Article 29(c)1 to only require listed companies to report if they meet the above thresholds. The same change applies to non-EU companies. This aligns it with the existing standards of the CSDDD and will remove 80% of companies from the CSRD reporting requirement.
2. Sustainability Reporting Delayed Two Years
The CSRD is being phased in over multiple years, starting with large publicly traded companies, then expanding to large companies that are not publicly traded, and eventually including some SMEs. Large publicly traded companies are reporting now for FY 2024. Large companies are set to begin in 2026 for FY 2025. While the third wave begins in 2027 for FY 2026. As most of the second and third waves will be exempt under the new plan, the European Commission is separately proposing to delay implementation of those waves by two years to allow the legislative process to unfold. This helps companies avoid costly ramp ups for reporting, only to eventually be exempt from sustainability reporting requirements.
3. SMEs Protected From Additional Sustainability Reporting Demands
Relating to climate change and greenhouse gas emissions, sustainability reporting is divided into three scopes. Scope 1 relates to the direct GHG emissions of the company. Scope 2 relates to the GHG emissions made by the energy provider for the energy consumed by the company. Scope 3 tracks GHG emissions along the value chain, including SMEs that the reporting company does business with. SMEs have expressed concern that the reporting of Scope 3 will, by default, require them to create costly sustainability reports, or not be able to do business with large companies. The proposal addresses this by amending Article 19a(3) to limit what reporting companies can request from SMEs to the lesser voluntary reporting requirements.
4. European Sustainability Reporting Standards To Be Rewritten
While the CSRD sets the high level standards of reporting, the drafting of the details was delegated to the European Financial Reporting Advisory Group. In 2024, EFRAG released their first wave ESRS. However, they were immediately met with push back from the business and financial sectors that claimed the standards were overly complicated. The Commission delayed the drafting of additional ESRS, asking EFRAG to focus instead on providing guidance for the first wave. The proposal will send the first wave of ESRS back to EFRAG to be rewritten. It also eliminates the sector specific ESRS.
Corporate Sustainability Due Diligence Directive
5. Indirect Businesses Removed From Due Diligence Requirement
One key aspect of the CSDDD is that it holds businesses accountable for the actions of other companies along their value chain. The proposal limits that responsibility of Article 8 to direct business partners. Indirect business partners may still fall under the scope, “where a company has plausible information that suggests that adverse impacts at the level of the operations of an indirect business partner have arisen or may arise, it shall carry out an in-depth assessment.”
Additionally, in line with the protection of SMES, companies are no longer allowed to request information beyond the CSRD requirements from direct partners with fewer than 500 employees.
6. Enforcement of Due Diligence Directive Reduced
Article 27 of the CSDDD required countries to impose financial penalties with a maximum cap that “shall not be less than 5% of the net worldwide turnover of the company in the financial year preceding the decision to impose the fine.” That language created a very costly penalty, and forced countries to allow their maximum to be at least 5% of net turnover, but gave them the option to go even higher. The proposal removes that requirement, leaving the penalties subject to further debate.
The proposal also removes the ability for organizations to take “representative action” against businesses for violation of the CSDDD. The original language, in essence, allowed for class action style lawsuits under limited circumstances. Under the proposal, that language of Article 29 has been removed. Additionally, the proposal no longer makes civil liability mandatory, leaving it to the countries to adopt their own national standards.
7. Consumers And Advocates Removed From Being ‘Stakeholders’
Unlike the United States, in the EU, the consideration of stakeholders is a part of the fiduciary duty of corporate executives and directors. Who is considered a stakeholder is dependent on the language of the applicable law. The proposal amends the Article 3 definition of stakeholder to mean “the company’s employees, the employees of its subsidiaries and of its business partners, and their trade unions and workers’ representatives, and individual or communities whose rights or interests are or could be
directly affected by the products, services and operations of the company, its subsidiaries and its business partners and the legitimate representatives of those individuals or communities”
This amendment removes consumers from consideration as well as outside organizations or individuals not directly impacted by the actions of the company. This will significantly reduce the ability of climate activist organizations to demand information.
8. Due Diligence Directive Delayed One Year
The CSDDD was adopted by the European Union in 2024. Member states currently have until July 2026 to transpose the directive into national law. The first wave of due diligence requirements are set to go into effect in 2027, with a second wave in 2028, and the third in 2029. The same proposal that delays the CSRD also delays all the CSDDD dates by one year.
The future of the Corporate Sustainability Due Diligence Directive and the Corporate Sustainability Reporting Directive is uncertain. The omnibus proposal by the European Commission is just the first step. It is very likely that the delays will be adopted quickly, allowing the legislative process to unfold at a reasonable pace. Expect a lively debate with business interests and climate activists aggressively asserting their positions. However, I expect the final outcome to align with the current proposal.
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