EU Omnibus Creates Significant Legal Uncertainty
The bloc’s simplification agenda is set to impede companies’ compliance with its sustainability reporting framework, warns Maria Cronin, Partner at Peters & Peters.
On 26 February the European Commission (EC) published detailed legislative proposals on the sustainability omnibus package. These proposals confirmed concerns that the envisaged measures were not limited to simplifying existing and incoming EU corporate sustainability reporting requirements, but were instead aimed at significantly scaling back the measures in their application and scope.
It is no coincidence that these proposals coincide with moves by the US to withdraw from the Paris Agreement and from numerous climate funding commitments.
The omnibus is a series of proposed changes to existing legislation put forward by the EC seeking to increase the ability of EU businesses to remain competitive.
It contains a proposed directive delaying the phase-in of corporate sustainability reporting requirements introduced by the Corporate Sustainability Reporting Directive (CSRD). It also aims to reduce the number of companies subject to CSRD reporting requirements and scale back the requirements in the Corporate Sustainability Due Diligence Directive (CSDDD). In addition, the omnibus contains a draft delegated regulation amending the EU taxonomy and a draft regulation simplifying the Carbon Border Adjustment Mechanism (CBAM).
The EC’s proposals represent a clear dilution of the EU’s ambitions on sustainability and due diligence requirements for companies. This is particularly evident in the proposed amendments to the CSRD and the CSDDD. However, it is also visible in the suggestions in respect of the EU Taxonomy Regulation (linked to the CSRD) and, to some extent, the CBAM.
The unfortunate result has been to create significant legal uncertainty around the future sustainability regulatory reporting framework, impeding companies’ compliance efforts, at least pending approval of the proposals by the European Parliament and European Council and likely beyond to the extent that further existing ESG legislation is open to re-negotiation.
The reduced availability of comparable and standardised sustainability reporting data may create further unintended consequences for investors, preventing their ability to make informed decisions to scale-up investments for industrial decarbonisation and long-term growth.
Key changes proposed for CSRD
The EC’s CSRD proposal postpones the phase in of reporting requirements by two years and reduces the number of companies subject to those reporting requirements by 80%. Only companies with more than 1,000 employees and either a turnover above €50 million (US$54.3 million) or a balance sheet total above €25 million would remain within scope.
The changes to the existing CSRD framework would create uncertainty – especially for mid-size corporations (with 500-1,000 employees) that may now be in doubt as to when and whether phase one CSRD reporting requirements will apply to them as anticipated and what data they need to be collating to remain compliant.
With the aim of shielding smaller companies from an excessive regulatory burden, the proposed amendment to the CSRD also restricts larger companies still subject to CSRD requirements in the information they can request from SME and small midcap business partners. Applications for additional information would be permitted only to the extent needed on areas not covered by voluntary standards set for SMEs. This information cannot be requested in any other reasonable way. This may generate further uncertainty and diverging standards on the meaning of “reasonable” in this context.
Finally, the proposed amendments to the CSRD impact the EU taxonomy, as they include CSRD reporting as a derogation to mandatory EU taxonomy reporting. This is coupled with suggestions to simplify and reduce data points in EU taxonomy reporting templates.
Proposed changes to the CSDDD
The proposal is also notable in its one-year postponement of the transposition deadline for the first CSDDD requirements and in scaling back companies’ CSDDD due diligence obligations in respect of human rights risks.
Under the omnibus, such obligations would be limited to direct suppliers and not to a company’s supply chain (including direct or indirect business partners), except where there is plausible information suggesting adverse impacts have or may arise at other levels of the supply chain.
Most large companies’ supply chains are complex and multi-layered and serious human rights abuses can occur throughout. Limiting the requirements to direct suppliers only will be seen as reversing the intended purpose of the CSDDD, while placing the burden on companies to assess what constitutes plausible information will require it to extend its obligations to other parts of its supply chain.
It should also be noted that the proposal removes the requirement to terminate a business relationship where efforts to mitigate adverse impacts have or would fail.
The proposal also decreases the frequency of the required review period, from one to five years, and scraps prescribed penalties, removing harmonised civil liability in EU member states for damages arising from failing to comply with CSDDD requirements.
Proposed amends to the CBAM
Interestingly, the proposal looks to exempt as many importers as possible from EU CBAM reporting obligations, namely those falling below a 50-tonne annual cumulative mass de minimis threshold, while still requiring reporting on at least 99% of CO2 emissions from relevant imports to the EU.
The proposal to exempt importers from CBAM obligations seemingly exceeds the “simplification” of the CBAM for smaller market players envisaged in the Competitiveness Compass report published in January.
As damaging as feared?
The proposals include measures that might mitigate the scope of the scale-back.
For example, despite concerns that it would be removed, the omnibus proposal maintains the requirement for companies still subject to CSRD reporting to conduct a double materiality assessment, through which a company must assess both the impact of the climate (and other ESG factors) on their business operations and its own impact on the climate (and other ESG factors).
In addition, a degree of voluntary reporting under the CSRD and taxonomy is envisaged for companies that would no longer be within CSRD’s scope.
This may go some way to bridging the gap between the scope of the current reporting framework and that proposed, but sustainable investment associations including Eurosif and the Institutional Investors Group on Climate Change have highlighted that voluntary reporting is not sufficient to give investors, who are the main users of reporting information, access to the comparable sustainability data needed to scale-up net zero investment.
While the CSDDD proposal undoubtedly reduces the depth of due diligence assessments, there is a requirement to look beyond immediate business partners where there is plausible information suggesting adverse impacts at other levels of the supply chain. This exemption may need to be utilised routinely, given high profile instances of human rights abuses involving certain jurisdictions and sectors. However, companies will be faced with the burden of interpreting what constitutes plausible information.
The proposed amendments to the CBAM would reportedly still capture 99% of CO2 emissions from relevant imports to the EU – aimed to strengthen and develop provisions to prevent abuse and circumvention – and will reportedly be followed by an assessment on extending the mechanism to a broader range of emissions than those covered in the initial phase.
What next?
Finally, and perhaps most significantly, the EC’s proposals have yet to be approved. These will need to be passed by the Parliament and Council, and, even then, the agreed amendments may not be as wide-reaching as currently outlined.
In the meantime, EU businesses will be anxiously awaiting further updates on the legislative progress of this proposal. Until then, the legal uncertainty surrounding the ultimate impact of the omnibus remains.
This article was co-authored by Isabel Phillips, Senior Associate at Peters & Peters.
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