E.U. is Dialing Dial Back Sustainability Reporting and Due Diligence

European Commission (EC) has proposed legislation that would significantly reduce sustainability reporting under the E.U.’s Corporate Sustainability Reporting Directive (CSRD) and postpone implementation of the requirements for many companies. The proposals – referred to as the omnibus packages -- would also narrow the scope of entities subject to CSRD reporting and potentially exclude many U.S. companies that would otherwise be required to comply with the CSRD and related requirements. See PwC Explains Audit Committee Responsibilities under the E.U.’s CSRD, May-June 2024 Update and  E.U. ESG Disclosure Requirements Will Affect Many U.S. Companies, October 2023 Update. The EC’s press release announcing the proposals states that the changes would “remove around 80% of companies from the scope of CSRD, focusing the sustainability reporting obligations on the largest companies which are more likely to have the biggest impacts on people and the environment.”

Aspects of the omnibus packages that are of particular significance to non-E.U. companies include:

• Reduce number of entities subject to CSRD reporting. The proposals would limit the scope of CSRD reporting to large E.U. undertakings. A large undertaking is an entity with more than 1,000 employees and either a balance sheet total of at least €25 million or worldwide annual net turnover of €50 million.  (Currently, the employee threshold is 250 employees.)  Non-E.U. companies would be subject to reporting if they have an annual net turnover of at least €450 million in the E.U. and either an E.U. subsidiary that is required to report or a branch in the E.U. with an annual net turnover of €50 million euros. Currently the turnover threshold for a non-E.U. parent is €150 million.

• Delay implementation of reporting requirements. The omnibus packages also propose a two-year delay in the implementation of CSRD reporting for “second wave” and “third wave” companies. The initial reporting date for the second wave of entities would change from 2025 to 2027 and for third wave of entities from 2026 to 2028.  (First wave entities are already subject to reporting.)  In very simplified terms, first wave entities are large E.U. or foreign companies that are listed on an E.U. exchange; second wave entities are large undertakings that are not included in the first wave, and third wave entities are smaller listed companies.

• Revise disclosures.  The proposals would provide for revisions to the European Sustainability Reporting Standards (ESRS). The ESRS are the reporting standards, rules, disclosures, and metrics that companies must comply pursuant to the CSRD. The EC's proposal envisions substantially reducing the number of “data points” that must be reported and clarifying the requirements.

• Limit value chain reporting.  The proposed revisions would also limit the reporting burdens imposed on smaller companies in a reporting entity’s value chain.  The Corporate Sustainability Due Diligence Directive (CSDDD) requires both E.U. and non-E.U. large companies (as defined above) to conduct due diligence on human rights and environmental impacts throughout their operations, subsidiaries, and value chains.  Under the proposals, reporting companies would only be required to apply due diligence measures to the activities of the company, its subsidiaries, and direct business partners.  Companies would not be required to obtain information from entities that are not subject to CSRD reporting.  The proposals would also delay application of the CSDDD to first wave companies by one year until 2028.

• E.U. Taxonomy (EUT) reporting.  The EUT a system for classifying sustainable economic activities. Under the EUT, in-scope companies are required to annually report the share of their business that is within the taxonomy using specific metrics. Under the proposals, mandatory EUT reporting would be limited to entities that are required to comply with the CSRD and have net turnover exceeding €450 million. The proposals would also decrease the information required to be reported.

In mid-April, the European Parliament approved the EC’s “stop the clock proposal” which implements the postponement of CSRD reporting and CSDDD due diligence, as described above.  The European Parliament will next consider the balance of the proposals and could make changes.  If the proposals are adopted, they will then need to be transposed into domestic law of the E.U. member states.

Audit committees of companies that do business in the E.U., directly or through subsidiaries, should  make sure that management monitors the progress of the omnibus packages and considers how changes to the scope and requirements of the CSDR ,CSDDD and EUT may affect the company.  Thought should also be given to how these changes could impact due diligence information requests from customers or suppliers that are subject to these directives. Since E.U. reporting deadlines and requirements are changing, managements and boards should also evaluate whether the company is investing in controls and disclosure procedures that will need to be modified or may even prove to be unnecessary. The scope and requirements of the CSRD are complex, as are the proposals to modify it, and many companies may potentially be affected by the proposed changes may want to consult professional advisors that specialize in this field.