SW Thinks
CSRD & CSDDD Insights
As the dust settles on the EU Parliament’s latest compromise on CSRD and CSDDD, we outline what was agreed, what it means and what happens next.
What just happened and what happens next?
Agreement
On 13 October, the European Parliament Legal Affairs Committee responsible for the Omnibus I package finally agreed its position on the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD).
Political negotiations
The EPP, a centre-right group, in an unprecedented move threatened to side with the far-right-who were pushing for extreme cuts to CSRD and CSDDD-unless centre-left parties accepted a compromise. This pressure forced centre-left groups to back a weaker version, while EPP’s centrist allies dropped their own positions. In protest, the S&D lead negotiator resigned.
Is this finally now all done?
Not yet! Negotiations now begin between the European Parliament, European Council and European Commission (known as the Trilogue) to agree a combined position before a final vote takes place in the European Parliament.
When will it all finally be agreed?
The Trilogue negotiations are expected to begin this week and there is likely to be final agreement by the end of the year.
CSRD
CSDDD
Our Key Insights
The increased scope of 1,000 employees and €450m turnover for CSRD will mean up to 90% of the companies that were originally mandated to report on sustainability issues are now exempt. This even goes beyond the European Commission’s February proposals to reduce scope by up to 80% and ultimately will mean less sustainability-related information for stakeholders such as investors, lenders, customers, partners, policymakers and regulators.
Companies not in scope of CSRD will still likely be subject to varying sustainability information requests from investors, lenders, regulators and other stakeholders. Whilst the European Commission is encouraging financial institutions to limit information requests to what is contained in the VSME, this may not be followed, in particular for companies bigger than SMEs but smaller than the scope for CSRD.
Only the largest companies will now be in scope of the CSDDD (5,000 employees and €1.5bn turnover – a 70% reduction in scope of the original legislation) meaning even fewer companies will be required to adopt climate transition plans and conduct mandated environmental and human rights due diligence.
Maintaining risk-based environmental and human rights due diligence in the CSDDD is, however, a welcome development but is in conflict with both the European Commission and European Council’s position which limited due diligence to Tier 1 suppliers (mostly). However, there are provisions which narrow the risk-based approach and seek to restrict the due diligence processes when compared to the leading international instruments.
The way the file was negotiated in Parliament leaves open the possibility of a rupture in the traditional centrist majority which has backed Ursula von der Leyen to date. The EPP’s threat to ally with the far right to push through even more widespread changes leaves open that same possibility regarding other negotiations over upcoming sustainability-related legislation, action plans and strategies, such as the EU’s 2040 climate targets, all in the name of ‘simplification’. This will likely bring more uncertainty and costs for companies rather than the stated aims of cutting costs, reducing burden and enhancing competitiveness.
Whilst the European Commission, Council and Parliament may present any resulting agreement as a win for companies, growth and competitiveness under the ‘simplification’ banner, questions can be raised over the process by which this has played out (and remember the EU Ombudsman is still investigating the EU Commission’s use of the Omnibus provisions) and whether the shorter-term political cycle has once again prevailed over more fundamental longer-term outcomes for business and society. The political leadership and will to prioritise these longer-term outcomes for the benefit of society and business seems to be sorely lacking at this time.
Reach Out
Want to know more? Reach out to us at info@sustainabilityworks.ie
