EU Proposes Relaxed Rules for Corporate Sustainability Reporting

Under the EU Omnibus package, the Council of the European Union has declared its negotiating position on key changes to corporate sustainability rules. This is significant news. These proposed changes pertain to two important legislative pillars in the bloc's ESG regulatory framework: the Corporate Sustainability Reporting Directive (CSRD) and the newly introduced Corporate Sustainable Development Regulation (CSAD). 

In February, the European Commission introduced the Omnibus proposal in hopes of streamlining reporting requirements and delaying some implementation deadlines. A reduction in the level of detail required for companies to comply with these regulations is proposed by the Council, along with a more relaxed approach to climate transition planning and disclosure. 

Proposed revisions to the CSRD will greatly increase or exceed the minimum threshold for companies to be included in the directive. Currently firms are €50 million in turnover or €25 million as total assets.... The latest proposal suggests increasing the limit to businesses with over 1,000 employees and a turnover exceeding €450 million. It also recommends the complete exclusion of small and medium-sized enterprises (SMEs) from the directive.. 

Also under certain conditions, businesses would be authorized to withhold some sensitive information. Instead of requiring companies to prove their plans' compatibility with a sustainable economy, the Council proposes redefining the role of compliance language to emphasize its contribution to sustainability. 

The CS3D revisions are more comprehensive than what is currently proposed. Only the largest companies, employing more than 5,000 people and global turnover of over €1.5 billion respectively, are targeted with the directive by the Council. EU companies operating outside the EU would need to have a turnover of €1.5 billion, which would be considered satisfactory. This is a significant deviation from the current turnover of €450 million and the minimum staff required to operate at 1,000. 

The due diligence responsibilities under CS3D would be reduced to a lesser extent. Environmental and human rights risks would be evaluated by companies in their own operations, subsidiaries or direct business partners. The burden on multinational supply chains would be reduced by assessing only indirect partners with objective and verifiable risk evidence. 

To further ease requirements, the Council recommends that companies prepare climate transition plans based on "reasonable efforts" rather than the current "best efforts.". Such plans are not required by law. In order to limit legal liability, the Council suggests capsizing penalties at 5% of a company's worldwide sales. This is particularly important. 

CS3D implementation timeframes could be subject to change. Why? The Council suggests deferring the enforcement start date from July 2028 to July 2nd, which would give businesses more time to adjust to the new regulatory expectations. 

The final form of the rules must be agreed upon by both sides, and negotiations with the European Parliament are still necessary for these proposals. The Parliament's preliminary drafts suggest that there is some agreement with the Council' softer approach. To give an example, the Parliament's Rapporteur has proposed to raise the employee threshold under CSRD to 3,000 while still keeping the €450 million turnover condition. The same report proposes that financial holding companies can avoid compliance, provided that their subsidiaries already have the necessary reporting requirements. 

Industry groups and policymakers have voiced their concerns about regulatory burden, competitiveness, and administrative capacity, which are now being considered as the basis for proposed revisions. The EU's approach to sustainability requires increasing compliance requirements and narrowing down operational requirements to meet business needs. 

The final regulations are expected to be agreed upon by the end of 2025 or early 2026, following interinstitutional discussions.... They will represent a major change in corporate sustainability and ESG compliance for the EU, as they will have an impact on reporting obligations to thousands of companies both within and outside the bloc. 

Source: Norton Rose Fulbright