The European Commission published in late February a package of legislative proposals to revise and simplify three pillars of EU sustainable finance: the Corporate Sustainability Reporting Directive (CSRD), the EU Taxonomy, and the Corporate Sustainability Due Diligence Directive (CSDDD). Although these proposals seek to reduce and delay the volume of expected sustainability reporting, corporate transparency is still set to increase. Further, the depth of mandated reporting in the EU may be leveraged by investors across their portfolios globally.
CSRD Reporting Is Already Coming In
The proposal limits mandatory reporting under CSRD to companies with more than 1,000 employees and at least €50 million in revenue or €25 million in assets. Mandated groupwide reporting for non-EU parent companies would be limited to those with EU subsidiaries that have €450 million of revenue (or branches with €50 million of revenue). Other companies, particularly those that are suppliers to those with mandatory reporting, might instead report in accordance with a slimmed down voluntary standard originally developed for small and medium-sized enterprises (SMEs).
Under current law, investors could have expected four ‘waves’ of initial CSRD reporting, starting with large ‘public interest’ entities with more than 500 employees in 2025, followed by other large companies in 2026, listed SMEs in 2027, and large non-EU companies in 2028.
Instead of four big waves, the proposal potentially leaves us with two smaller ones. The first wave in 2025 would be reduced to large, listed EU companies (and non-listed companies in sectors such as finance) with more than 1,000 employees. The second wave of large non-EU companies may not come until 2028 and will be much smaller than the first one.
Even these reduced disclosure waves leave investors with standardized cross-cutting sustainability reporting on more than 7,000 companies, according to the European Commission, with most reporting starting already in 2025. Although the number of reporting companies is down sharply from the more than 30,000 companies covered by CSRD under existing law, investors potentially will still have access to a much broader and deeper set of sustainability data from EU companies than ever before, including materiality assessments.
The World’s Largest Business Externality Assessment Project Is Still Underway
The proposal aims to ‘deliver swiftly on the simplification and streamlining’ of CSRD reporting to reduce the number of datapoints (now well over 1,000), in part by prioritizing quantitative data over narrative text. Importantly, the proposal will try to do so in a way that avoids harming the quality of each company’s materiality assessment, including the social and environmental impacts. Instructions on how to apply the materiality principle would be clarified, to ensure that non-material items are not included that would add to the company’s reporting burden and reduce the utility of data for investors.
From an investor’s perspective, the materiality assessment is perhaps the most critical piece of information reported. Investors could benefit from the largest comparable analysis on the externalities of business activities ever conducted: the analysis is aggregated across more than 7,000 companies. The scope of CSRD is still large enough that investors may be able to create benchmarks of impacts, risks, and opportunities for many business activities that can inform portfolio analysis globally.
In addition, the new voluntary standard for SMEs would enable investors to get a high-level sense of the financial effects of sustainability issues, even if the standard omits the formal materiality analysis of mandatory CSRD reporting. The supply-chain-information needs of the more than 7,000 mandatory filers may encourage out-of-scope companies to report voluntarily.
EU Taxonomy Data May Become More Useful
The proposal would limit future mandatory EU Taxonomy reporting to large companies with at least 1,000 employees and more than €450 million of revenue, unless the company wishes to claim some degree of alignment in its public disclosures. Further, a new de minimis threshold of 10% of revenue, capex, or operating expenditures would enable companies to assess Taxonomy-eligibility and Taxonomy-alignment only for activities material to the overall business.
Despite the scope reduction, the utility of Taxonomy information may increase. The proposal to simplify the reporting templates may improve investor usability. The inclusion of an option for ‘partial-Taxonomy alignment’ would add to information on activities that provide gradual support for environmental transition.
Moreover, the ‘Do No Significant Harm’ screening criteria would need to be applied to a business activity only if a potential material risk to a specific environmental objective exists. For business activities with material risks to one or more of the environmental objectives, the assessment criteria would be simplified where it is deemed too complex.
These streamlining steps could increase the proportion of aligned revenue, operational expenditures, and capex to levels that are potentially more consistent with investors’ views of environmental benefits and attendant risk reduction or opportunity realization.
Civil and Regulatory Liability under CSDDD May Become More Uncertain
The proposal would delay the first wave of CSDDD implementation until 2028, remove an EU-wide civil liability regime, and eliminate the mandate to enable alleged victims to be represented by civil society groups. Also, the minimum regulatory fines cap of 5% of revenue would be removed and additional guidelines would be developed on imposing fines to ensure greater parity across the EU.
On balance, these measures might reduce potential corporate liability for adverse environmental and social impacts. However, on their own and when coupled with the proposed simplification of due diligence requirements (e.g., only direct suppliers once every five years, narrower definition of stakeholders that are part of due diligence processes), the variability of liability for companies within a portfolio may increase.
Next Steps in the Legislative Process
The Commission’s proposal is just the first step in the EU legislative process, which ordinarily runs approximately 18 months, during which time the European Parliament and the Council debate and potentially amend the proposals (aka, ‘trilogues’). A public consultation (or ‘call for evidence’) on the proposal to simplify the EU Taxonomy concludes March 26. The process could be completed by the middle of 2026.
However, the Commission already has asked to ‘fast track’ the process, particularly the proposal to delay CSRD and CSDDD application, and the European People’s Party Group (EPP) has urged the same. If their appeals are successful, trilogues on CSRD and CSDDD delay could move swiftly, potentially concluding before summer.
EU Is Still Moving toward Delivering More and Better Corporate Sustainability Information
This is the first year of CSRD reporting for large companies, and while the Omnibus proposal may lead to fewer datapoints for future reporting years, investors are set to have a better view of sustainability topic materiality than has ever been possible until now. Proposed changes to the EU Taxonomy may make disclosures more useful, even with fewer companies reporting. The legislative journey of EU sustainable finance to this point has been a long one, and may yet have more twists, but it is still positioned to deliver critical information to help guide investors.
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By:
Joe Arns, CFA, Global Head of Strategy & Scalability for ESG Research, ISS ESG
Héctor Páez, Team Lead, ESG Methodology – Regulatory Solutions and Fixed Income, ISS ESG
