Navigating the Corporate Sustainability Reporting Directive

Summary

The European Commission has recently unveiled the "Simplification Omnibus," a legislative package aimed at enhancing the global competitiveness of European businesses by streamlining existing regulations. A significant component of this package involves proposed amendments to ESG reporting regulations under the Corporate Sustainability Reporting Directive (CSRD), which are poised to impact a vast number of companies operating within the European Union and also multinational firms with material EU business footprints.

Key Proposed Changes to the CSRD:

1. Revised Applicability Thresholds:

• Employee Count and Financial Thresholds: The proposal suggests that only companies with more than 1,000 employees and have either a net turnover (sales) above €50 million or a balance sheet above €25 million will be obligated to comply with CSRD requirements. This marks a substantial shift from the previous threshold of 250 employees, effectively exempting approximately 80% of companies that were initially within the directive's scope. This threshold is now aligned with requirements for the Corporate Sustainability Due Diligence Directive (CS3D).

2. Revised Reporting Requirements & Implementation Timeline:

• Postponement of all Reporting Obligations: The omnibus proposes to extend the reporting deadline for companies due to report under the CSRD in 2026 and 2027 (2nd wave and 3rd wave) to 2028, thereby also aligning with 1st wave reporting under the CS3D.
• Simplified Reporting Obligations: The existing sustainability reporting standards (ESRS) will be revised and simplified with the aim of substantially reducing the number of data points and improving consistency with other pieces of legislation. The CSRD will no longer have sector specific standards.
• Assurance Requirements: The proposal is removing the possibility for the Commission to propose moving from a limited assurance requirement to a reasonable assurance requirement.

 3. Reporting Obligations for Smaller Entities: 

• Value Chain Cap: Small and medium-sized enterprises (SMEs), those with less than 1,000 employees, will have the right to decline requests for specific data from larger corporations seeking information to fulfill their CSRD obligations. This measure aims to alleviate the reporting burden on smaller entities within the supply chain.

4. Alignment with EU Taxonomy: 

• Scope Limitation: The amendments propose that only companies exceeding the 1,000-employee threshold will be required to report on their alignment with the EU's taxonomy standards, which define environmentally sustainable economic activities. Summary Revised Implementation Timeline

Summary Revised Implementation Timeline

Implications for Businesses: 

• For Large Enterprises (Over 1,000 Employees):
  • Sustained Reporting Duties: These organizations must continue to align their reporting frameworks with CSRD mandates, ensuring comprehensive disclosure of sustainability metrics. o Strategic Adjustments: Companies may need to refine reporting processes and resource allocations to adapt to the streamlined requirements, potentially leading to more efficient compliance mechanisms.
  • Reduced Assurance Requirements: Verification will remain at limited assurance rather than reasonable assurance, reducing administrative costs.
  • Reduced Due Diligence Scope: Under CSDDD, due diligence is now limited to immediate business partners (one level down) rather than the entire value chain with mandatory checks happening once every 5 years, significantly easing compliance efforts and allowing companies to focus on direct supplier relationships rather than tracking sustainability risks across multiple tiers.
• For Small and Medium-Sized Enterprises (SMEs):
  • Reduced Compliance Pressure: The proposed changes aim to lessen the administrative and financial burdens associated with sustainability reporting, allowing SMEs to focus more on business activities.
  • Reduced Reporting Obligations: SMEs further down the supply chain will no longer be required to provide extensive sustainability data to multiple business partners, reducing reporting obligations and operational costs.
  • Voluntary Participation: While exempt from mandatory reporting, SMEs that choose to engage in sustainability disclosures may enhance their attractiveness to investors and partners prioritizing environmental, social, and governance (ESG) criteria.

Strategic Recommendations:

1. Stay Informed and Proactive: 

• Regulatory Monitoring: Companies should closely monitor the progression of these proposals through the European legislative process, as they require approval from both the European Parliament and EU member states.
• Scenario Planning: Develop contingency plans to swiftly adapt to potential regulatory changes, ensuring compliance and minimizing operational disruptions.

 2. Proactively Engage with Stakeholders: 

• Conduct a Double Materiality Assessment: Identify and engage with various stakeholders across your value chain to evaluate stakeholder sentiment around impacts, risks, and opportunities within your business model. Doing so, can strengthen relationships with stakeholders, refine sustainability strategies to align with business priorities, and ensure readiness for mandatory reporting obligations.
• Transparency Initiatives: Maintain open lines of communication with stakeholders, including investors, customers, and supply chain partners, to convey how your organization is addressing sustainability and regulatory changes.
• Collaborative Efforts: Participate in industry groups or forums to share best practices and stay abreast of collective responses to regulatory developments. 

3. Enhance Internal Reporting Operating Model: 

• Enhanced Governance: Clearly define decision-making oversight to include roles and responsibilities, leveraging a Responsible, Accountable, Consulted, and Informed (RACI) framework or similar
• Strengthen Internal Processes: Sharpen and refine reporting processes with a focus on transparent, traceable, and repeatable processes with strong internal SOX controls. Integrate your ESG reporting timeline with your existing financial close timeline and activities.
• Systems / Technology Upgrades: Invest in robust sustainability reporting systems that can efficiently handle data collection and analysis, facilitating compliance with current and future requirements.
• Training and Development: Equip relevant teams with the necessary skills and knowledge to navigate evolving sustainability reporting landscape effectively.

In conclusion, the proposed amendments to the CSRD under the EU's Simplification Omnibus reflect a strategic shift towards balancing regulatory oversight with business competitiveness. Companies are encouraged to assess how these changes may affect their operations and to proactively adjust their sustainability strategies to align with the evolving regulatory environment.

Additional References:

• European Commission: Commission simplifies rules on sustainability and EU investments, delivering over 6 billion in administrative relief
• European Commission: Q&A 'Omnibus' package
• Reuters: What's inside the EU's 'Simplification Omnibus' on sustainability rules

For additional insights, contact: Lane Jost, Managing Director ESG, Edelman Smithfield (Lane.Jost@edelmansmithfield.com) | Josh Joseph, Senior Vice President ESG, Edelman Smithfield (Josh.Joseph@edelmansmithfield.com) | Nikolaus Schultze, Chairman, Climate, Public & Gov't Affairs, Edelman (Nikolaus.Schultze@edelman.com)