With Omnibus Simplification Package scheduled to be revealed next week amidst a turbulent political environment, Forward Law Review canvassed practitioners on their concerns and predictions for the EU’s plans for streamlined corporate sustainability reporting. Comment from Rebecca Perlman at Kirkland & Ellis, Rachel Lowe at Proskauer, Jill Shaw at A&L Goodbody and Jacquelyn MacLennan at Edinburgh University Law School.
Ursula von der Leyen, the president of the European Commission, announced in November an ‘Omnibus’ package that would simplify the law around the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD) and the taxonomy.
An announcement on the Omnibus Simplification Package is slated for next week – although the Brussels grapevine suggests it might be delayed until early March.
The decision has been controversial, not least because few details have been released in advance of its publication. The commission has said that it intends to reduce all administrative costs for businesses by 25-35%. It has also said that it will introduce a new category of ‘small mid-cap’ company for the purposes of reporting.
Further details remain scarce, however. And, whilst streamlining bureaucracy has been broadly welcomed by businesses, there are concerns that the regulations will be diluted. On 21 January, a group of prominent business and human rights professionals published an open letter to the European Commission criticising the Omnibus Simplification Package.
“It is creating further confusion and false incentives within the business community,” the signatories said, arguing that concerns over sustainability reporting burdens could be met without reopening the legal texts.
It continued: “The CSDDD, CSRD, and Taxonomy have been under development for several years. Many companies have closely monitored this legislation over time, investing substantial financial, human and operational resources to establish new procedures and prepare for its implementation. Delaying the enforcement of these legal acts, or diluting their requirements, would penalise companies that have diligently invested and prepared.”
Meanwhile, the UN Working Group on Business and Human Rights released a statement on 12 February encouraging the European Union to ensure that any developments relating to the CSDDD are in alignment with the UN Guiding Principles on Business and Human Rights.
Earlier in the month, the American Chamber of Commerce to the EU called for “immediate, bold action” on Omnibus simplification, while US Commerce Secretary, Howard Lutnick said he would use “all available trade tools” to respond to reporting burdens placed on US companies.
The European Commission was invited to respond to the issues raised in this article.
Regulatory uncertainty
“We will have to wait and see whether the benefits of the streamlined EU regime end up outweighing the current state of uncertainty,” said Rebecca Perlman, a partner in Kirkland & Ellis’s ESG & Impact practice in London. “For the time being, it is uncertainty and instability that dominate corporate and public discourse.”
Perlman said that the stated aims of the Omnibus – better alignment with the needs of investors, proportionate timelines, financial metrics that do not discourage investments in smaller companies and so on – seem sensible.
“What is unclear, however, is the extent of the changes we can expect to see,” she said. “Although President von der Leyen has been outspoken on her intention to uphold the content of the laws, the ‘far-reaching’ simplification exercise is likely to extend beyond procedural amendments to address overlaps and inconsistencies.”
Perlman continued: “Once the legislative process has started, the European Parliament and Council could very well propose their own wider changes to the legislation – as was the case with the EU Deforestation Regulation.”
She noted that key stakeholders – including the European People’s Party in Parliament and Germany and France in the Council, as well as numerous industry bodies – have already proposed additional changes, some of which could substantially limit the scope and application of CSRD and the CSDDD.
Perlman’s key concern – which was echoed by all the lawyers we spoke to – is the confusion that revisiting the regulations creates for businesses.
“The degree of regulatory uncertainty is concerning for businesses – many of which have already invested significant time and funds into preparing for compliance with the regulations that are under review as part of the Omnibus proposal,” she said. “Most clients are frustrated by the uncertainty and lack of insight into what the changes will look like.”
Rachel Lowe, special regulatory counsel in Proskauer’s London office, pointed out that while ‘competitiveness’ may be the aim of the Omnibus, regulatory uncertainty is currently making it harder for businesses to move forward. “Businesses – especially those deep into costly double materiality assessments – urgently need clarity,” she said.
In particular, she said, the changes to CSRD, which is partially implemented, will need careful handling. “Many businesses have invested in compliance, risk and sustainability resources to successfully assess and report under CSRD and to better support sustainable practices,” she said. “If there is uncertainty on the direction of the simplification package, businesses will be faced with increased and uncertain planning, investment and governance challenges on sustainability matters.”
Jill Shaw, ESG & Sustainability Lead at A&L Goodbody in Dublin, said the devil will be in the detail.
“Any proposals published in the next few weeks should, as a matter of priority, provide clarity on whether the existing reporting timelines will continue to apply and that companies can rely on the work that has already been undertaken,” she said. “Without such certainty, there is a risk that the policy objectives will not be achieved and this package will result in companies facing more costs, having an opposite effect to what the commission is seeking to achieve.”
She continued: “Time is of the essence, particularly in the context of CSRD. Equally as important as the publication of a comprehensive legislative package will be simultaneous confirmation from the European Parliament and the Council that they agree to fast track its approval.”
Clarity
Despite the promise of a streamlined and proportionate burden in the longer term, the current lack of clarity creates substantial uncertainty for businesses worldwide. Added to this, companies operating in the United States are currently facing significant changes there at both a federal and state level.
Lawyers are clear that they need more information on what will change and how.
Although the responsibility for global reporting standards for non-EU headquartered businesses lies with the European Financial Reporting Advisory Group (EFRAG) rather than the Commission, there is hope that the simplification package will accelerate progress and provide much-needed certainty for multinational businesses, Lowe said.
“In an increasingly fragmented political landscape on sustainability, particularly for US headquartered in-scope global businesses, timing, scope and reporting requirements must have clarity to enable businesses to implement the necessary changes effectively and navigate their range of, at times conflicting, stakeholders,” she said
Lowe continued: “Further key areas that will require urgent clarity include clear thresholds for the proposed small mid-cap category and their proposed ‘adapted requirements’, alongside definitive timelines and detail on changed reporting requirements for the broader population of in-scope companies too.”
There are some areas of convergence across stakeholder groups, however, Perlman noted.
“One such area of convergence relates to consistent concerns regarding the burden on SMEs, although there is disagreement about how to relieve that burden – such as by scoping them out, by limiting applicable data points, or both,” she said. “The commission has already foreshadowed the introduction of a ‘small mid-cap’ category in a bid to address this – how broad this category will be remains unclear.”
She continued: “There is also general consensus that fragmentation across the EU is unhelpful, with widespread corporate opposition to gold-plating, which can make compliance challenging for multinationals across jurisdictions.”
In the context of EU regulation, ‘gold-plating’ refers to member states imposing additional regulatory requirements and burdens beyond the minimum standards set by EU directives, which may lead to increased costs and complexity for businesses.
There has been significant external input – from member states, business groups and elsewhere – on how the commission should proceed with its simplification plan. Some of these proposals have suggested extensive changes, such as reducing the CSRD to focus solely on climate change – and exclude the social aspect.
Perlman thinks this unlikely, however. “While the EU’s focus is on decarbonisation, it is not likely to reduce reporting standards to only focus on GHGs,” she said. “Climate neutrality by 2050 continues to be law and non-climate elements have been a feature of European reporting for some time.”
She also noted that the EU also seems unlikely to make further changes to take non-EU business out of the rules, although this may depend on political negotiations beyond sustainability regulations – including those on tariffs.
Perlman said she also considers it unlikely that the EU will backtrack on double materiality assessments – which evaluate a company’s impact on the environment and society, as well as its financial performance, and how it may be affected financially by sustainability issues.
“This was a core principle underpinning the development of the ESRS [European Sustainability Reporting Standards] and is something that the ISSB’s submission on the Omnibus continues to support,” she said.
Unintended consequences
Lawyers warn of the potential pitfalls of reopening legislation that businesses and member states have been implementing for some time.
Shaw said it would be helpful for the commission to deliver implementation strategies, explanatory templates and transposition roadmaps to support member states in introducing national legislation for the CSDDD – the transposition deadline for which is next year.
What’s more, a number of member states – including Ireland – have already introduced legislation implementing the sustainability reporting obligations set out in CSRD – meaning it will be more challenging for the EU to use level 1 amendments to avoid fragmentation.
“As the implementation of CSRD to date has shown, gold plating and fragmentation can lead to regulatory complexity for multinationals who are required to navigate differing obligations across member states. In our view, any steps taken to elimination or substantially reduce such fragmentation would be a welcome development.”
Shaw also highlighted the issues that may arise for businesses in the financial services sector that have been reporting under the EU’s Sustainable Finance Disclosure Regulation (SFDR) for several years:
“Given the importance of the corporate sustainability data prepared under CSRD to asset managers and other financial market participants preparing disclosures under SFDR, it is interesting to note that the timing of the revision of SFDR detailed in the work programme is not aligned with that of the omnibus package,” she said. “As these pieces of legislation are intrinsically linked, it will be critical to communicate the potential impacts that any proposed amendments to the CSRD framework will have on those preparing disclosures under SFDR as part of the omnibus package.”
The EU’s sustainability aims
Jacquelyn MacLennan, professor at Edinburgh University Law School – and a former Brussels-based partner at an international law firm – told Forward Law Review that there is no doubt that the European Commission should be concerned with competitiveness and innovation.
“Europe must be a place where business can prosper, and grow, and provide stable, fair-wage employment opportunities,” she said. “But it’s a short-termist fallacy to think that competitiveness and innovation require the dismantling of the EU sustainability regulations.”
MacLennan is concerned that regulations designed to tackle the most fundamental of issues – climate change and human rights violations which persist in many industries – are under threat. She said that the commission should not ignore the arguments of investors about the risks of moving away from mandatory sustainability reporting and due diligence. She worries that companies which have already taken steps towards compliance will be penalised in favour of incentivising irresponsible actors.
“Yes, inconsistent reporting requirements should be streamlined; contradictions removed and streamlining introduced. Yes, SMEs need time and assistance to comply. Yes, guidance must be provided quickly to provide clarify on all this, and more,” MacLennan said. “But rules requiring companies to know their value chains, identify and take steps to address the risks that exist there and face sanctions and litigation for failing to do so, are not just good for business in the long term, they are essential for the future of our planet and the next generations living there, and patently the right thing to do in the face of forced and child and slave labour.”
“If European values stand for anything,” she continued, “they stand for this.”
With additional reporting by David Vascott.