CSRD Changes Risk Causing “Massive Uncertainty”
Potential reopening of EU directive is seen as hampering both companies and investors, following comments from a German minister and a proposed EUDR delay.
Investors hoping to benefit from heighted transparency of ESG risks under the Corporate Sustainability Reporting Directive (CSRD) must remain wary of attempts to water down the legislation.
Adopted in 2022, the CSRD mandates comprehensive ESG disclosures to enhance accountability across the corporate sector, extending beyond the EU. It has applied since 1 January, with reporting starting early 2025 for large public-interest entities already subject to the Non-Financial Reporting Directive (NFRD).
Less than a fortnight ago, German Justice Minister Marco Buschmann expressed a desire to reopen the CSRD’s text.
Germany was one of 17 EU member states warned by the European Commission had – including Austria, the Netherlands and Spain – after not transposing CSRD rules by the official 6 July deadline.
“There’s this idea that renegotiation might ease or reduce the burden, but fundamentally what it really does is create massive uncertainty for companies who are currently trying to prepare for what they see as a live mandate,” Andie Wood, Vice President for Regulatory Strategy at reporting compliance platform Workiva, told ESG Investor. “Uncertainty isn’t what they’re looking for at this point, what they need now is guidance and certainty to move forward.”
The CSRD has already seen some areas delayed or softened. In February, sector-specific disclosure rules were pushed back by two years to 30 June 2026 by the European Parliament and Council to give companies more time to prepare for the implementation of the first set of European Sustainability Reporting Standards (ESRS), the disclosure framework used to comply with the directive.
The EU also delayed general sustainability reporting standards for non-EU companies to the same date. In its 2024 work programme, the commission cut CSRD reporting requirements by 25% to ease the regulatory burden for corporates.
“We have people actually implementing CSRD, while at the same time a group is trying to slow this down,” said Richard Gardiner, EU Public Policy Lead at the World Benchmarking Alliance. “It’s a mess of a conversation to be frank [and] the delay of sectoral standards was disaster.”
Warning signs
Last week, the commission confirmed a 12-month delay to the introduction of the EU Deforestation Regulation (EUDR) despite recent denials it would do so.
In September, a report from Mario Draghi, former president of the European Central Bank, criticised the efficacy of Europe’s sustainability-related regulations as well as taking aim at red tape more broadly, encouraging policymakers to adopt a more consistent and comprehensive approach.
Michael Rice, Value Chains, Trade and Investment Lead at environmental law firm ClientEarth, expressed disappointment about the commission “dragging its feet” on EUDR, “We cannot hit pause on the climate crisis [or] postpone catastrophic biodiversity loss,” he said. “Postponing this law is not only delaying but actively preventing action against these crises, threatening and compromising the lives of indigenous peoples who rely on forests for their livelihoods [and] letting down millions of European citizens who called for this law.”
Gardiner said the about-turn, just three months before EUDR was set to come into effect, may not bode well for other pieces of legislation such as the CSRD which impose compliance deadlines on large European firms.
Gardiner described the delay to EUDR as a “really bad signal” on the EU’s ability to deliver on any piece of legislation in a way that “meaningfully achieves its goal” while also recognising that the EU has a global impact, both positively and negatively, beyond its borders.
“If the EU can delay this so late, how can people trust they will get implementation right a year later,” he added.
Desire for data
A report by Workiva found that roughly nine in ten of 997 executives and institutional investors agreed that ESG regulation in the US and Europe will enable them to make more informed investments.
“Institutional investors want the best quality data possible out of this reporting,” said Wood. “The desire for data is really apparent. Although there might be nervousness that it won’t necessarily be as consistent as it could be in the first year, anything that helps us produce more consistent, reliable data is something for institutional investors to focus on.”
In a recent report, Danish pension fund Arbejdsmarkedets Tillægspension (ATP) noted the balance that must be stuck by regulators, warning that over-reporting would fail to create more value for investors and other stakeholders, instead putting greater burden on firms.
“The benefits of CSRD in terms of better risk management and societal outcomes should be greater than the reporting burden that is placed on the companies,” said Johan Mellerup, Senior Director of ATP’s ESG Team. “The main risk is that the material information is crowded out by non-material information. Producing data is also burdensome for the company as well those in its supply chain, so investors also need to be aware that demanding data is not a free lunch.”
The European Financial Reporting Advisory Group – the commission’s advisor on financial and sustainability reporting – has supported companies on the most complex aspects of the new standards by publishing three sets of detailed implementation guidance on the ESRSs.
The guidance explains how companies should conduct materiality assessments and communicate on the process, provides clarity on treatment of companies’ value chains, and lists all ESRS datapoints in a single Excel spreadsheet.
The CSRD’s second phase begins 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 (US$43.9 million). These firms will report from January 2026.
Its third phase in 2026 significantly broadens the scope of CSRD to include listed small and medium-sized enterprises for the first time, while the fourth phase in 2028 marks the full implementation of the CSRD encompassing companies with a net turnover exceeding €150 million within the EU and at least one subsidiary or branch meeting specific thresholds.
The post CSRD Changes Risk Causing “Massive Uncertainty” appeared first on ESG Investor.