Sustainability after Omnibus
After years of rapid developments and increased demand in sustainability reporting requirements, progress seems to have taken an abrupt u-turn. With the European Commission’s Omnibus proposal published on February 26th, significant shifts in the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) are expected. The publication is still a proposal that requires further approval from the Parliament and the Council. Also, national legislation needs to be amended.
Here are some of the key takeaways of the proposed changes:
CSRD
- Scope: The proposal recommends mandatory reporting requirements only for companies with more than 1000 employees and either a turnover above EUR 50 million or a balance sheet above EUR 25 million. This is expected to reduce the number of companies in scope by 80%. Voluntary reporting standards will be developed further for companies that fall outside the scope of CSRD.
- Timeline: The proposed 2-year postponement in the timeline would especially affect companies that currently fall into the scope of CSRD but would with the new scope thresholds be relieved from the requirements (second and third wave of companies obliged to report for financial year 2025 or 2026).
- Assurance: The possibility of moving from a requirement for limited assurance to a requirement for reasonable assurance would be removed.
- Sector-specific standards: Sector-specific standards have been removed.
- Revising the ESRS: Substantially reduce the number of ESRS datapoints by giving up on those considered least significant for general-purpose sustainability reporting, prioritizing quantitative datapoints over qualitative ones and further distinguishing between mandatory and voluntary datapoints.
- Opt-in regime: The proposal introduces an “opt-in” regime where large companies with more than 1000 employees on average and net turnover not exceeding EUR 450 million which claim that their activities are aligned or partially aligned with the EU Taxonomy shall disclose their turnover and CapEx KPIs and may choose to disclose their OpEx KPI.
CSDDD
- Scope: The proposal recommends that due diligence requirements should be generally limited to the company’s own operations, subsidiaries, and direct business partners. Companies must assess indirect business partners only if there is plausible information suggesting adverse impacts.
- Timeline: The proposal suggests a postponement of the deadline for implementation into national legislation as well as the application of the Directive by one year for the first group of companies in the scope of the Directive.
- Monitoring and penalties: The frequency of the periodic monitoring exercises is suggested to be reduced from annually to every five years. The requirement to terminate business relationships as a last resort is removed, allowing for suspension instead. The proposal also deletes the requirement for the fine to be commensurate to the company’s net worldwide turnover. Instead, Member States must ensure that penalties are effective, proportionate and dissuasive.
Analysis of the proposed changes
Aligning CSRD with CSDDD regarding scope will most likely have serious negative effects on many companies’ sustainability plans. In practice it will mean that thousands of mid-size companies fall out of scope. While voluntary reporting is still an option for those companies, and many will probably take this opportunity to still report, the risk is high that many will not. Inevitably this will result in the pace of transition slowing down due to lack of transparency. Investors will lack the sustainability disclosures they need to make informed investment decisions, and banks will be unable to precisely estimate sustainability risks for the companies they lend to.
With many companies now excluded from the new CSRD scope, the proposed timelines may seem confusing for many. Companies that currently fall within the initial scope of CSRD and are now working on with their CSRD process will be granted for an additional two years to prepare for the reporting, while there is an ultimate goal to relieve them from the requirements. It will be interesting to see how many companies will continue with their work and how many will abandon their plans. This development may well distinguish companies genuinely committed to developing sustainably.
Aligning CSDDD with CSRD by limiting Due Diligence to the scope of CSDDD to company’s own operations, subsidiaries, and direct business partners is also concerning. In certain sectors, the largest problem in the value-chain is indirect business partners. Reducing the scope by making it mandatory to only look at the direct business partners could create a loop-hole, where the companies that do not actively want to tackle the problem of human rights issues further down the value chain have an excuse not to. When we take into account the fact that human and labor rights abuses are often more serious the further down the value chain where suppliers and partners are, this change in scope could mean many companies miss the main human rights problems entirely.
The same reasoning goes for the reduction of monitoring and penalties. It is extremely doubtful that periodic monitoring every five years is enough to ensure compliance with human rights standards in the value chain. Some sub-contractors and even contractors have agreements that are year on year only. And if the requirement to terminate business relationships as a last resort is taken away, it will erode the companies’ ability to act by impeding the company from taking definitive action in the most serious cases.
Revising the first set of ESRS by substantially reducing the number of mandatory ESRS datapoints is undoubtedly one of the more positive changes proposed by the Commission. It has been clear for some time that the ESRS is overly complex and that they may even act as a deterrent instead of stimulating sustainability work in an organization. Regarding the elimination of the planned sector-specific standards, while postponement could be wise for now, taking them away completely is more questionable since different sectors often have unique issues from a sustainability perspective, and need to deliver different kinds of data.
The “opt-in “ regime for large undertakings with more than 1000 employees and with a net turnover not exceeding EUR 450 million to provide them more flexibility by allowing them to report on activities that meet certain Taxonomy technical screening criteria without meeting all of them is maybe one of the only aspects of the proposal that is truly positive since it will encourage more companies to align with the Taxonomy, even if they cannot achieve full alignment. The move could also serve as an important driver in transition finance, especially for companies that are in sectors that are not fully covered by Taxonomy but have ambitious sustainability agendas.
In conclusion, while the changes have been made to respond to an actual need – easing the reporting burden and reducing complexity around sustainability reporting – the EU Commission has chosen a path of active deregulation for mid-size companies that risks undermining the accuracy and comprehensiveness of sustainability reporting and due diligence. Investors and banks have been left high and dry by these proposed changes, their needs for credible and transparent sustainability data being traded for professed gains in operational efficiency. Balancing the justified need to reduce regulatory burdens while ensuring steady and forward-looking progression toward a sustainable future is a challenge. We believe that sustainable practices are a key competitive advantage for companies now as well as will be in the future, and after the Omnibus maybe more than ever. The challenges we collectively face in managing, accelerating climate change, loss of nature and human rights abuses remain as acute as ever. For companies now is not the time to abandon their plans, but instead to work even harder to fulfill the characteristics of becoming truly sustainable.
Don’t miss the opportunity to participate in timely discussions at the Advisense’s Omnibus seminars where leading experts will provide their insights on the Omnibus package and its future implications. The seminars will take place in March in both Oslo and Stockholm. Read more here:
Oslo March 18: Bærekraft etter Omnibus; veivalg i en usikker regulatorisk tid.
Stockholm March 24: Hållbarhet efter Omnibus: Vägval i en osäker regulatorisk tid
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