EU to Pare Back Sustainability Rules for Companies, Draft Shows

The European Union (EU) is set to ease sustainability reporting requirements for companies, according to a draft of the EU omnibus regulation obtained by Bloomberg. The proposed changes aim to reduce the compliance burden on companies while maintaining the overall effectiveness of sustainability reporting. The draft shows that the EU intends to reduce the reporting burden for larger companies by 25 percent and for smaller businesses by 35 percent, compared to a baseline recommended by the Draghi report.



The EU omnibus regulation seeks to consolidate the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), and the EU Taxonomy into one omnibus to reduce regulatory complexity. Some specific changes expected in the omnibus proposal to reduce the compliance burden for companies include:

1. Better aligning data requirements with investor needs: The omnibus proposal aims to ensure that the information reported by companies is more relevant and useful to investors, reducing the burden of reporting irrelevant data.
2. Revising compliance timelines: The proposal may introduce phasing-in of some disclosure requirements or delay compliance deadlines by 1-2 years to give companies more time to prepare, reducing the immediate burden on companies.
3. Shifting focus to most harmful activities: The omnibus may focus sustainability reporting requirements on activities that have the most significant environmental and social impacts, reducing the burden on companies with less impactful activities.
4. Amending financial metrics: The proposal may change financial metrics to avoid discouraging investments in smaller firms, reducing the burden on these companies.
5. Changing obligations to be proportionate with the scale of a company’s activities: The omnibus may introduce a new definition for small mid-cap firms (between 250 and 1,500 employees, with sales not exceeding 1.5 billion euros or balance sheet totals not exceeding 2 billion euros) to reduce reporting requirements for these firms.
6. Removing some reporting requirements for smaller firms within larger supply chains: The omnibus may better align reporting requirements with the original intent of legislators, reducing the burden on smaller firms.

These changes are expected to reduce the compliance burden for companies while maintaining the overall effectiveness of sustainability reporting. By focusing on the most relevant and impactful information, companies can provide more meaningful disclosures, and investors can make better-informed decisions. Additionally, giving companies more time to prepare and aligning reporting requirements with the scale of their activities ensure that the burden is proportionate and manageable.

The new definition for small mid-cap firms introduced in the EU omnibus regulation will reduce reporting requirements for these companies, aligning with the original intent of legislators. This definition categorizes firms with between 250 and 1,500 employees, with sales not exceeding 1.5 billion euros or balance sheet totals not exceeding 2 billion euros, as small mid-cap firms. This change aims to reduce the compliance burden for these companies, which are bigger than SMEs but smaller than large companies.

The reduced reporting requirements will have several implications for small mid-cap firms:

1. Easier compliance: With fewer disclosure requirements, these companies will find it easier to comply with sustainability reporting standards, freeing up resources to focus on core business activities.
2. Improved sustainability efforts: By reducing the administrative burden, these companies can redirect resources towards implementing and improving their sustainability initiatives, contributing to the green transition and human rights protection.
3. Better investor relations: Simplified reporting requirements will make it easier for investors to understand the company's sustainability performance, potentially attracting sustainability-oriented investors and talent. This transparency can also enhance consumer trust and provide victims of harm with better access to justice and remedies.
4. International impact: The reduced reporting requirements may also have an international impact, as the Directive's obligations extend along the global supply chain. This could improve living conditions, better protect human rights and the environment, and drive sustainable investments towards value chain companies beyond the EU.

In conclusion, the EU omnibus regulation aims to reduce the compliance burden for companies by streamlining and simplifying sustainability reporting requirements. By focusing on the most relevant and impactful information, giving companies more time to prepare, and aligning reporting requirements with the scale of their activities, the EU can maintain the overall effectiveness of sustainability reporting while reducing the burden on companies. The new definition for small mid-cap firms will also have positive implications for these companies' sustainability efforts, investor relations, and international impact.