EU sustainability rules watered down in omnibus package

Sustainable finance expert James Hay and public policy specialist Mark Ferguson, both of Pinsent Masons, were commenting after the European Commission proposed significant amendments to the EU’s Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CS3D) as part of a new omnibus simplification package, which was widely trailed.

The CSRD is regarded as the most comprehensive sustainability reporting standard globally, requiring companies in-scope to report both on how sustainability issues affect their performance, position, and development and on their own impact on the environment and people.

The CS3D provides a framework for sustainability due diligence for large EU companies and non-EU companies with significant EU activity. It imposes a duty on in-scope companies to identify and address actual and potential adverse human rights and environmental impacts within their own operations, those of their subsidiaries, and their “chains of activities”. This duty is backed by related disclosure obligations as well as by the threat of turnover-linked fines and a civil liability framework in respect of intentional or negligent breaches of certain obligations.

CSRD was written into EU law in 2022 and is already in effect for some companies. The first wave of CSRD-compliant reports have already started to be published, amidst some concern about over-disclosure and associated legal risks. CS3D was written into EU law in 2024 but has not yet taken effect.

However, the European Commission said that changes need to be made to the two pieces of legislation to address fresh challenges that have emerged that threaten EU competitiveness.

“The CSRD and the CSDDD are now being implemented in a new and difficult context,” the European Commission said. “Russia’s war of aggression against Ukraine has driven up energy prices for EU undertakings. Trade tensions are rising as the geopolitical landscape continues to shift. The different approach undertaken by some other major jurisdictions regarding the regulation of corporate sustainability reporting and due diligence raises questions about the effects of these laws on the competitive positioning of EU companies. The ability of the Union to preserve and protect its values depends amongst other things on the capacity of its economy to adapt and compete in an unstable and sometimes hostile geopolitical context.”

“This proposal therefore postpones the entry into application of the CSDDD and of certain provisions of the CSRD,” it said.

Under the plans, the scope of the CSRD would be significantly reduced. If implemented, the amendments would result in only large undertakings with more than 1,000 employees on average – undertakings that have more than 1,000 employees and either a turnover above €50 million or a balance sheet above €25 million – facing reporting requirements. The Commission said this would mean “about 80%” fewer businesses would face mandatory sustainability reporting requirements under CSRD than under the existing legislation. A new voluntary sustainability reporting regime is envisaged for businesses that wish to report on sustainability-related issues.

Additionally, the proposals also push back the reporting deadline by two years to 2028 for companies that are currently due to report in 2026. Given the revised reporting thresholds, some of those companies may be out of scope altogether.

In tandem with these changes, the Commission’s proposals also seek to reduce the “trickle-down effect” of the mandatory reporting requirements under CSRD. In practice, it would mean in-scope CSRD companies would only be able to ask other businesses in their value chain for information that those businesses themselves are required to report under proportionate applicable European sustainability reporting standards – standards the Commission said it intends to revise.

The Commission has further proposed to row back existing requirements to publish sector-specific reporting requirements under CSRD to avoid “an increase in the number of prescribed datapoints that undertakings should report”.

In relation to CS3D, the Commission has proposed to push back the current date by which the directive needs to be transposed into the national laws of EU member states – from 25 July 2026 to 25 July 2027 – and also to push back the application of the disclosure obligations that in-scope companies will face. It means the disclosure regime would be triggered for financial years commencing on or after 25 July 2028, for the first wave of companies in-scope.

Mark Ferguson said the proposed amendments create short-term uncertainty for businesses.

“Though the intention is to simplify the reporting obligations, companies that have already undertaken a significant amount of work to comply with the regulations are going to be faced with comparing what the existing requirements are with what is now being proposed,” Ferguson said.

“The impact is going to be felt differently across the spectrum of businesses. Fewer companies are going to be affected by the regulations overall, but the largest businesses are likely to see much of the regulatory requirements remain,” he said.

James Hay said businesses should consider all the drivers for sustainability-related activities before scaling back existing compliance programmes.

“Where companies may fall out of scope of regulatory requirements under new scoping thresholds, it’s not as simple as just abandoning compliance activities – regulation isn’t the only driver for sustainability,” Hay said. “A company should consider the expectations of stakeholders such as investors or customers; potential legal, reputational or litigation risks, which are increasingly relevant given the uptick in activist NGOs bringing lawsuits or public campaigns; and business value where mitigating sustainability risks can prevent financial loss.”

“Therefore, companies should identify ‘no regrets’ actions and triage what activities should be maintained, scaled back or cut altogether,” he said.

Ferguson said publication of the omnibus package is just “the end of the beginning” of the legislative process. He said further amendments to what is proposed could come when the Commission’s plans come to be scrutinised by EU lawmakers in the European Parliament and Council of Ministers.

“Politics is going to be integral to how the legislative proposals develop,” Ferguson said. “The European Parliament has a very different political makeup to the one which passed the CSRD and CS3D and this will have a big impact on the outcome of the legislation. The Parliament has already been successful in nudging the Commission into delaying another piece of sustainability-related legislation, the EU Deforestation Regulation, for one year.”

Pinsent Masons has tool to help businesses check if and when they will be in scope for CSRD reporting.