On February 26, the European Commission presented a far-reaching revision of sustainability reporting obligations. The proposal, which largely corresponds to leaks that had previously become public, means a drastic reduction in the number of companies subject to reporting requirements and a significant reduction in the scope of reporting. The effects of these adjustments, which are based on promoting efficiency and competition, could slow down the sustainable transformation of European companies in the long term.

More efficiency and less responsibility

The revision of the Corporate Sustainability Reporting Directive (CSRD) follows the logic of reducing the administrative burden on companies. A central element of this reform is the increase in the thresholds for the reporting obligation: instead of companies with more than 250 employees as before, the obligation now applies to companies with more than 1,000 employees. In addition, only one of the two financial criteria remains as a threshold: > €50 million turnover or > €25 million balance sheet total. In practice, this means that more than 80% of the companies previously required to report will no longer be subject to the obligation.

At the same time, a "stop-the-clock" mechanism is being introduced, which grants companies that would have to report for the first time from 2025 or 2026 a two-year deferral. Many of these companies could ultimately no longer be required to report at all, as the new thresholds would mean they would fall outside the scope anyway.

Sustainability reporting is becoming a largely voluntary task

In addition to reducing the group of companies affected, the scope of reporting obligations will also be significantly reduced. The European Commission plans to

• A significant reduction in the mandatory data points in the European Sustainability Reporting Standards (ESRS). In future, the focus will be primarily on quantitative KPIs, with many qualitative disclosures becoming optional.
• No more sector-specific standards, which makes comparability within sectors more difficult.
• Limited reporting along the value chain, especially for SME suppliers, which could weaken transparency in supply chains.
• Downgrade of the audit requirement from "Reasonable Assurance" to "Limited Assurance". While "reasonable assurance" means a detailed audit comparable to financial reporting, "limited assurance" is restricted to plausibility checks with lower requirements for evidence.
• A voluntary VSME standard as a guide for companies that are no longer covered by the CSRD. Whether this will establish itself as a new market standard or lead to further fragmentation remains to be seen.

EU taxonomy and CSDDD: fewer obligations for companies

The EU taxonomy will also be greatly eased. Only companies with >1,000 employees and >€450 million in turnover must continue to report. All other companies can report voluntarily, although it remains unclear whether banks and investors will still demand ESG data.

The Corporate Sustainability Due Diligence Directive (CSDDD) is also becoming much less stringent:

• Companies only have to check their direct suppliers, while indirect suppliers no longer have to be taken into account.
• The timeframe for implementation has been extended from two to five years.
• The planned fines will be weakened and will no longer be linked to the company's global turnover.

One-sided focus on reducing bureaucracy at the expense of sustainability

The Commission justifies the reform with a reduction in the administrative burden for companies. However, what at first glance appears to be a pragmatic simplification has far-reaching consequences:

• Less transparency: The comparability and quality of sustainability reports will suffer as a result of the reduction in data points and the restriction of the depth of review.
• A greatly reduced number of affected companies negates the positive effects of broad reporting, which has so far also encouraged smaller companies to become more sustainable.
• Regulatory uncertainty: Companies that have already implemented extensive reporting processes need to rethink their strategy and are faced with the question of whether their previous investments are still worthwhile.
• Voluntary reporting could lead to a fragmented ESG landscape in which companies use different standards and comparability is made more difficult.

Not yet decided - but the direction is clear

It should be emphasized that this proposal has not yet been finalized. The draft is now being discussed in the European Parliament and the Council, and a decision could take months. However, it is already clear that the course taken will fundamentally change sustainability reporting in the EU. Companies should not change course prematurely, but should evaluate their long-term ESG strategy and ensure that they can continue to provide reliable sustainability data. Either way, the developments are a severe blow to the importance of sustainability in European economic policy.

Further information on the EU Commission's official proposal can be found here.