EU Proposes Major Simplifications In Sustainability Rules

The European Commission has launched its first "Omnibus" package, bringing forward a package of proposals to simplify sustainability reporting requirements for businesses. One of the main reforms is to take 80% of businesses out of the scope of the Corporate Sustainability Reporting Directive (CSRD). The proposals also cap the sustainability information that large firms and banks can ask for from smaller firms.

These reforms are in line with the Commission's "Competitiveness Compass," aimed at increasing Europe's productivity and global competitiveness. The aim is to cut reporting obligations by at least 25% for all firms, and 35% for SMEs. The Commission estimates that the new Omnibus proposals will generate yearly administrative cost savings of around €6.4 billion, including €4.4 billion through reforms to the CSRD.

The CSRD, which came into effect at the beginning of 2024 for large public-interest businesses employing more than 500 staff, demands detailed disclosure on company effects regarding the environment, human rights, social standards, and risks relating to sustainability. But the new proposal will restrict the CSRD's scope to companies employing over 1,000 people and with either revenues above €50 million or a balance sheet of over €25 million, exempting around 80% of companies from its sustainability report requirement.

For SMEs, the EU intends to implement mandatory sustainability reporting requirements based on EFRAG's new voluntary standards for SMEs (VSME). These standards will also cap the amount of detail of sustainability information that banks or large companies can ask for from SMEs in their value chains. The proposal also pushes the introduction of the CSRD for the second wave of companies two years back.

Aside from taking most firms out of the CSRD, the Commission will also overhaul the European Sustainability Reporting Standards (ESRS), hoping to lower the number of data points and steer clear of sector-specific standards or reasonable assurance requirements under the CSRD.

The Corporate Sustainability Due Diligence Directive (CSDDD) sets out obligations for firms to tackle effects on people and the planet in their supply chains, ranging from child labor to deforestation. The Commission has also suggested postponing the implementation of the directive for big businesses to 2028, applying due diligence only to direct business partners unless there are signs of negative effects further down the supply chain. The rate of monitoring the effectiveness of due diligence will also be lowered from annual to once every five years.

The EU Taxonomy, used to rank economic activities on the basis of how well they contribute to the environmental objectives, would only be required for firms with revenue above €450 million, while smaller firms making a bid for sustainable finance would do so voluntarily. The Commission's plan involves cutting the number of required Taxonomy data points by almost 70% and exempting firms from evaluating activities that are not financially significant.

The Carbon Border Adjustment Mechanism (CBAM), intended to avoid "carbon leakage," will create a new threshold that exempts 90% of importers from the regulation's reach. Albeit removing about 182,000 importers, the Commission indicated that more than 99% of emissions will remain covered by CBAM. The proposals also make calculations of emissions and other reporting more straightforward.

The proposals will be proposed to the EU Parliament and Council for approval, where the Commission is asking that they be taken as a priority. European Commission President Ursula von der Leyen noted that the proposals are important simplifications, streamlining things for businesses while continuing progress toward decarbonization objectives.