Explanatory Memorandum to COM(2025)81 - Amendment of Directives 2006/43/EC, 2013/34/EU, (EU) 2022/2464 and (EU) 2024/1760 as regards certain corporate sustainability reporting and due diligence requirements - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2025)81 - Amendment of Directives 2006/43/EC, 2013/34/EU, (EU) 2022/2464 and (EU) 2024/1760 as regards certain corporate sustainability ... |
|---|---|
| source | COM(2025)81  |
| date | 26-02-2025 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
Contents
- General context and objectives
- Specific context and objectives of this proposal regarding the CSRD
- Specific context and objectives of this proposal regarding the CSDDD
- Corporate Sustainability Reporting Directive
- Corporate Sustainability Due Diligence Directive
- Corporate Sustainability Reporting Directive
- Corporate Sustainability Due Diligence Directive
- Corporate Sustainability Reporting Directive
- Corporate Sustainability Due Diligence Directive
- Corporate Sustainability Reporting Directive
- Corporate Sustainability Reporting Directive
- Corporate Sustainability Due Diligence Directive
- Corporate Sustainability Reporting Directive
- Corporate Sustainability Due Diligence Directive
- Corporate Sustainability Reporting Directive
In his report on ‘The Future of European Competitiveness’, Mario Draghi emphasised the need for Europe to create a regulatory landscape which facilitates competitiveness and resilience, drawing attention to burden and compliance costs created by the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). 1 In the Budapest Declaration on the New European Competitiveness Deal, EU Heads of State and Government called for ‘a simplification revolution, ensuring a clear, simple and smart regulatory framework for businesses and drastically reducing administrative, regulatory and reporting burdens, in particular for SMEs’. 2 They called on the Commission to make concrete proposals to reduce reporting requirements by at least 25 % in the first half of 2025.
In its Communication on the Competitive Compass for the EU, the Commission confirmed that it would propose a first ‘Simplification Omnibus package’ which would include far-reaching simplification in the fields of sustainable finance reporting, sustainability due diligence and taxonomy. 3 In its Communication entitled ‘A simpler and faster Europe: Communication on implementation and simplification’, the Commission set out an implementation and simplification agenda that delivers fast and visible improvements for people and business on the ground, requiring more than an incremental approach and underlining the need for bold action to streamline and simplify EU, national and regional rules. 4
The CSRD entered into force on 5 January 2023. 5 It strengthened and modernised corporate sustainability reporting requirements through modifications to the Accounting Directive, the Transparency Directive, the Audit Directive and the Audit Regulation. 6 The CSRD is an important element of the European Green Deal and of the Sustainable Finance Action Plan. 7 It aims to ensure that investors have the information they need to understand and manage the risks to which investee companies are exposed from climate change and other sustainability issues. It also aims to ensure that investors and other stakeholders have the information they need about the impacts of companies on people and the environment. It thereby contributes to financial stability and environmental integrity. This is a necessary condition for financial resources to flow to companies that pursue sustainability goals and creates more accountability and transparency towards all stakeholders regarding companies’ sustainability performance.
The CSDDD entered into force on 25 July 2024 8 . It aims to ensure that companies operating in the EU single market contribute to attaining the European Union’s broader ambition to transition towards a sustainable and climate-neutral economy putting in place adequate governance and management systems and taking appropriate measures to identify and address adverse human rights and environmental impacts in their own operations, as well as in the operations of their subsidiaries and their global value chains. In addition, it aims to ensure that companies adopt and put into effect a transition plan for climate change mitigation.
The CSRD and the CSDDD are now being implemented in a new and difficult context. Russia’s war of aggression against Ukraine has driven up energy prices for EU undertakings. Trade tensions are rising as the geopolitical landscape continues to shift. The different approach undertaken by some other major jurisdictions regarding the regulation of corporate sustainability reporting and due diligence raises questions about the effects of these laws on the competitive positioning of EU companies. The ability of the Union to preserve and protect its values depends amongst other things on the capacity of its economy to adapt and compete in an unstable and sometimes hostile geopolitical context.
This proposal therefore contains provisions to simplify and streamline the regulatory framework with a view to reduce the burden on undertakings resulting from the CSRD and the CSDDD without undermining the policy objectives of either piece of legislation and to ensure more cost-effective delivery of the overall ambition of the European Green Deal related to the green and just transition.
The proposal includes several important simplifications and flexibilities, which may encourage undertakings to voluntarily apply sustainability and taxonomy reporting at a bigger scale. Companies with strong sustainability profiles could benefit from this as differentiator, potentially gaining an edge in attracting investments into their businesses. Companies in transition can benefit from voluntary reporting since these undertakings can decide how to communicate their transition strategies without the pressure of mandatory disclosures, while also attracting investments.
In parallel to this proposal, the Commission is submitting a separate legislative proposal to postpone the entry into application of the CSDDD and of certain provisions of the CSRD.
The CSRD is currently scheduled to apply to large undertakings, SMEs with securities listed on the EU regulated markets, parent undertakings of large groups, as well as to issuers that belong to these categories of undertakings. The entry into application of the reporting requirements introduced by the CSRD is phased in according to different categories of undertakings. In the first wave, large public interest entities with more than 500 employees must report for the first time in 2025 for financial year 2024. 9 In the second wave, other large undertakings must report in 2026 for financial year 2025. 10 In the third wave, SMEs with securities listed in EU regulated markets must report in 2027 for financial year 2026, although they have a possibility to opt out of reporting for financial years 2026 and 2027. 11 In the fourth wave, certain non-EU undertakings that have business in the territory of the Union above certain thresholds must report in 2029 for financial year 2028. 12
The CSRD requires undertakings in scope to report sustainability information according to mandatory European Sustainability Reporting Standards (ESRS) and requires the Commission to adopt such standards through delegated acts. In July 2023 the Commission adopted a first set of ESRS which are sector-agnostic, meaning they are to be applied by all undertakings in scope independently of the sector of the economy in which the undertaking operates. 13 The CSRD also requires the Commission to adopt sector-specific reporting standards, with a first set of such standards to be adopted by June 2026. The CSRD allows listed SMEs to report using a separate and lighter, proportionate set of standards instead of the full set of ESRS.
At the request of the Commission, EFRAG has submitted a sustainability reporting standard for voluntary use by SMEs that are not in scope of the reporting requirements (VSME standard). 14 The objective of the VSME standard is to provide SMEs with a simple, widely recognised tool through which they can provide sustainability information to banks, large companies and other stakeholders that may demand such information.
Other important aspects of the CSRD are the provisions on assurance and on reporting value-chain information. Undertakings must publish their sustainability information together with the opinion of a statutory auditor or, if the Member States allows, an independent assurance service provider. The current requirement is for limited assurance and the CSRD provides that this could in the future become a requirement for reasonable assurance under certain conditions. 15 The CSRD also requires the Commission to adopt standards for sustainability assurance by means of delegated acts.
The CSRD requires undertakings to report value-chain information to the extent necessary for understanding their sustainability-related impacts, risks and opportunities. The CSRD establishes a so-called value-chain cap, which states that ESRS may not contain reporting requirements that would require undertakings to obtain from SMEs in their value chain information that exceeds the information to be disclosed under the proportionate standard for listed SMEs.
This proposal aims to reduce the reporting burden and to limit the trickle down of obligations on smaller companies. Firstly, this current proposal aims to simplify the framework and reduce burden in the following ways:
–The number of undertakings subject to mandatory sustainability reporting requirements would be reduced by about 80%, taking out of scope large undertakings with up to 1000 employees (i.e. some of the undertakings from the second wave and some of the undertakings from the first wave) and listed SMEs (i.e. all undertakings in the third wave). The reporting requirements would only apply to large undertakings with more than 1000 employees (i.e. undertakings that have more than 1000 employees and either a turnover above EUR 50 million or a balance sheet above EUR 25 million). This revised threshold would align the CSRD more closely with the CSDDD. 16
–For undertakings not subject to mandatory sustainability reporting requirements, the Commission proposes a proportionate standard for voluntary use which would be based on the VSME standard developed by EFRAG. According to this proposal, the Commission would adopt this voluntary standard as a delegated act. In the meantime, to address market demand, the Commission intends to issue a recommendation on voluntary sustainability reporting as soon as possible, based on the VSME standard developed by EFRAG.
–The value-chain cap would be extended and strengthened. It would apply directly to the reporting company instead of being only a limit on what ESRS can specify. It would protect all undertakings with up to 1000 employees rather than just SMEs as is currently the case. And the limit would be defined by the voluntary standard adopted by the Commission as a delegated act, based on the VSME standard developed by EFRAG. This will substantially reduce the trickle-down effect.
–There would be no sector-specific reporting standards, so avoiding an increase in the number of prescribed datapoints that undertakings should report.
–The possibility of moving from a requirement for limited assurance to a requirement for reasonable assurance would be removed. This will provide clarity that there will be no future increase in costs of assurance for undertakings in scope.
–Instead of an obligation for the Commission to adopt standards for sustainability assurance by 2026, the Commission will issue targeted assurance guidelines by 2026. This will allow the Commission to address emerging issues more quickly in the field of sustainability assurance that may be generating unnecessary burden on undertakings that are subject to the reporting requirements.
–The proposal introduces an “opt-in” regime where large undertakings with more than 1000 employees and with a 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. This “opt-in” approach will eliminate entirely the cost of compliance with the Taxonomy reporting rules for large undertakings with more than 1000 employees and with a net turnover not exceeding EUR 450 million which do not claim that their activities are associated with economic activities that qualify as environmentally sustainable under the Taxonomy Regulation. In addition, this proposal provides more flexibility by allowing these undertakings to report on activities that meet certain Taxonomy technical screening criteria without meeting all of them. Such reporting on partial alignment can foster a gradual environmental transition of activities overtime, in line with the aim to scale up transition finance.
Secondly, the Commission intends to adopt a delegated act to revise the first set of ESRS. To deliver swiftly on the simplification and streamlining of the ESRS, and to provide clarity and legal certainty to undertakings, the Commission aims to adopt the necessary delegated act as soon as possible, and at the latest six months after the entry into force of this proposal. The revision of the delegated act will substantially reduce the number of mandatory ESRS datapoints by (i) removing those deemed least important for general purpose sustainability reporting, (ii) prioritising quantitative datapoints over narrative text and (iii) further distinguishing between mandatory and voluntary datapoints, without undermining interoperability with global reporting standards and without prejudice to the materiality assessment of each undertaking. The revision will clarify provisions that are deemed unclear. It will improve consistency with other pieces of EU legislation. It will provide clearer instructions on how to apply the materiality principle, to ensure that undertakings only report material information and to reduce the risk that assurance service providers inadvertently encourage undertakings to report information that is not necessary or dedicate excessive resources to the materiality assessment process. It will simplify the structure and presentation of the standards. It will further enhance the already very high degree of interoperability with global sustainability reporting standards. It will also make any other modifications that may be considered necessary considering the experience of the first application of ESRS.
Thirdly, the separate proposal made by the Commission in parallel to this proposal would postpone by two years the entry into application of the reporting requirements for the second wave (large undertakings that are not public interest entities and that have more than 500 employees, as well as large undertakings with up to 500 employees 17 ) and the third wave (listed SMEs, small and non-complex credit institutions, and captive insurance and reinsurance undertakings). The objective of the postponement is to avoid a situation in which certain undertakings are required to report for financial year 2025 (second wave) or 2026 (third wave) and are then subsequently relieved of this requirement. Such a situation would mean that the undertakings in question incur unnecessary and avoidable costs.
The Commission invites co-legislators to reach rapid agreement on that postponement, in particular to provide the necessary legal clarity for undertakings in the second wave that are currently required to report for the first time in 2026 for financial year 2025.
According to the current rules, Member States should transpose the CSDD Directive by 26 July 2026. Entry into application is envisaged in three waves: as from July 2027, the rules would start applying only to the largest EU companies, i.e. those that have more than 5000 employees and report a net annual (worldwide) turnover of more than 1.5 billion euro, as well as to non-EU companies that generate more than EUR 1.5 billion net turnover in the EU. In the second wave, EU companies with more than 3000 employees and more than EUR 900 million net turnover, as well as non-EU companies generating such net turnover in the EU would need to comply with the new framework as from July 2028. Last, in July 2029, all other companies falling under the general scope would have to start applying the (national rules transposing the) Directive. As from this date, the CSDDD is estimated to apply to approximately 6000 large EU companies, and some 900 non-EU companies. The personal scope and phased-in application take into account that companies of different size have different capacities to implement the new mandatory framework and, as such, is a key element in ensuring a proportional approach.
As regards large companies, the Directive adopts a risk-based approach, allowing them to prioritise addressing those impacts first which are most likely or most severe. Also, the Directive requires the company to take “appropriate measures” that are reasonably available to it, taking into account the circumstances of the specific case.
The Directive also enables cost sharing opportunities through joint industry initiatives and multi-stakeholder initiatives.
As regards preventing the shifting of the compliance burden on SME business partners, the Directive requires large companies under the scope to use responsible contractual clauses, investments, support, and improved purchasing practices.
Despite all these elements, the Directive is perceived as imposing significant regulatory burden, in particular, when value chains are very complex and extensive and therefore business associations have called for further simplifications and burden reduction, including regarding SMEs which may allegedly still experience unwanted trickle-down effects. Furthermore, business associations have pointed to uncertainties linked to a possible increase in liability risks.
While the CSDDD already incorporates a number of mechanisms to ensure proportionality and to ensure that companies in scope obtain the reputational and resilience benefits of more sustainable value-chain management, taking into account companies’ feedback, this proposal aims to clarify and simplify the framework, and to reduce the burden of companies, including one-off and recurring compliance costs, already in the short-term. In particular, the following changes are introduced to this end:
–tailoring the obligations with respect to indirect business partners in the chain of activities to cases of circumvention or when there is information pointing to likely or actual adverse impacts,
–reducing the required frequency of the periodic monitoring exercises, and
–clarifying and targeting the scope of stakeholder engagement.
The proposal also includes several other elements that aim to increase legal certainty and create a level playing field in the EU, contributing to burden reduction and improved international competitiveness.
In parallel with this proposal, the Commission has also adopted a proposal that would postpone by one year the transposition deadline and remove the first wave for the entry into application. By advancing the deadline set out in the Directive for adopting the general guidelines by the Commission (Article 19(3)), the overall result is that in-scope companies will have two years to prepare for the entry into application allowing them to take fully into account the best practices provided in these guidelines.
• Consistency with existing policy provisions in the policy area
By removing the distinction between listed and non-listed undertakings this proposal is consistent with the goal of the Capital Markets Union to make EU regulated markets more attractive as a source of financing.
The reporting requirements set out in the CSRD and ESRS aim to ensure, amongst other things, that financial market participants, credit institutions and benchmark administrators have access to the sustainability information that they need from undertakings to meet their own reporting obligations under the Sustainable Finance Disclosure Regulation, the Capital Requirements Regulation and the Benchmarks Regulation. Undertakings that would no longer be subject to the CSRD reporting requirements according to this proposal may still provide information to financial market participants, credit institutions and benchmark administrators on a voluntary basis. Where appropriate they may do this using the voluntary reporting standards that, according to this proposal, the Commission would adopt as delegated acts.
According to this proposal, to be in scope of the sustainability reporting requirements undertakings must have more than 1000 employees. Since the 1000 employee threshold is one of the main criteria used to define which undertakings are subject to the CSDDD, this proposal promotes closer alignment between the CSRD and CSDDD.
Undertakings subject to both the CSRD and the CSDDD are not required by the CSDDD to report any information additional to what they are required to report under the CSRD. The proposed modifications will not take out of the CSRD scope any undertakings that are subject to the CSDDD, meaning that this consistency between the two pieces of legislation is maintained.
Consistency with other pieces of EU legislation will be enhanced through modifications to the ESRS delegated act where modifications to ESRS are the most appropriate means of achieving that goal.
Under the CSRD/ESRS, reporting on adverse impacts is not limited to direct value chain partners. Consistency with the CSRD is maintained as the proposed changes to CSDDD limiting due diligence, in the first place, to direct value chain partners are complemented by requirements for companies in scope to assess indirect business partners in case of plausible information suggesting actual or potential impacts at their level. The CSRD complements the CSDDD regarding due diligence reporting and the scope of both legal acts is now proposed to be aligned. The provision on climate transition plans will be better aligned to the language of the CSRD, while continuing to complement CSRD with a clear obligation to adopt such a plan.
• Consistency with other Union policies
This proposal is consistent with EU policy to enhance competitiveness, to simplify the regulatory framework and to reduce burden on business while still achieving the policy goals of the CSRD and CSDDD. This includes preserving the Green Deal as mid- to long-term competitiveness depends on companies sufficiently integrating sustainability considerations into their operations.
With regard to the CSDDD, the proposal would simplify and streamline the sustainability due diligence requirements for in-scope companies, thereby reducing administrative burdens, in line with the objectives set out in the Competitiveness Compass, namely the 25% and 35% (for SMEs) burden reduction targets.
At the same time, by reducing impacts on business partners, many of which will be SMEs or small mid-caps, the proposal also contributes to the objective of supporting SMEs and small mid-caps and relieving them from unnecessary burdens that might negatively affect their prosperity and growth. Extending the scope of provisions subject to maximum harmonisation to cover the core due diligence duties also contributes to the objective of the Single Market by avoiding fragmentation through different national rules (‘gold-plating’) and ensuring a level playing field across the European Union. While removing the uniform rules on civil liability reduces harmonisation, it ensures respect for existing, national liability regimes – with which companies in scope are familiar - in line with the subsidiarity principle and ensures greater legal certainty on liability risks under a new type of risk-based corporate obligations.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
The proposal’s legal basis rests on Articles 50 and 114 of the Treaty on the Functioning of the European Union (TFEU). Article 50 of the TFEU is the legal basis for adopting EU measures aimed at attaining the right of establishment in the single market in company law, and it mandates the European Parliament and the Council to act by means of Directives. Article 50 of the TFEU is the legal basis for Directives 2006/43/EC and 2013/34/EU, as well as part of the legal basis for Directive (EU) 2022/2464 and Directive (EU) 2024/1760. Article 114 of the TFEU is a general legal basis with the objective of establishing or ensuring the functioning of the single market – in this case, the free movement of capital and the freedom of establishment. Article 114 of the TFEU is part of the legal basis for Directive (EU) 2022/2464 and Directive (EU) 2024/1760.
• Subsidiarity (for non-exclusive competence)
The Accounting Directive, as amended by the CSRD, already regulates the disclosure of sustainability information in the EU. Common rules on sustainability reporting and its assurance ensure a level playing field for companies established in the different Member States. Significant differences in requirements for sustainability reporting and assurance between Member States would create additional costs and complexity for companies operating across borders, which would be detrimental to the single market. Member States acting alone are not able to modify existing EU laws to reduce the burden on companies.
The CSDDD ensures a level playing field across the European Union by harmonising the rules on corporate sustainability due diligence against the background of diverging existing due diligence legislation at Member State level. In this light, the objective of simplifying and streamlining the due diligence requirements and related provisions on public and private enforcement cannot be achieved by the Member States alone. Therefore, action at the EU level is necessary.
• Proportionality
This proposal sets out a simple and proportionate framework for sustainability reporting that would treat undertakings according to their size:
–Large undertakings with more than 1000 employees (i.e. undertakings that have more than 1000 employees and either a turnover above EUR 50 million or a balance sheet above EUR 25 million) 18 : subject to mandatory reporting requirements and must report against the full set of ESRS, which will itself be revised and simplified.
–Out-of-scope undertakings (undertakings with up to 1000 employees): not subject to mandatory reporting requirements, may use the proportionate voluntary standard to be adopted by the Commission as a delegated act, based on the VSME standard developed by EFRAG and are protected by the value-chain cap from excessive information requests from larger companies within scope.
This framework is a more proportionate means of achieving the policy objectives of the CSRD.
With the proposed amendments the CSDDD becomes more proportionate as the changes aim to simplify and streamline sustainability due diligence obligations of companies without undermining the objectives of the Directive and the EU’s sustainability framework. The underlying policy objective of this proposal is precisely to further strengthen the proportionality of the Directive with a view to increase its efficiency in achieving its goals, reflecting on calls from some stakeholders who consider that the CSDDD as currently in force, would have placed excessive burden on businesses. Targeting the obligations with respect to indirect business partners in the value chain, reducing the required frequency of the periodic monitoring exercises, as well as streamlining the definition of stakeholders and better targeting engagement to relevant stakeholders and limiting the due diligence steps when engagement is required are all examples for the proposed elements that are designed to make the Directive more proportionate.
• Choice of the instrument
This proposal is composed of a Directive that amends provisions of the Audit Directive, Accounting Directive, Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD). These directives set out complementary reporting and behavioural duties in the area of sustainability, and an Omnibus Directive is the most appropriate legal instrument to amend such existing inter-linked Directives with the common objective as regards simplification and burden reduction.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Ex-post evaluations/fitness checks of existing legislation
The CSDDD has not yet been transposed or applied by companies. The CSRD has been applied by a first set of companies who are publishing their first sustainability statements mainly in the first half of 2025. It has therefore not been possible to undertake an ex-post evaluation or fitness check of either piece of legislation.
• Stakeholder consultations
The following consultation activities have helped to shape the content of this proposal.
–European Commission ‘Call for evidence on the rationalisation of reporting requirements’, from October to December 2023. 19
–European Commission meetings with companies and other stakeholders in early February 2025.
–The European Commission has also held separate stakeholder activities including two large hybrid stakeholder forums on the CSRD in May and November 2024 with the participation of approximately 400 people in person and more than 3000 people virtually.
–The European Commission received a very significant number of letters and detailed analyses from all types of stakeholders (from companies to investors, banks, civil society, Non-Governmental Organisations, chambers of commerce and Member States’ national administrations).
The European Commission’s Call for Evidence on the Rationalisation of Reporting Requirements sought evidence and views regarding regulations which are perceived to produce administrative burden. Almost 200 stakeholders responded, and primarily called for a simplification of sustainability reporting, due diligence and the EU Taxonomy.
In the European Commission’s meetings with European industry, social partners and civil society in early February 2025 – including, in particular, a two days-stakeholder event (‘reality check’) that allowed the Commission to hear from practitioners – stakeholders expressed support for the overarching objectives of the CSRD and CSDDD but highlighted a need for simplification and harmonisation in their implementation. Many business representatives stated that some of the sustainability disclosure requirements in the ESRS are overly complex and numerous, and called for a revision of the ESRS to reduce the number and complexity of the disclosure requirements. They recommended to further consider interoperability of European standards with international ones, as well as to limit value chain reporting requirements.
Some stakeholders have argued for a reduction in scope of the CSRD to relieve listed SMEs and smaller large companies from sustainability reporting requirements. Some advocated for achieving simplification by means of keeping smaller large companies within the scope of the CSRD but allowing them to apply proportionate reporting standards instead of applying the first set of ESRS. SME stakeholders highlighted the need to address the trickle-down effect on SMEs in the value chain from sustainability reporting requirements and pointed out that the lighter reporting regime for them should not be undermined by more extensive information requests along the supply chain or by financial institutions.
While some stakeholders suggested pausing the application of existing legislation to focus on simplification, others saw strong merits in maintaining the rules and argued for the importance of legal certainty and regulatory stability for companies, as well as for maintaining the objectives of the European Green Deal and the Sustainable Finance Action Plan. They also argued that implementation guidelines should be used to clarify and simplify certain parts of the sustainability reporting framework, instead of an extensive change to the existing rules. Representatives of civil society argued that progressive companies should not be treated less favourably than others. They highlighted the demand for sustainability information from financial markets and end-investors.
Many stakeholders noted that the assurance requirements are creating a situation of over-compliance. In this context, certain stakeholders called for a postponement of the limited assurance requirement or urged the Commission to quickly adopt guidelines for limited assurance in order to clarify the requirements.
Many business and industry stakeholders called for either a further postponement of the sector-specific sustainability reporting standards or requested that the requirement for sector-specific standards be removed completely from the CSRD. Companies highlighted the need to correctly implement and become accustomed to reporting under the first set of ESRS and argued that introducing sector-specific disclosure standards on top of the first set of ESRS would further complicate the sustainability reporting process.
Stakeholders also called for clear guidance as regards the double materiality assessment under ESRS. Many called for increased consistency of requirements and harmonised definitions across different pieces of legislation, such as CSRD, CSDDD, Taxonomy, SFDR, etc.
The need for simplification has also been echoed by many other reports, recommendations, and stakeholder views from both financial and non-financial sector undertakings, many of which underscore the importance of reducing complexity and administrative burdens and which have informed the burden reduction measures described in this proposal.
Corporate Sustainability Due Diligence Directive
Consultations with various stakeholders, including businesses, trade associations, and civil society organizations, as well as other contacts with and inputs received from stakeholders have informed the proposal. This includes, in particular, a two days-stakeholder event (‘reality check’) that allowed the Commission to hear from practitioners about which challenges they see with the current legislative framework and what could be possible solutions to address them. While some stakeholders called for far-reaching changes and postponements, others emphasized the need for regulatory certainty and opposed reopening the Directive, instead focusing on implementation. This proposal aims to balance these perspectives by maintaining the integrity of the CSDDD while introducing changes to simplify and streamline the Directive.
• Collection and use of expertise
To prepare this proposal the Commission has taken account of analyses produced by stakeholders and experts on the actual and future implementation of the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive. In addition, the proposal has been informed by input from relevant stakeholders, including companies’ sustainability officers.
• Impact assessment
The issue of competitiveness is of critical urgency as it directly influences the European Union's ability to achieve sustainable economic growth and maintain its position in the global market. Competitiveness, tied closely to innovation, efficiency, and sustainability, is essential for fostering economic resilience and ensuring that EU businesses can thrive in a rapidly evolving global landscape. The current economic environment, characterized by rapid technological advancements, shifting consumer demands, and increased global competition, necessitates swift action to safeguard the EU's competitive edge. Given this urgency, the proposal does not allow for an impact assessment.
However, it is important to note that this initiative involves amendments to existing legal acts, which have already undergone comprehensive impact assessments. The insights and evidence gathered from those previous assessments, together with input from stakeholders and discussions with practitioners, have helped to shape the current proposal. For that reason, and given the importance and urgency of this initiative, a derogation was granted under the Commission’s Better Regulation Guidelines. Accordingly, no full-fledged impact assessment has been prepared but the proposal is accompanied by a Commission Staff Working Document that includes an analysis of the impacts of the proposed measures, including a qualitative analysis and, where possible, estimations of costs savings as well as supporting evidence.
• Regulatory fitness and simplification
This proposal is expressly designed to achieve a major simplification of the sustainability reporting regime.
The proposal contributes to regulatory fitness by reducing burdens and ensuring a more coherent and simpler regulatory environment, while respecting the EU's sustainability objectives.
• Fundamental rights
The proposal respects the fundamental rights enshrined, and adheres to the principles stated, in the Charter of Fundamental Rights of the European Union. The Corporate Sustainability Reporting Directive has an indirect positive impact on fundamental rights, given that sustainability reporting requirements can influence corporate behaviour for the better. It serves to make companies more aware of fundamental rights and positively influence how they identify and manage actual and potential adverse impacts on fundamental rights. The proposed modifications may partially diminish these positive impacts with regard to companies that would no longer be subject to mandatory reporting requirements, but the reduction of administrative burden on such companies should lead to other societal gains in terms of wealth creation, employment and innovation, including innovation for sustainability.
The proposal respects the fundamental rights enshrined, and adheres to the principles stated, in the Charter of Fundamental Rights of the European Union. One of the CSDDD’s main objective was to improve human rights protection through companies addressing their human rights impacts in their chains of activities. The targeting of obligations regarding the chain of activities, which requires action beyond direct business partners whenever the company in scope of the Directive has plausible information pointing to such adverse impacts, is a recognition of the fact that adverse human rights impacts often arise in indirect business relationships. While their obligations to pro-actively identify such impacts will be reduced to avoid burdens from systematically addressing all parts of often complex value chains, companies will continue to have a responsibility to respect human rights along their value chains in the future when they have such information.
4. BUDGETARY IMPLICATIONS
The proposal does not have any new implications on the Union budget.
5. OTHER ELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
To monitor progress towards achieving the proposal’s specific objectives, the Commission will explore the possibility of organising exchanges with stakeholders in different formats as well as periodic surveys of users of sustainability information and of undertakings that report such information, depending on the availability of financial resources. Article 6 of the CSRD requires the Commission to present a report on the implementation of the Directive by April 2029. The implementation of the CSDDD as amended, and its effectiveness in reaching its objectives, in particular in addressing adverse impacts, will also be subject to regular evaluation according to Article 36 of that Directive. This proposal does not require an implementation plan.
• Explanatory documents (for directives)
As the proposal introduces specific amendments to 4 existing directives, Member States should either provide the Commission with the text of the specific amendments to national provisions or, in the absence of such amendments, explain which specific national law provision already implements the amendments provided in the proposal.
• Detailed explanation of the specific provisions of the proposal
Article 1 amends Directive 2006/43/EC (Audit Directive) as follows:
–paragraph i replaces Article 26a(3) of the Audit Directive to delete the time limits for the Commission to adopt standards for limited assurance and to delete the empowerment for the Commission to adopt standards for reasonable assurance together with the related cross-references;
–paragraph (2) replaces Article 48a, second subparagraph, of the Audit Directive to correct an error in the cross-reference to the limited assurance standards.
Article 2 amends Directive 2013/34/EU (Accounting Directive) as follows:
–paragraph i modifies in Article 1(3) of the Accounting Directive the size for an undertaking to be in scope of sustainability reporting when that undertaking is a credit institution or an insurance undertaking, to reflect the changes made to the size of undertakings in the scope of Article 19a (i.e. large undertakings with more than 1000 employees on average during the financial year);
–paragraph i also specifies in Article 1 i of the Accounting Directive that the European Financial Stability Facility (EFSF) established by the EFSF Framework Agreement is not subject to sustainability reporting;
–paragraph (2) amends Article 19a of the Accounting Directive by:
·limiting the undertakings required to prepare and publish individual sustainability reporting to only large undertakings with more than 1000 employees on average during the financial year;
·introducing a requirement for Member States to ensure that, for the purposes of reporting sustainability information as required by the Accounting Directive -and with no prejudice to Union requirements to conduct a due diligence process - undertakings do not seek to obtain from undertakings in their value chain with not more than 1000 employees on average during the financial year any information that goes beyond the information specified in the standards for voluntary use to be adopted under Article 29ca, except for additional sustainability information that is commonly shared between undertakings in the sector concerned. Undertakings reporting on their value chain in accordance with this requirement must be deemed to comply with sustainability reporting;
·deleting the option for listed SMEs to report based on a more proportionate set of standards and deleting the 2-year opt out from sustainability reporting for listed SMEs, to reflect the exclusion of these companies from the scope of sustainability reporting;
–paragraph (3) inserts Article 19b to allow large undertakings with an average of more than 1000 employees and a net turnover not exceeding EUR 450 000 000 during the financial year to disclose information referred to in Article 8 of Regulation (EU) 2020/852 in a more flexible way;
–paragraph i amends Article 29a of the Accounting Directive by:
·limiting the undertakings required to prepare and publish consolidated sustainability reporting to only parent undertakings of a large group with more than 1000 employees on average during the financial year on a consolidated basis;
·introducing a requirement for Member States to ensure that, for the purposes of reporting sustainability information as required by the Accounting Directive -and with no prejudice to Union requirements to conduct a due diligence process - undertakings do not seek to obtain from undertakings in their value chain with not more than 1000 employees on average during the financial year any information that goes beyond the information specified in the standards for voluntary use to be adopted under Article 29ca, except for additional sustainability information that is commonly shared between undertakings in the sector concerned. Undertakings reporting on their value chain in accordance with this requirement must be deemed to comply with sustainability reporting;
–paragraph (5) inserts Article 29aa to allow large undertakings with an average of more than 1000 employees and a net turnover not exceeding EUR 450 000 000, on a consolidated basis, during the financial year to disclose information referred to in Article 8 of Regulation (EU) 2020/852 in a more flexible way;
–paragraph (6) amends Article 29b of the Accounting Directive by:
·deleting the empowerment for the Commission to adopt sector-specific standards by way of delegated acts;
·specifying that the sustainability reporting standards must not specify disclosures requiring undertakings to obtain from undertakings in their value chain with not more than 1000 employees on average during the financial year any information that goes beyond the information to be disclosed pursuant to the sustainability reporting standards for voluntary use to be adopted under Article 29ca;
–paragraph (7) deletes Article 29c of the Accounting Directive on the Commission’s empowerment to adopt a more proportionate set of standards for listed SMEs to reflect the exclusion of these companies from the scope of sustainability reporting;
–paragraph (8) inserts the new Article 29ca in the Accounting Directive, which empowers the Commission to adopt delegated acts to provide for sustainability reporting standards for voluntary use by out-of-scope undertakings. These standards must be proportionate and relevant to the capacities and the characteristics of these undertakings and to the scale and complexity of their activities. They must also specify, where possible, the structure to be used to present that information;
–paragraph (9) replaces Article 29d of the Accounting Directive to specify that until a Delegated Regulation for the marking up of sustainability reporting is adopted, undertakings are not required to markup their sustainability reporting;
–paragraph (10) replaces Article 33 i of the Accounting Directive to specify that the collective responsibility of members of an undertaking’s administrative, management and supervisory bodies as regards the digitalisation of the management report is limited to its publication in the single electronic format, including the digital marking up;
–paragraph (11) amends Article 34 of the Accounting Directive by:
·deleting the reference to Article 29c in Article 34 i to reflect the removal of the sustainability reporting standards for listed SMEs;
·adding paragraph 2a, which specifies that assurance providers prepare their assurance opinion respecting the obligation on undertakings not to seek to obtain from undertakings in their value chain with not more than 1000 employees on average during the financial year any information that goes beyond the information specified in the standards for voluntary use;
–paragraph (12) amends Article 40a i of the Accounting Directive by:
·limiting the size for a subsidiary undertaking to be in scope of Article 40a to the criteria for large undertakings as defined in Article 3 i of the Accounting Directive;
·increasing the net turnover threshold for a branch to be in scope of Article 40a from EUR 40 million to EUR 50 million, to align with the turnover threshold for large undertakings;
·increasing the net turnover threshold for the third-country undertaking to be in scope of Article 40a from EUR 150 million generated in the Union to EUR 450 million;
–paragraph (13) amends Article 49 of the Accounting Directive to empower the Commission to set out rules supplementing the reporting regime for activities that are only partially taxonomy aligned.
Article 3 amends Article 5(2) of Directive (EU) 2022/2464 (Corporate Sustainability Reporting Directive “CSRD”) to reflect the reduction of the undertakings in scope of sustainability reporting under Articles 19a and 29a of the Accounting Directive. In particular:
–paragraph i point (a) deletes Article 5(2) subparagraph 1, point (a) of the CSRD to reflect the exclusion from scope of some of the undertakings in wave 1;
–paragraph i point (b)(i) replaces Article 5(2) subparagraph 1, point (b)(i) of the CSRD specifying which undertakings will be subject to individual sustainability reporting in wave 2, i.e. large undertakings with more than 1000 employees on average during the financial year;
–paragraph i point (b)(ii)) replaces Article 5(2) subparagraph 1, point (b)(ii) of the CSRD specifying which undertakings will be subject to consolidated sustainability reporting in wave 2, i.e. parent undertakings of large groups with more than 1000 employees on average, on a consolidated basis, during the financial year;
–paragraph i point (c) repeals Article 5(2) subparagraph 1, point (c) of the CSRD to reflect the exclusion from the scope of listed SMEs;
–paragraph (2) point (a) deletes Article 5(2) subparagraph 3, point (a) of the CSRD to reflect the exclusion from scope of some of the issuers in wave 1;
–paragraph (2) point (b)(i) replaces Article 5(2) subparagraph 3, point (b)(i) of the CSRD specifying which issuers will be subject to individual sustainability reporting in wave 2, i.e. issuers that are large undertakings with more than 1000 employees on average during the financial year;
–paragraph (2) point (b)(ii) replaces Article 5(2) subparagraph 3, point (b)(ii) of the CSRD specifying which issuers will be subject to consolidated sustainability reporting in wave 2, i.e. issuers that are parent undertakings of large groups with more than 1000 employees on average, on a consolidated basis, during the financial year;
–paragraph (2) point (c) repeals Article 5(2) subparagraph 3, point (c) of the CSRD to reflect the exclusion from the scope of issuers that are SMEs.
Article 4 amends Directive (EU) 2024/1760 (Corporate Sustainability Due Diligence Directive ‘CSDDD’) on the following main points: extending the scope of maximum harmonisation, targeting due diligence, as a general rule, to direct business partners, removing the duty to terminate the business relationship as a measure of last resort, limiting the notion of ‘stakeholder’ and further restricting the stages of the due diligence process that require stakeholder engagement, extending the intervals in which companies need to regularly monitor the adequacy and effectiveness of due diligence measures, clarifying the principles regarding pecuniary penalties and removing the ‘minimum cap’ for fines, removing aspects of the civil liability clause and the rules regarding representative actions, changing the provisions on the implementation of the climate transition plans, deleting the review clause regarding financial services, and bringing forward the adoption of the first set of (general) implementing guidelines by the Commission. In particular:
–paragraph i replaces Article 1 i, point (c) of the CSDDD to align the description of the subject matter of the Directive with the changes proposed to Article 22 i regarding the implementation of the transition plans for climate change mitigation;
–paragraph (2) replaces Article 3 i, point (n) of the CSDDD on the definition of ‘stakeholders’ to reduce the scope of the ‘stakeholder’ notion by simplifying the definition and limiting it to workers and their representatives, and to individuals and communities whose rights or interests are (in case of actual adverse impacts) or could be (in case of potential adverse impacts) “directly” affected by the products, services and operations of the company, its subsidiaries and its business partners. This includes, for instance, individuals or communities in the neighbourhood of plants operated by business partners when they are directly affected by pollution (e.g., an oil spill or harmful emissions), or indigenous people whose right to lands or resources are directly affected by how a business partner acquires, develops or otherwise uses land, forests or waters;
–paragraph (3) replaces Article 4 of the CSDDD on the level of harmonisation to extend the scope of maximum harmonisation to several additional provisions of the Directive that regulate the core aspects of the due diligence process. This includes in particular the identification duty, the duties to address adverse impacts that have been or should have been identified, and the duty to provide for a complaints and notification mechanism. However, the proposal also recognises that there are legal limits of what can be harmonised fully in a cross-sectoral framework directive dealing with social and environmental protection and which essentially sets out a general process to implement companies’ duty of care with regard to adverse impacts linked to business activities. Extending maximum harmonisation beyond this scope would risk undermining human – including labour – rights and environmental standards, both existing or still to be developed, for instance to address emerging risks linked to new products or services, while the practical benefits would be very limited. Where such risks are addressed by Member States, in particular in areas where the Union has limited competences like for instance labour law, they should not be prevented from doing so where they consider this necessary to regulate how the duty of care applies in specific circumstances;
–paragraph i amends Article 8 of the CSDDD on identifying and assessing actual and potential adverse impacts by replacing paragraph (2), point (b) and paragraph i, and by adding new paragraphs (2a) and (5) concerning the chain of activities:
·to limit due diligence measures, as a general rule, to the companies’ own operations, those of their subsidiaries and, where related to their chains of activities, those of their direct business partners. Consequently, when it comes to business relationships, following a mapping of their value chains, companies would be required to carry out an in-depth assessment only at the level of direct business partners. At the same time, the proposal recognises that there can be situations where companies have to look beyond their direct business partner, namely where they have plausible information that suggests an adverse impact at the level of an indirect business partner. This may, for instance, be the case where the structure of the business relationship lacks economic rationale and suggests that it was chosen to remove an otherwise direct supplier with harmful activities from the purview of the company, where the company has received a complaint or is aware of credible NGO or media reports about harmful activities at the level of an indirect supplier or is aware of past incidents involving the supplier, or where the company through its business contacts knows about problems at a certain location (e.g., conflict area). In these cases, companies should be required to further assess the situation. Where the assessment confirms the likelihood or existence of the adverse impact, it should be deemed to have been identified. In addition, a company should seek to ensure that its code of conduct – which is part of its due diligence policy and sets out the expectations as to how to protect human, including labour, rights and the environment in business operations – is followed throughout the chain of activities (contractual cascading). This aligns with the approach taken under the German Supply Chain Act (Lieferkettensorgfaltspflicht-Gesetz) which contains similar rules both as regards the focus on direct suppliers and the ways in which due diligence should go beyond in light of the available information. The company should also take into account SME support measures; and
·to further limit the trickle-down effect on companies with fewer than 500 employees (i.e. SMEs and small midcap companies), by limiting the amount of the information that may be requested as part of the value chain mapping by large companies to the information specified in the VSME sustainability reporting standard, unless additional information is necessary, for instance because the standards do not cover a relevant impact, and where such information cannot reasonably be obtained in any other way.
–paragraphs (5) and (6) replace Article 10(6) and Article 11(7) of the CSDDD, respectively, as regards disengagement in order to remove the duty to terminate the business relationships in the case of both actual and potential adverse impacts. Companies may find themselves in situations where their production heavily relies on inputs from one or several specific suppliers. At the same time, where the business operations of such a supplier are linked to severe adverse impacts, for instance child labour or significant environmental harm, and the company has unsuccessfully exhausted all due diligence measures to address these impacts, the company, as a last resort should suspend the business relationship while continuing to work with the supplier towards a solution, where possible using any increased leverage resulting from the suspension.
–paragraph (7) amends Article 13 on meaningful engagement with stakeholders, by amending paragraph (3), point (a), and deleting points (c) and (e), to clarify that companies are only required to engage with “relevant” stakeholders, thereby underlining that companies do not have to consult every possible stakeholder group but may limit themselves to those stakeholders that have a link to the specific stage of the due diligence process being carried out (e.g., affected individuals when designing a remediation measure). In addition, the proposed amendments further limit the stages of the due diligence process at which companies are required to engage with stakeholders;
–paragraph (8) amends Article 15 of the CSDDD on monitoring to extend the intervals in which companies need to regularly assess the adequacy and effectiveness of due diligence measures, from 1 year to five years. This will significantly reduce burdens not just for in-scope companies but also for their business partners, often SMEs, which risk being at the receiving end of (detailed) information requests as part of these monitoring exercises. At the same time, the proposal recognises that business relationships, and the risks and impacts arising from the activities covered by such business relationships, may evolve over time, sometimes even within short time frames. Also, measures taken to address potential or actual impacts might turn out to be inadequate or ineffective, based on experience gained with implementing them, and indications for this may arise before the date for the next regular assessment. Therefore, the company should carry out ad hoc assessments in these situations;
–paragraph (9) amends Article 19(3) of the CSDDD to require the Commission to make available its general guidelines with practical guidance and best practices on how to conduct due diligence in accordance with the Directive by half a year;
–paragraph (10) amends Article 22 i concerning companies’ transition plans for climate change mitigation with a view to ensuring more legal clarity and alignment of the CSDDD with the sustainability reporting regime of the CSRD. More particularly, the proposal introduces a modification regarding the requirement to put into effect the transition plan for climate change mitigation. The proposal makes clear that the plan should include implementation actions planned and taken. The adoption of the plan and its initial and updated design remains subject to administrative supervision;
–paragraph (11) replaces Article 27 i as regards the imposition of pecuniary penalties as part of public enforcement. The current text of Article 27 already clarifies that “[i]n deciding whether to impose penalties and, if such penalties are imposed, in determining their nature and appropriate level”, due account shall be taken of a series of factors that determine the gravity of the infringement (in particular the nature, gravity and duration of the infringement, and the severity of the impacts resulting from that infringement) and whether there are attenuating (e.g., investments made and any targeted support provided) or aggravating circumstances (e.g., recidivism). In addition, the provision stipulates that any penalties imposed shall be “effective, proportionate and dissuasive”. This aligns with similar provisions in other pieces of EU legislation, for instance the General Data Protection Regulation. While the Directive does not require Member States to set a maximum amount of any fines (i.e., a ‘cap’ or ‘ceiling’), it stipulates that, in case Member States nevertheless decide to do so, such a cap “shall be not less than 5 % of the net worldwide turnover of the company”. The purpose for introducing this provision was to ensure a level playing field in the Union, by avoiding that Member States set a cap at a level that would undermine the effectiveness and dissuasiveness of any fines imposed on companies under their jurisdiction. However, this provision has led to confusion. In particular, while such a cap says nothing about the actual fines imposed in a specific case, it has sometimes been misunderstood as a minimum fines amount. To clarify the situation, the proposed amendments address the issue of the level playing field differently, namely by tasking the Commission with developing fining guidelines (an instrument that also exists in other areas, e.g., competition law and data protection) in collaboration with the Member States and by prohibiting Member States from setting a fines cap that would prevent supervisory authorities from imposing penalties in accordance with the factors and principles set out in Article 27 i and (2). Furthermore, the proposal deletes the requirement for the fine to be commensurate to the company’s net worldwide turnover;
–paragraph (12) amends Article 29 of the CSDDD as regards civil liability by deleting paragraph i, paragraph (3), point (d) and paragraph (7), and changing paragraphs (2), (4) and (5):
·to remove the specific, EU-wide liability regime in the Directive. At the same time, in line with the core objective of the Directive to ensure the protection of victims against human rights violations and environmental harm resulting from business operations, the proposed amendments maintain the requirements for effective access to justice, including the right to full compensation in case a company is held liable for a failure to comply with the due diligence requirements under this Directive in accordance with national law and where such failure caused damage, while also protecting companies from over-compensation;
·in view of the different rules and traditions that exist at national level when it comes to allowing representative action, to delete the specific requirement set out in the CSDDD in this regard; and
· for the same reason, by deleting the requirement for Member States to ensure that the liability rules are of overriding mandatory application in cases where the law applicable to claims to that effect is not the national law of the Member State; and
–paragraph (13) removes Article 36 i of the CSDDD, deleting the first review clause of the Directive that would require the Commission to submit “no later than 26 July 2026” a report to the European Parliament and to the Council on the necessity of laying down additional sustainability due diligence requirements tailored to regulated financial undertakings with respect to the provision of financial services and investment activities, and the options for such due diligence requirements as well as their impacts. It is proposed to delete this review clause as it does not leave any time to take into account the experience with the newly established, general due diligence framework.
Article 5 requires Member States to transpose this Directive by [12 months after into force] at the latest, and to communicate to the Commission the text of their transposing measures.
Article 6 specifies that this Directive enters into force 20 days after its publication in the Official Journal of the European Union.