Shifting Sands of EU ESG Reporting Compliance

The Commission has proposed a package of measures compiled in a so-called Omnibus Directive aiming at simplifying substantial elements of the EU’s sustainability regulatory framework (see draft law). This includes amendments to the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS), as well as the Corporate Sustainability Due Diligence Directive (CSDDD).

The proposed changes would be far-reaching and significantly reduce:

• the number of companies that must report directly;
• the sustainability-related compliance costs for reporting companies—e.g., fewer data points, quantitative as opposed to narrative text, no more reasonable assurance requirements—as well as for companies in their supply chains that are indirectly exposed to CSRD;
• while simultaneously extending the timeline for a large number of companies that must report (initial reports due 2028).

In fact, some experts are describing the Omnibus Directive as a first step toward deregulation in the EU. And advisors with a depth of expertise in sustainability and ESG—including our partners at MoFo, who started their focus on ESG in 2004—were anticipating that the EU would experience and then react to the severe push back to scale down sustainability regulations at some point in time. Millions of dollars in compliance costs, spent internally and externally, could have been avoided (or devoted to corporate action to reduce risk and emissions) based on the modified requirements if the EU had come forward with more proportionate reporting obligations earlier. While the outcome and timeline of deregulation remain uncertain in the EU, we advise, more than ever, to carefully assess the costs and benefits of complying with CSRD and ESRS in their current form and to ensure that ESG metrics and practices are viewed from an operational (and not merely compliance) lens.

CSRD and ESRS

With regards to CSRD and ESRS, the Commission proposes several changes limiting the scope and depth of sustainability reporting:

• Higher application thresholds to reduce the number of reporting companies by 80%: Only companies with more than 1,000 employees and either a turnover above EUR 50 million or a balance sheet total above EUR 25 million would be subject to sustainability reporting requirements.
• Simplifying the reporting process and reduce complexity:
• ESRS: ESRS would be revised by substantially reducing the number of data points, clarifying provisions, and improving consistency with other related legislation. The Commission explicitly aims “to reduce the risk that assurance service providers inadvertently encourage undertakings to report information that is not necessary or dedicate excessive resources to the materiality assessment process.” (EU Commission Explanatory Memorandum to draft law, p. 5) The Commission also envisages to enhance the degree of interoperability with global sustainability reporting standards.
• Limit value chain reporting requirements: The Commission proposes to adopt a voluntary reporting standard (VSME) that would serve as guidance as to what information in-scope companies can (and should) request from smaller companies in their value chains, i.e., from companies which themselves are not subject to CSRD reporting because they have fewer than 1,000 employees.
• Limited assurance requirement: Companies would only have to obtain limited assurances from their auditors; a reasonable assurance requirement in later phases of CSRD application would no longer apply.
• Limiting the scope of non-EU reporting requirements: Under the current CSRD regime, subsidiaries and branches of non-EU companies will have to report on the non-EU parent company’s sustainability matters if the latter has generated more than EUR 150 million in the EU for the first time in 2029 for the financial year 2028. Under the proposal, the threshold amount would increase to EUR 450 million and reporting requirements would only be triggered if the subsidiary of the non-EU company itself meets the new CSRD threshold criteria (i.e., has more than 1,000 employees) or if a branch of the non-EU company has generated more than EUR 50 million in the EU.

Irrespective of the adoption of the material changes discussed, the Commission proposes to delay reporting requirements by two years for all companies that are not yet but would in the coming years be required to report under CSRD.

CSDDD

With regards to the CSDDD, the Commission proposes several changes limiting the scope and depth of human rights and environmental due diligence (HREDD):

• Focus on tier 1 (direct) business partners in complex value chains: Companies would only have to extend HREDD to lower-tier (indirect) business partners (i.e., business partners with whom the company does not have a contractual relationship) where the company has plausible information suggesting that adverse impacts have arisen or may arise at such lower-levels.
• Reduce cadence of HREDD: The intervals between two regular periodic risk assessments would increase from one year to five years. Companies would, however, be under an obligation to assess the implementation of their HREDD measures and update them in case of reasonable indicators suggesting measures are no longer adequate or effective.
• Limit the scope of stakeholder engagement: By changing the definition of “stakeholder,” the number of individuals and communities to be taken into account as part of stakeholder engagement would be reduced.
• Limit outreach to smaller value chain companies: The information that in-scope companies may request from smaller companies (i.e., companies with not more than 500 employees) would be limited to the information specified in the VSME standard to be introduced under CSRD. In-scope companies may only request additional information to the extent that such information is necessary to carry-out risk-mapping and is not available through other reasonable sources.
• No mandatory rules on civil liability: There would be no mandatory rules for civil liability in case of HREDD violations. Rather, it would remain with the Member States and their respective national laws to define relevant civil liability in case of HREDD violations. This would significantly reduce litigation risks.
• No application to financial services: The Commission proposes not to review at a later stage whether financial services companies should be included in CSDDD’s scope of application, thereby permanently de-scoping this sector.

Irrespective of the adoption of the material changes discussed, the Commission proposes to delay entry into application of CSDDD by one year and push back the first phase of application (relevant for companies with more than 3,000 employees and net worldwide turnover of more than EUR 900 million) accordingly.

Timeline of Legislative Procedure

The timeline and outcome of the legislative proposal are uncertain. For example, it is possible that the draft Omnibus Directive does not find the required votes in the EU Parliament and/or the Council, or that the EU Parliament and Council reject certain changes but still adopt provisions delaying the entry of application of CSRD and CSDDD.

Most EU Member States have transposed CSRD into their national laws, effectively imposing a statutory obligation on directors and officers of currently in-scope large undertakings (i.e., fulfilling two of the following three criteria: 250 employees, EUR 50 million turnover, balance sheet total above EUR 25 million) to publish a sustainability report for the financial year 2025 in 2026. To mediate legal uncertainty until it has become clearer whether, and how, CSRD will be revised, in-scope companies must assess how to spend and allocate resources to be prepared for the respective scenario in due time.