Double Materiality Avoids Omnibus Chop
Company reporting on ESG-related impacts through CSRD may be safe, for now, but EC revisions still represent a setback for investors’ data drive.
Sustainable investors have received some respite during a difficult week, as the European Commission’s (EC) omnibus package has preserved the double materiality element of the Corporate Sustainability Reporting Directive (CSRD).
Rumours had emerged earlier this month that some businesses were calling for the scrapping of double materiality in behind-closed-doors meetings with the EC, with investors and industry alike warning that its removal would severely hamper the impact and usefulness of the directive. However, the official proposal makes clear that a shift from double to single materiality is not currently under consideration.
Double materiality requires firms to report not only on ESG-related risks to their enterprise value, but also on their ESG-related impacts on society and the environment. It is widely seen as a cornerstone of CSRD, which was adopted in 2022, mandating comprehensive ESG disclosures to enhance accountability across the corporate sector.
Nearly 50,000 large companies across EU member states already subject to the Non-Financial Reporting Directive (NFRD) are expected to publish their first CSRD reports early this year, with many having started doing so in the past fortnight.
“Double materiality, which has been retained as a key feature of the CSRD, recognises the strategic importance of transparency for the impacts of companies on the economy, environment and people,” said Robin Hodess, CEO of the Global Reporting Initiative. “However, reducing the scope, with even fewer companies included than under the previous NFRD, undermines the level playing field needed to achieve sustainable growth.”
Many EU member states have also already started transposing the CRSD into their laws. Spain and Denmark voiced support for the CSRD’s use of double materiality in public statements ahead of the omnibus’ publication, with the principle also supported by Germany’s Sustainable Finance Advisory Council.
Speaking at a webinar, Julia Otten, Senior Policy Officer at law firm Frank Bold, stressed the importance of double materiality, adding that she was “glad that the EC has kept its leadership on this core element”.
Stripped down scope
Through the omnibus, the EC has targeted what it called an “unprecedented simplification effort”, reducing “administrative burdens” across the board by 25%, and at least 35% for SMEs until the end of this mandate.
The omnibus makes key changes to both the CSRD and Corporate Sustainability Due Diligence Directive, while the EU’s taxonomy for sustainable activities saw some less severe impacts. Investors and other stakeholders have long been expecting CSRD to significantly improve data on corporates’ ESG and sustainability performance.
This simplification has manifested in removing approximately 80% of companies from the scope of CSRD, only marginally fewer than the 85% suggested by leaks about the omnibus ahead of its publication. The EC justified this by arguing that it was focusing the sustainability reporting obligations on the largest companies which are more likely to have the biggest impacts on people and the environment.
The EC also stated that it aimed to ensure that sustainability reporting requirements on large companies “do not burden smaller companies in their value chains”.
The change in scope means that reporting will now only be mandatory for companies with more than 1000 employees and either a turnover more than €50 million (US$52 billion) or a balance sheet surpassing €25 million.
“Limiting this to the very large companies with more than 1000 employees is a big carve out,” said Otten. “We are particularly concerned about this complete removal of mid cap companies without giving them a proportionate standard. The reliability and the availability of the sustainability data will be drastically reduced.”
The European Sustainable Investment Forum (Eurosif) also warned that the amendments to CSRD, including its reduced scope, will weaken EU sustainability disclosures and undermine legal certainty for investors and businesses.
“The proposal aims to reduce the number of in-scope companies by over 80%,” said Aleksandra Palinska, Executive Director at Eurosif. “Drastic changes to the scope of sustainability reporting rules will limit investor access to comparable and reliable sustainability data and impair their ability to scale-up investments for industrial decarbonisation and long-term growth. Voluntary reporting from companies will not fill this data gap.”
Vincent Vandeloise, Senior Research and Advocacy Officer at Finance Watch, added that changes to the scope of CSRD means that “investors lose access to critical ESG data and any certainty over which companies will still disclose. Businesses already invested in compliance are left stranded.”
Timeline troubles
The next steps for CSRD have been thrown into disarray by the omnibus proposal, alarming both investors and industry. The directive’s second phase began on 1 January 2025, extending compliance to large companies not previously covered under the NFRD, specifically including companies with more than 250 employees and turnover exceeding €40 million. These firms were due to report from January 2026.
The third phase, starting in 2026, was due to significantly broadens the scope of CSRD to include listed small and medium-sized enterprises for the first time. In 2028, the fourth phase would have seen full implementation of the CSRD capturing companies with a net turnover exceeding €150 million within the EU and at least one subsidiary or branch meeting specific thresholds.
The EC’s omnibus proposal has confirmed a two-year postponement of the reporting requirements for companies currently in the scope of CSRD and which will be required to report as of 2026 or 2027. This means they will not need to produce reports demonstrating CSRD compliance until 2028.
The World Wide Fund for Nature’s European Policy Office stated that the proposed two-year delay in the law’s implementation would “significantly undermine companies that have already invested in compliance while signalling that the environment and human rights are not a priority.”
Otten noted that, while the postponement only impacts companies due to report in the CSRD’s second and third phases, it has “created quite some confusion for first wave companies in terms of what from the omnibus is applicable to them.”
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