Many businesses could be exempt from complying with mandatory sustainability reporting under the omnibus proposal, unveiled by the European Commission, in its bid to reduce the compliance burden and boost the struggling economy.
The Commission proposed deep cuts and delays to four of the bloc’s major green rules: the Corporate Sustainability Reporting Directive (CSRD), which requires companies to report on a range of sustainability topics; the Corporate Due Diligence Directive (CSDDD), which requires them to investigate and address social and environmental issues in their global supply chains; the EU Taxonomy, which defines what counts as a sustainable investment; and the carbon border tax (CBAM) – essentially a levy on carbon-intensive products coming into the EU.
Trimming Reporting Requirements
The simplification of the laws is a part of the Commission’s work program for its five-year mandate. By 2029, the EU’s executive body wants to reduce compliance obligations for all companies by 25% and for small- and medium-sized businesses by 35%, in response to claims that existing reporting and due diligence requirements are a cost burden that undercuts competitiveness.
“Simplification promised, simplification delivered,” Commission President Ursula von der Leyen said in the announcement. “This will make life easier for our businesses.”
As a key tenet of its simplification, the omnibus proposal raises the threshold for companies to be considered in scope. The CSRD would only apply to companies with at least 1,000 employees that hit the turnover or balance sheet sum.
Companies within the CSRD's scope will report using a revised and simplified version of the European Sustainability Reporting Standards (ESRS), with a “substantially” reduced number of data points. The revisions also remove a reasonable assurance requirement from the legislation and the Commission’s authority to create sector-specific standards.
Companies below the revised threshold are encouraged to adopt a voluntary standard for non-listed micro, small, and medium-sized undertakings (VSME), according to the Commission's released Q&A.
Omnibus – A Win For SMEs?
Although the hope is that more companies will report voluntarily once reporting standards are simplified and reduced, it will still mean less ESG data.
Let us reconsider why the CSRD was introduced. It was created to support companies in their sustainable transition towards more resilient and competitive business models and meet growing demands for transparency. So far, the market has been unable to ensure convergence and consolidation between different reporting requirements, leading to limited comparability and relevance of ESG information. The CSRD and ESRS present a solution to this problem, providing a common framework that simplifies the complexities of addressing varied requests from investors and others who deem this information critical.
The current version of the reporting directive applies to approximately 50,000 companies. These businesses differ significantly in size, listing status and reporting readiness, with the largest 20% accounting for about 80% of the total revenues of all CSRD companies. Assuming a company’s impact on the planet and society correlates with its size, the top 20% of businesses disclosing would provide transparency on 80% of economy-wide impacts, all reporting in the same language.
If the omnibus proposal becomes law, the number of companies subject to mandatory reporting will be reduced by about 80%. Large companies will remain in the spotlight and face relatively strict requirements, while small and mid-sized peers will see more relaxed rules.
Further, the proposal prescribes that an entity reporting under the CSRD must not ask value chain actors with fewer than 1,000 employees for information beyond what’s included in the new voluntary sustainability reporting standards (VSME, mentioned before). This “value chain cap” is set to minimize the “trickle-down” of reporting burden to non-CSRD concerns.
Disclosure is Good For Business
However, while many companies may no longer be legally pressured to report, they will still be expected to provide ESG data to investors, banks, and supply chain partners. Therefore, it is vital to reinforce the narrative around the CSRD – a narrative that adequately captures the interplay between reporting and value creation.
“CSRD is just another bureaucratic exercise that will tie up considerable resources, and ultimately does not create any impact.” This and similar criticism of the reporting directive was often voiced and emphasized during the omnibus introduction process. Mario Draghi’s 2024 report, which serves as a basis for the EU’s competitiveness strategy, labeled the CSRD “a major source of regulatory burden,” citing estimated CSRD-reporting costs ranging from €150,000 to €1 million.
Meanwhile, we only have small samples of evidence on CSRD implementation costs, even among large listed companies. While these costs might seem high, they remain a fraction of other administrative expenses that the long-term benefits of improved transparency, better risk management, and stakeholder trust can easily offset.
Moreover, the omnibus proposals must be subject to subsequent legislative procedures involving the European Council and European Parliament, which means that the final impact of any changes may not be known for some time. The co-legislators seem far from finding common ground, and no formal decisions have been made. However, some parties have shown a willingness to use a fast-track procedure for the “stop-the-clock” proposal to delay the CSRD and CSDDD by two years and one year, respectively.
Until the proposed changes are adopted, companies currently mandated to comply will have to decide whether to continue preparing for compliance under the existing version of the CSRD or gamble on the changes coming into effect before the reporting obligations start to bite.
Here at EcoVadis, our solutions to meet your CSRD needs have never been better.
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