The European Commission (“EC”) has published its proposals for directives amending the EU Corporate Sustainability Reporting Directive (“CSRD”) and the Corporate Sustainability Due Diligence Directive (“CS3D”), as well as a draft delegated act amending the current delegated acts under the Taxonomy Regulation (“Taxonomy”) (the “Proposal”). The EC also published a Q&A summarising the key parts of the Proposal, as well as its proposed changes to the Carbon Border Adjustment Mechanism and the InvestEU Regulation.
While it was anticipated that the EC would make sweeping amendments as part of its simplification drive, the scope of change proposed is unprecedented and the potential impacts should not be underestimated.
The EC intends to make significant amendments to the scope, requirements and timing of the CSRD, CS3D and Taxonomy. If adopted in its current form, the amendments would remove around 80% of companies from the scope of the CSRD and reduce the Taxonomy reporting data points by around 70%. In addition, it would delay the CSRD and CS3D compliance deadlines for many participants by two years.
The Proposal
The Proposal includes the following proposed changes to the CSRD, CS3D and Taxonomy:
| Topic | Current position | Proposed position under the Omnibus |
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| A. CSRD | | |
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| Scope | Large EU undertakings in-scope (i.e., companies that meet two of the following three thresholds: 250 employees; EUR 50m net turnover; and/or EUR 25m balance sheet total). Non-EU undertakings in-scope if they have: (a) an annual net turnover (at consolidated or individual level) in the EU exceeding EUR 150m for each of the last two consecutive financial years; and (b) a qualifying EU subsidiary or a branch in the EU that generated an annual net turnover in excess of EUR 40m in the preceding financial year (the “EU Turnover Test”). Listed SMEs also in-scope. | “Large” EU undertakings will be changed to companies that have over 1,000 employees and either a EUR 50m net turnover or EUR 25m balance sheet total. The thresholds for the EU Turnover Test will be amended from EUR 150m and EUR 40m, to EUR 450m and EUR 50m, respectively. Listed SMEs no longer in-scope. For companies that will not be in-scope anymore, the EC will adopt by delegated act a voluntary reporting standard (the “CSRD VESRS”). |
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| Assurance | Limited assurance required, with the EC empowered to amend to reasonable assurance. | Limited assurance required, and the EC will no longer be empowered to amend to reasonable assurance. |
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| Value Chain Reporting | Companies required to retrieve data from all suppliers where reasonable and feasible. | Companies will only be required to retrieve data from suppliers who are themselves in-scope of the CSRD. In respect of SMEs, limitations will be placed on data requests in accordance with the CSRD VESRS. |
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| European Sustainability Reporting Standards (“ESRS”) | ESRS in effect, but EC also to adopt additional sector-specific ESRS. | Current ESRS to be revised, with the aim of substantially reducing the number of data points, clarifying provisions and improving consistency with other pieces of legislation. No sector-specific ESRS will be adopted. |
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| Timing | Wave 2 and wave 3 companies to report in 2026 and 2027. | Wave 2 and wave 3 companies to report in 2028 and 2029. |
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| B. CS3D | |
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| Scope | Due diligence requirements for Financial Institutions (“FIs”) were under consideration. | No consideration of due diligence requirements for FIs. |
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| Risk assessment | Companies required to assess adverse impacts that occur across their entire value chain. | Companies will only be required to assess adverse impacts in respect of direct business partners, unless they have plausible information suggesting that adverse impacts have arisen or may arise at the level of indirect business partners. |
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| Supplier monitoring | Companies required to conduct assessment of suppliers annually. | Companies will be required to conduct assessment of suppliers every five years. |
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| Supplier information | Companies required to take appropriate measures to obtain the information required to assess adverse impacts across their value chain. | Companies will only be required to request from their SME and small midcap business partners (i.e. companies with not more than 500 employees) the information specified in the CSRD VESRS, unless they need additional information to carry out mapping and cannot obtain that information in any other reasonable way. |
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| Contract termination | Companies must terminate contracts for non-compliant suppliers as a last resort measure. | Companies will not be required to terminate contracts for non-compliant suppliers as a last resort measure. |
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| Transition plans | Mandatory adoption and implementation of transition plans. | Mandatory adoption, but not implementation, of transition plans. |
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| Non-compliance | Civil liability and fines for non-compliance specified at Directive-level. | EU Member States to determine civil liability and fines. |
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| Timing | EU Member State transposition deadline of 26 July 2026. Wave 1 companies to report in 2027. | EU Member State transposition deadline changed to 26 July 2027. Wave 1 companies to now report in 2028. |
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| C. Taxonomy | |
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| Reporting for CSRD companies | Mandatory reporting for all companies in-scope of the CSRD. | Voluntary reporting for companies in-scope of the CSRD with a net turnover up to EUR 450m. Reporting is also to be limited to economic activities that are financially material. Companies that have made progress towards sustainability targets, but only meet certain Taxonomy requirements, may choose to voluntarily report on partial Taxonomy-alignment. |
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| Delegated Acts | Delegated Acts currently set out reporting templates with several data points, including do no significant harm (“DNSH”) criteria. | The EC is publishing a consultation with draft amendments to the Taxonomy Delegated Acts, with the aim of simplifying the reporting templates and reducing the number of data points by around 70%. The EC is asking for feedback on how to simplify the DNSH criteria for pollution prevention and control related to the use and presence of chemicals that apply horizontally to all economic sectors under the Taxonomy. |
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| KPIs for FIs | KPIs for FIs, including the Green Asset Ratio (“GAR”) for banks. | KPIs for FIs to be amended, e.g., banks will be able to exclude exposures that relate to undertakings which are not under the future scope of the CSRD from the denominator of the GAR. |
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However, it is important to note that the Proposal does not contemplate any changes to the principle of double materiality under the CSRD.
What next?
The Proposal will be submitted to the European Parliament and the Council of the EU for their consideration and adoption.
The changes to the CSRD and CS3D will enter into force once the co-legislators have reached an agreement on the Proposal and after publication in the EU Official Journal. The draft delegated act amending the current delegated acts under the Taxonomy will be adopted after public feedback and will apply at the end of the scrutiny period by the European Parliament and the Council of the EU.
Comment
The extent to which the so-called Omnibus Regulation would overhaul core EU ESG and sustainability legislation on reporting and disclosures, and supply chain due diligence, has been much anticipated and highly controversial (you can read more about the background here and here). Because of the vastly reduced number of companies that will be required to participate if the Proposal is enacted in its current form, many companies and groups will find themselves out of scope of one or more of the CSRD, CS3D and Taxonomy. Many of those in-scope will be relieved by the reduced compliance burden in terms of reporting and due diligence requirements, and by the additional time to comply. Others may be aggrieved that they may have spent significant time and cost on preparing, perhaps unnecessarily. However, this is not yet law and it may be subject to change. A major complicating factor is also that many EU Member States have already implemented laws which are in force and, subject to any national legal or regulatory positions, may still need to be complied with. These developments may therefore leave many companies in an unsatisfactory and uncertain limbo. In light of this, prior to making any changes to their compliance procedures, companies should liaise with their advisers. CMS experts are able to help with such enquiries.
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