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. The initial Omnibus is set to be released on February 26, but a copy was leaked and heavily circulated on LinkedIn on February 22. The leaked draft eliminates required reporting for small and medium-sized enterprises, raises the reporting thresholds to match the CSDDD, and limits what can be asked of SMEs.
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.”
The Omnibus Simplification Package is scheduled to be released on February 26, assuming there are no delays. The process has been shrouded in silence, but there is speculation that the release will be delayed until March due to a lack of consensus on the final proposal. On February 22, a partial draft of the package was circulated. While it is unclear if it is the final draft, or just one of many being debated, it provides insights as to the direction of the Commission and fueled debate as to the future of the CSRD.
Proposed Changes To The Corporate Sustainability Reporting Directive
Unlike the CSDDD, the legislative summary of the changes to the CSRD was not included in the select pages that were leaked. However, the text of the proposal relating to the CSRD was included. Most of the changes are focused on limiting the impact on SMEs by raising the threshold of what businesses have to report and limiting what large companies can ask from SMEs.
Raised Threshold For Sustainability Reporting For EU 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. This aligns it with the existing standards of the CSDDD.
Removes Mandatory Sustainability Reporting For Listed Companies
Under the current text of the CSRD, all companies whose securities are traded on a regulated market in the European Union are required to report. Under the proposal, Article 29(c)1 is amended to require listed companies to only report if they meet the above thresholds. The related provisions in 19(a)7 are also deleted.
Large Companies Limited In What They Can Request From SMEs
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.
Raised Threshold For Sustainability Reporting For Non-EU companies
Under the current CSRD, some companies not based in the EU, but meeting certain requirements, are required to start reporting in 2027 for fiscal year 2026. For now, the threshold is that the company must generate more than €150 million in the EU annually and have either 1) an in-scope EU branch that nest more than €40 million annually or 2) a large subsidiary that would be independently in-scope. The proposal raises all thresholds to over 1,000 employees and €450-plus million in annual net turnover in the EU.
Notably, a recent proposal by the European Financial Regulatory Advisory Group, tasked with drafting reporting standards for the CSRD, suggested that non-EU companies use the standards of their home country.
Likelihood The Changes To Corporate Sustainability Reporting Directive Will Be Adopted
The final language of Omnibus Simplification Package as it relates the Corporate Sustainability Reporting Directive is still being negotiated. Once proposed, the legislative debate that follows will be one to watch and could result in changes. However, the leaked draft aligns with the overall direction of the EU on this matter, and I expect they will be adopted.
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