Reduced CSRD Scope Could Derail ESG Ambitions
Slashing number of companies subject to reporting rules threatens to harm investors’ push for greater data and transparency.
Limiting the reach of Europe’s Corporate Sustainability Reporting Directive (CSRD), as part of the upcoming omnibus reforms, could significantly harm investors’ pursuit of increased ESG data from firms.
Recent reports suggest that the European Commission (EC) is considering a reduction in CSRD reporting thresholds to match the requirements of the Corporate Sustainability Due Diligence Directive (CSDDD).
The CSRD’s second phase began on 1 January 2025, extending compliance to large companies not previously covered under the Non-Financial Reporting Directive (NFRD), specifically including companies with more than 250 employees and turnover exceeding €40 million (US$41.4 million). These firms are due to report from January 2026.
If this change goes ahead, it would see mandatory reporting only apply to companies with more than 1,000 employees, as will be the case for the CSDDD in 2029 under current plans.
Some estimates suggest this would represent a dramatic 85% reduction in the number of companies that fall within the scope of the CSRD.
Although such planned changes to the CSRD are yet to be officially confirmed, Richard Howitt, an independent advisor who spent more than 20 years as a Member of European Parliament, told ESG Investor that such rumours “don’t happen for no reason”. They are likely a “kite flying exercise” by the EC to sound out opinions on alterations to CSRD, said Howitt.
The rumours emerged the same week as the EC hosted a behind-closed-doors meeting on the omnibus with businesses, followed by a roundtable involving NGOs but dominated by businesses. The EC is expected to publish further details on the omnibus on 26 February.
Investors and other stakeholders have long been expecting CSRD to improve data on corporates’ ESG and sustainability performance.
Rolling back CSRD
Adopted in 2022, the CSRD mandates comprehensive ESG disclosures to enhance accountability across the corporate sector, extending beyond the EU. Nearly 50,000 large companies across EU member states already subject to the NFRD are expected to publish their first CSRD reports imminently. Many EU member states have already started transposing the CRSD into their laws.
Unlike the CSDDD, the CSRD is at a sufficiently advanced stage in its implementation that scrapping the directive seems unlikely. However, there is still time for it to be watered down during its second phase.
Jurei Yada, Director of Strategic Member State Engagement and Head of EU Sustainable Finance, E3G, who attended the behind-closed-doors roundtable on 6 February, said that investors should find potential changes to the scope of companies covered by CSRD “very alarming”.
“If there was a significant number of companies taken out, that would break the information infrastructure created around the CSRD, which is predicated on having the amount of information that then it makes it possible for investors to start understanding the data,” she added. “If you reduce the scope of CSRD to the same level as the CSDDD, then the whole idea that Europe is a leader on sustainability goes.”
Despite protests from more than 160 investors, it seems increasingly likely that the commission will reopen CSRD at Level 1, used to make significant alterations to the core of a directive, rather than streamline requirements and address inconsistencies and implementation issues within Level 2 technical standards.
Businesses have also warned against the omnibus reopening negotiations on the CSRD and CSDDD. Last June, PwC research found that 97% of 547 business executives and senior professionals felt confident in being ready to report under the CSRD for the 2025 financial year and 93% for the 2026 financial year.
Double materiality doubts
A cornerstone of CSRD is its use of double materiality, which 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.
Attendees told ESG Investor that, at the meeting last week, some businesses called for the scrapping of double materiality. The idea may have also been discussed at the business-only behind-closed-doors meeting the previous day.
This would severely hamper the impact of CSRD and its usefulness to investors, forcing companies to only report on their financial materiality.
“This is the absolute opposite of what the investment community want, and the chasm between what the business lobbyists are saying they want and what investors and NGOs want is massive,” said Howitt. “There’s [also] a huge chasm between businesses that essentially have embraced this and are getting on with doing it, and a febrile political debate which bears no relation to that whatsoever.
“It’s a remarkable and almost unprecedented landscape at the moment. People are feeling bewildered, and some cooler heads, thoughtfulness and due process are desperately needed here to rescue an omnibus that is completely out of control,” he added.
Maria van der Heide, Head of EU Policy at ShareAction, who also attended the behind-closed-doors meeting, said that leaked papers from the EU showed an “agenda of deregulation” rather than simplification.
“This is the moment to speak out and defend those key concepts, like double materiality,” she said. “If the EC suggests a U-turn on double materiality and significantly reducing the scope of CSRD, investors must make themselves heard to preserve those important elements.”
Yada said that there was “no concrete statement of views” shared by the commission on the rumours surrounding the CSRD or CSDDD, or any information on the next steps for the omnibus.
The final session of the day, which focused on the Carbon Border Adjustment Mechanism, saw a presentation and concrete proposals presented in what Yada described as a “stark contrast” to the discussions on CSRD and CSDDD.
She added that, in the concluding statements for the meeting, the EC said that there would be further omnibuses to come and that this omnibus marks the start of “five years of simplification” under its mandate.
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