Council Approves Less Stringent Sustainability Reporting Rules for Businesses within EU
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On June 23, the European Council announced their stance on cutting back sustainability reporting requirements, following the Commission's proposed Omnibus Simplification Package in February. This package aimed to lessen the load on businesses by reducing requirements in both the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD).
The CSRD mandates companies to disclose greenhouse gas emissions and various environmental, social, and governance actions. The CSDDD adds additional reporting requirements and legal liabilities for corporations concerning their supply chain.
However, the financial burden of these proposals on businesses and the potential impact on the EU economy became a prominent issue during the 2024 elections. The rise in right-leaning politics in the EU strengthened opposition to the European Green Deal directives. Consequently, the Commission introduced a set of new directives to alleviate the strain on businesses. The Omnibus Simplification Package was formally approved by the Commission in February.
Once a commission presents a law, both the Parliament and the Council develop their respective positions. In the Parliament, the process is similar to regular legislation, with committees and members suggesting amendments. The Council engages in private negotiations, occasionally providing brief updates. Once all three parties adopt their positions, they participate in a "trialogue" to finalize the directive.
Currently, the Parliament is vigorously engaging in the process to adopt their position. On June 23, the Council revealed their final position.
Corporate Sustainability Reporting Directive
The current CSRD utilizes a two out of three criteria test to determine if a company must report. The Commission proposes raising the employee threshold, setting "any undertaking having an average of more than 1000 employees during the financial year and either a net turnover above €50 million or a balance sheet total above €25 million" as the new benchmark, aligning it with the CSDDD.
The Council's proposal adopts the 1000 employee threshold but raises the annual turnover to €450 million. Additionally, they included a "review clause" to potentially broaden the scope of the CSRD in the future to ensure sufficient availability of corporate sustainability information.
Corporate Sustainability Due Diligence Directive
The current CSDDD requires companies to conduct due diligence to ensure compliance with environmental and human rights requirements among their supply chain. The Commission chose not to revise the scope, but the Council recommends elevating the employee threshold to 5000 employees and an annual net turnover of €1.5 billion.
One crucial aspect of the CSDDD is that it holds businesses accountable for the actions of other companies along their value chain. The Commission proposal restricts this responsibility to direct business partners. Indirect business partners may still fall under the scope if a company has plausible information suggesting potential adverse impacts at the level of the operations of an indirect business partner.
The Council suggests shifting the focus from an entity-based approach to a risk-based approach, focusing on areas with the highest likelihood of actual and potential adverse impacts. Companies should no longer be required to conduct an exhaustive mapping exercise but instead perform a more general scoping exercise. To provide relief from a significant burden, the Council preserves the limitation of the relevant obligations to the 'tier 1'. In-scope companies are expected to base their efforts on reasonably available information.
Streamlining Sustainability Reporting
It's evident that the EU will significantly narrow the businesses subject to both the CSRD and the CSDDD. The Parliament is expected to adopt a final position in October. Then, the trialogue will ensue. The Commission aims to wrap up the final changes by December, though negotiations may extend into January.
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- The Council's proposal for the Corporate Sustainability Reporting Directive (CSRD) aligns its employee threshold with the Corporate Sustainability Due Diligence Directive (CSDDD), setting the new benchmark at "any undertaking having an average of more than 1000 employees during the financial year and either a net turnover above €50 million or a balance sheet total above €25 million."
- The Council's position on the CSDDD recommends elevating the employee threshold to 5000 employees and an annual net turnover of €1.5 billion, shifting the focus from an entity-based approach to a risk-based approach, and preserving the limitation of the relevant obligations to the 'tier 1'.
- The Parliament is engaged in streamlining the sustainability reporting requirements by adopting a final position on both the CSRD and the CSDDD in October. This process will be followed by a trialogue to finalize the directives, with the Commission aiming to wrap up the final changes by December.
- The EU's policy-and-legislation around climate change, environmental-science, and finance, as exemplified by the CSRD and CSDDD, is a significant part of the general-news and business landscape, influenced by science, politics, and right-leaning politics in the European Union. The ongoing climate-change discussions and the proposed directives are intertwined with the European Green Deal directives and the politics of the region, making them a topic of interest for the general public and businesses alike.
