In February, the European Commission adopted a proposal to drastically reduce sustainability reporting requirements in the European Union. The reductions must also be approved by the Parliament and the Council of the European Union before being adopted into national law. On April 16, the Council released its draft position. It mostly aligns with the Commission’s proposal, but with some changes.
As part of the European Green Deal, a trilogy of directives were passed by the EU to force businesses to address climate change and report carbon emissions. The Taxonomy for Sustainable Activities created a classification system for business and investors to know what activities are considered green or climate friendly. The Corporate Sustainability Reporting Directive created requirements for businesses to report GHG emissions and other environmental, social, and governance actions. The Corporate Sustainability Due Diligence Directive created additional reporting requirements, as well as legal liability, for companies in relation to their supply chain.
However, by the summer of 2024, the tide was shifting on green initiatives. As the financial obligations in the CSRD and CSDDD became clear, the business community began to push for reforms. During the 2024 European Parliament elections, the burden on businesses became a major theme. Conservative parties blamed EU’s faltering economy on the burdens of the European Green Deal. The elections resulted in a shift to the right.
The reform process began almost immediately. In November 2024, Ursula von der Leyen, president of the European Commission, publicly announced her intention to revamp the Taxonomy, CSRD, and CSDDD to reduce the burden on businesses. The Omnibus Simplification Package was officially adopted by the Commission on February 26. Included in the proposal was a stand alone “stop the clock” directive to delay new sustainability reporting until 2028, for fiscal year 2027.
With the passage of the delay on April 3, the public debate over broader directive to reduce reporting requirements has started in the Parliament. The Council held their negations in private. On April 16, the Council released a draft proposal to be circulated to member states for feedback. The Council draft mostly followed the Commission’s proposal, with some notable like item changes.
The current reporting requirements for the CSRD will require all companies based in the EU that meet two of the following three qualification will be required to report: €50-plus million in net turnover, €25-plus million in assets, or 250-plus employees. However, the Commission proposal significantly reduces the number of businesses impacted by raising the standard to only include companies with over 1,000 employees. The same change applies to non-EU companies, but an increase to €450 million in net turnover in the EU or an EU based subsidiary with €50-plus million in net turnover.
Further, the Council proposal limits specific disclosures under the Taxonomy to companies that make relevant claims. Stating, “In order to reduce the administrative burdens on those undertakings and to achieve the objectives of such reporting in a more proportionate way, the specific disclosure obligations provided in this Directive should apply only when such undertakings claim through any communication or representation to external stakeholders and the public at large that their activities are associated with environmentally sustainable activities under Regulation (EU) 2020/85”
For climate activists, this may be viewed an encouraging green hushing, or the intentional omission of climate friendly and environmentally friendly actions by a company to avoid controversy of liability.
The most notable change relates to the CSDDD and the obligations of businesses to “conduct risk-based human rights and environmental due diligence” on the actions of indirect business partners. One key aspect of the original CSDDD is that it holds businesses accountable for the actions of other companies along their value chain.
The Commission proposal limits that responsibility to direct business partners. Indirect business partners may still fall under the scope, “where a company has plausible information that suggests that adverse impacts at the level of the operations of an indirect business partner have arisen or may arise, it shall carry out an in-depth assessment.” However, the Council proposal provided a new definition of plausible.
“Plausible information should be defined as information that objectively has a reasonable likelihood of being true, taking into account amongst other things the credibility of the source. Those sources could include data produced by government bodies, baseline studies or impact assessments commissioned by other parties, local community grievances and demand records, studies and indices by academics, NGOs, government agencies and industry bodies, available reports prepared by other enterprises operating in the local area or region, studies and reports by inter-governmental organisations and multilateral and bilateral development institutions, studies undertaken by communities about key issues that may be relevant to project development, land mapping and other information about the project or activity. Examples of information suggesting an adverse impact could include a notification or complaint, stakeholder engagement, credible reports in the media or from international organisations or NGOs, environmental and social impact assessments, geographical risk assessments, reports of recent incidents, or information about recurring problems in the sector in which the company operates or at certain locations. Using such information sources constitutes good practice under the OECD Due Diligence Guidance for Responsible Business Conduct. Where the company has, or can reasonably be expected to know of, such information, it should carry out an in-depth assessment.”
The draft Council proposal is just a starting point. The proposal will be disseminated to member states for feedback. Once a final proposal is adopted, it will be sent to a trialogue where representatives from the Commission, Council, and Parliament will meet to find consensus on the final directive. While the Commission and Council debate in private, the public debate over sustainability reporting will occur in the Parliament. It is anticipated that final changes will be adopted by the end of 2025.