S Poddar
In a policy reversal, the European Union is to exempt most companies from the requirement to publish environmental impact reports, a big reversal of its sustainability reporting legislation. The action, intended to cut red tape for businesses, is part of the European Commission’s overall approach to streamlining rules.
The Commission on Wednesday revealed that 80 percent of companies will no longer need to adhere to strict sustainability disclosure requirements. It is one of the central elements of its long-awaited legislative package aimed at reducing red tape. The suggested law, the first of a series of deregulation laws, aims to change four of the European Green Deal’s key pillars: the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), the EU Taxonomy on Sustainable Investments, and the Carbon Border Adjustment Mechanism (CBAM).
According to the suggested changes, the application of the CSRD will be postponed by two years. In addition, only companies with more than 1,000 employees and a minimum turnover of €50 million or a balance sheet of more than €25 million will need to provide their sustainability information. This represents a drastic lowering of the threshold, reducing the number of companies covered by the law from 50,000 to about 10,000. A previous version of the proposal had originally proposed a turnover hurdle of €450 million, but the final proposal has dramatically reduced this.
Even with these exceptions, the double materiality principle still holds, i.e., companies are still required to report their exposure to climate risks as well as the effect of their operations on the environment. Early versions of the proposal had put forward the idea of eliminating this concept, but later it was restored after internal debates, sources familiar with the situation revealed.
The new legislation also intends to reduce the amount of sustainability data points companies must gather by half while doing away with industry-specific reporting requirements that were due in 2026. The CSDDD will also be significantly watered down. Originally intended to make corporations responsible for human rights abuses and environmental degradation in their supply chains, the new version restricts corporate responsibility only to direct suppliers. In addition, firms will need to review their suppliers only every five years, rather than have an annual review system in place.
A dramatic change is also being suggested to the EU Taxonomy on Sustainable Investments. Up to 85 percent of firms would be able to exempt themselves from reporting if their activities align with the EU’s definition of environmentally sustainable economic activities, and hence make the framework voluntary for nearly all companies.
In another expansive reform, the CBAM would be calibrated so that it exempted about 90 percent of importers to be taxed under the measure due to the contention that these corporations only contribute about 1 percent of the emission imports. All the same, even with all these adjustments, the Commission had no intention to postpone the effectiveness of the CBAM.
At official estimates, these deregulatory steps will save companies around €6.3 billion in administrative expenditures while releasing another €50 billion of public and private investment potential.
Backlash and Criticism
The move has prompted a wave of criticism from environmental campaigners and European Parliamentarians. Most say the undoing undermines the EU’s climate commitment and erodes the pillars of the European Green Deal.
“Today is a contradictory day for European climate action,” commented French Renew MEP Pascal Canfin. Although the Commission also published the Clean Industrial Deal on the same day, asserting its dedication to green policy, Canfin warned that the package of deregulatory measures watered down many essential elements of the Green Deal significantly.
The move has raised alarms among green groups, who perceive the reforms as a step backward in corporate accountability and transparency. The critics maintain that relaxing the requirements for sustainability reporting will not only reduce corporate responsibility but potentially slow down the transition of Europe towards a greener economy.
As the discussion continues, it is yet to be determined whether the EU’s recent action will be successful in lowering bureaucratic barriers while retaining its environmental aspirations. With increasing attention from climate campaigners and politicians, the future of corporate sustainability reporting within the EU is now more than ever in a state of flux.
