Sustainability: EU provisional agreement to limit scope of CSRD and CS3D
Following trilogue negotiations, the EU Commission, Council, and Parliament have reached an agreement (subject to final approval) on the proposed Sustainability Omnibus I Directive. The Directive will amend the Corporate Sustainability Reporting Directive (CSRD) and the EU Corporate Sustainability Due Diligence Directive (CS3D), the implementation of which had already been delayed to allow for a reconsideration of their requirements by the ‘Stop the Clock’ Directive in April.
What has been agreed?
The trilogue agreement provides for a significant limitation to the scope of each of CSRD and CS3D, with a view to aligning them with the EU’s current drive towards simpler, more effective regulation to boost EU competitiveness and growth. The consolidated text of the negotiated Directive is not yet published but, based on currently available information, the key changes are as follows.
CSRD: Sustainability reporting requirements will only apply to EU companies with more than 1,000 employees and with net annual turnover of more than €450 million. For non-EU companies, the net turnover threshold has also been increased to €450 million generated in the EU.
Listed SMEs and financial holding undertakings will be removed from scope.
For “wave one” companies that had started reporting for financial year 2024 but would have been out-of-scope under the revised tests, there will be an exemption from reporting requirements for financial years 2025 and 2026, to allow time for transposition of the Omnibus I Directive.
For in-scope companies, the reporting requirements will be simplified and sector-specific reporting will be voluntary. To ensure the reporting burden is not shifted to smaller out-of-scope companies, smaller companies will be allowed to refuse requests from in-scope companies for any information beyond what is in voluntary sustainability reporting standards.
The European Commission will be required to create a digital portal that will provide businesses with helpful templates and guidelines on EU and Member State reporting requirements.
CS3D: the scope of CS3D is also being narrowed considerably. The trilogue agreement increases the threshold so that only (i) EU corporations with more than 5,000 employees and a net annual turnover of more than €1.5 billion, and (ii) non-EU corporations with net turnover of over €1.5 billion in the EU, are required to carry out due diligence to minimise any potential impact on people and the planet.
In-scope corporations no longer need to prepare a transition plan to make their business compatible with the Paris Agreement. When conducting due diligence, corporations should take a risk-based approach and refrain from requiring unnecessary information from companies that are not within scope.
A corporation in breach of obligations may still be liable for a fine of up to 3% of its net worldwide turnover. However, the proposed EU harmonised liability regime has not been adopted and Member States will instead need to enact appropriate national rules.
Finally, the transposition deadline for CSRD has been postponed by another year until 26 July 2028, with in-scope corporations having until July 2029 to comply.
What happens next?
Before being enacted as law, the provisional agreement on the Sustainability Omnibus I Directive must be formally adopted by the European Parliament and the Council. This expected to happen before the Christmas break.
If you have any questions about any of the developments mentioned in this briefing, please get in touch with one of the below key contacts, or your usual contact at McCann FitzGerald LLP.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
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