Simplifying ESG rules: reporting and due diligence

ESG reporting

Among the key changes is a modification of the Corporate Sustainability Reporting Directive (CSRD). Under the proposal, the obligation to publish sustainability reports is to apply only to large companies with more than 1,000 employees if they meet at least one of the financial criteria – an annual turnover of more than EUR 50 million or a balance sheet total of more than EUR 25 million. This would reduce the number of companies covered by the CSRD by around 80%.

The obligation to report under the EU taxonomy is also being reduced. Large companies with a turnover of more than EUR 450 million and more than 1,000 employees will be subject to an "opt-in" regime, i.e., they can choose to report voluntarily. It is also proposed to postpone by two years the reporting obligation for companies that were to report under the CSRD in the second wave (i.e., large businesses that are not public interest entities and have more than 500 employees, and large businesses that are a parent company of a group with less than 500 employees). Changes are also being made to the Carbon Border Adjustment Mechanism (CBAM).

Supply chain due diligence

The changes also concern the Corporate Sustainability Due Diligence Directive (CSDDD), which regulates the rules for supply chains. The new due diligence obligation is to cover only direct suppliers rather than the entire value chain. Businesses should only consider indirect suppliers if credible information has come to their attention about adverse impacts at the level of these suppliers (e.g., if the structure of the business relationship indicates that it was chosen with the aim to eliminate an otherwise direct supplier, or if the business has information from NGOs or the media about the harmful activities of an indirect supplier).

The intervals at which businesses shall assess the adequacy and effectiveness of their due diligence measures are also to be extended, from one year to five years. Postponement by one year has also been proposed for this directive.

Other changes

The European Commission also intends to simplify the rules of the InvestEU programme to reduce the administrative burden for businesses. Omnibus II is to simplify the definition of medium-sized and small enterprises (SMEs) for the purposes of InvestEU and to remove the obligation to monitor key performance indicators (KPIs) for smaller transactions. In addition, the frequency of reporting under InvestEU and its predecessor, the European Fund for Strategic Investments, should be reduced.

Next steps

The proposals are now at the beginning of the legislative process and await approval by the European Parliament and the Council of the EU. In early April, the European Parliament will vote whether to fast-track the postponement of non-financial reporting and supply chain due diligence.