Simplification Promised, Uncertainty Delivered

The EU’s Green Deal had an ambitious goal: to make Europe the world’s first climate-neutral continent. During Ursula von der Leyen’s first term as President of the EU Commission, the sustainability transformation took center stage. Now, in her second term, the Commission shifted its focus to instruments like the “Clean Industrial Deal” and prioritizes the EU’s competitiveness: It now proposes to drastically cut back core Green Deal instruments in the so-called “Omnibus Packages”. These were published in bulk on 26 February 2025 and are set for a vote in the European Parliament on 1 April 2025.

This blog post will concentrate on the changes proposed in the field of sustainability reporting in the Corporate Sustainability Reporting Directive (CSRD) – one of the most criticized “bureaucracy monsters”. Since this EU directive has already become domestic law in 19 of the 27 EU Member States, the Omnibus Packages now impose substantial uncertainty on companies.

The Green Deal’s lost promise

The Omnibus Packages concern sustainable finance, sustainability reporting, supply chain due diligence, the carbon border adjustment mechanism and European investment programs, substantially altering and watering down the CSRD, the Corporate Sustainability Due Diligence Directive (CSDDD, see Saumya/Bäumler and Wolfers), the EU Taxonomy, and the Carbon Border Adjustment Mechanism (CBAM).

The process around the Omnibus Packages has clarified the interconnectedness of the addressed Green Deal instruments. Previously, the interplay between, inter alia, the CSRD, CSDDD, and EU-Taxonomy had been less transparent with some arguing that the regulations should have been combined from the beginning – specifically regarding their implementation timelines, which differ by years due to their separate negotiations. A closer look at those three instruments, specifically their recitals, reveals that they are designed to complement and reinforce each other in achieving the overall objective of a just socio-ecological transformation. These instruments center around directing investments to economic activities in line with the European Green Deal objectives: (1) no net emissions of greenhouse gases by 2050 as well as a 55% cut by 2030 as compared to 1990-levels, (2) economic growth decoupled from resource use, and (3) “no person and no place left behind”, i.e. a just transition.

To redirect investments towards sustainable activities, the EU Taxonomy creates security and comparability for investors by defining criteria for economic activities aligned with the Green Deal objectives. The CSDDD broadens the field of sustainably managed companies by setting benchmarks for sustainable and responsible corporate behavior to protect human rights and addressing environmental impacts. The CSRD complements both by imposing obligations on sustainability reporting, ensuring transparency on whether the criteria defined in the EU Taxonomy and the due diligence standards (as obligation of conduct rather than of result) for human rights and environmental impacts are met.

Why sustainability reporting matters

In redirecting investments towards sustainable activities, the CSRD serves transparency. It is aimed at informing distinct groups stating in its recitals that

“[i]f undertakings carried out better sustainability reporting, the ultimate beneficiaries would be individual citizens and savers, including trade unions and workers’ representatives who would be adequately informed and therefore able to better engage in social dialogue” (Recital 9).

To achieve this objective, the sustainability information disclosed in the annual reports is designed to reach investors as well as civil society actors. The EU legislator, as stated in Recital 9, expects (1) investors to use the disclosed information to redirect their investments to better align with the market’s increasing sustainability expectations in accordance with EU Taxonomy criteria, while expecting (2) civil society actors to hold undertakings to account for their environmental and social impacts. Additionally, the disclosed sustainability information will be of interest to (3) business partners and customers who seek to improve their understanding of impacts, risks and opportunities (IRO) in their value chains – for instance, to comply with their sustainability due diligence obligations under the CSDDD (and national standards, such as the German Supply Chain Act, LkSG). While not all of these stakeholders may be intrinsically motivated to prioritize sustainability, the interplay between the different legal instruments is built to ensure compliance.

Understanding the framework

As part of the regulatory Green Deal interplay, the CSRD and the corresponding delegated regulation define minimum disclosure requirements for all in-scope companies and, beyond the minimum, criteria grouped into “E”, “S”, and “G” categories for disclosures on Environment, Social, and Governance. In each of these categories, companies are to report on their sustainability targets as well as on indicators of their performance.

The regulatory design for the reporting obligations is dispersed over different legislative acts. The CSRD, as amending directive, amends the Directive 2013/34/EU (Accounting Directive) to include the general obligation to report and corresponding provisions on the auditing of sustainability reports (Articles 19a and 29a Accounting Directive, as amended by the CSRD). Standards on how to report are defined in the European Sustainability Reporting Standards (ESRS) developed for this purpose by the European Financial Reporting Advisory Group AISBL (EFRAG) with stakeholder and expert input. They are based on the above-mentioned delegated regulation for which Article 29b Accounting Directive, as amended by the CSRD, provides the legal basis.

Anything but red tape

The ESRS have primarily been criticized for being just too many. Across the minimum requirements, the E, S, and G categories, the ESRS contain about 1,200 data points. This has led companies and business associations to complain about bureaucratic overwhelm. Along with others, the German government has chimed in with Olaf Scholz claiming that the added value of suitability reporting is “out of proportion to the bureaucratic effort involved”.

However, a closer look at the legislative framework reveals that the comprehensiveness of the ESRS may be an advantage rather than a disadvantage, as the ESRS sensibly break down complex E, S, and G subject matter enabling management strategies and only a share of the 1,200 data points is mandatory to report.

Firstly, no company must ever report all 1,200 data points. Subject to the reporting obligation are only the minimum disclosure requirements and data points “material” to a company. The CSRD introduces in that respect the concept of “double materiality”, requiring companies to report (1) the “inside-out” impact of their operations on people and the environment and (2) “outside-in” impact of social or environmental factors on the company. Depending on the sector in which a company operates as well as its specific processes, a company will only ever touch upon part of the IROs addressed in the ESRS. For instance, the ESRS E3 addresses water and marine resources and ESRS E4 biodiversity and ecosystems. A services-oriented rather than production-oriented company located far from the sea may touch upon neither, leaving out many data points. In this way, the double materiality assessment (DMA, explained here) allows companies to slim their respective scope of reporting (see here for examples of implementation).

Secondly, the CSRD can be characterized as a valuable management tool rather than bureaucratic futility. This is supported by the structure of the disclosure requirements. Articles 19a and 29a of the Accounting Directive require (parent) companies to disclose information about: (1) business model; (2) policies, including due diligence processes implemented; (3) the outcome of those policies; (4) risks and risk management; and (5) key performance indicators (KPIs) relevant to the business. These give a clear analysis of a company’s governance structure, the IRO it encounters, along with its strategy and success in addressing these challenges. This is why, as Andreas Rasche, professor at the Copenhagen Business School, finds that “the CSRD is, strictly speaking, a management framework and not just a reporting standard.”

While the process of adapting to sustainability reporting under the CSRD, using the ESRS, may take time and, undoubtedly, holds a significant initial cost to be set up, it may well – along with advancing the sustainability transformation – create benefit for those subject to this regulation over time, and for managers who over the past months and years were most intensely agitating against it.

Original reporting timeline

The timeline for the implementation of the CSRD initially foresaw the first sustainability reports in 2025 for financial years starting on or after 1 January 2024. Member States were obligated to transpose the CSRD into national law by 6 July 2024. Most Member States, while not necessarily meeting the transposition deadline, have transposed the CSRD in the course of 2024 while some, including Germany, have failed to transpose the law to date (with national transposition laws linked here and an overview available here). This raises the question of the CSRD’s direct effect. Member States generally opted for a 1:1 transposition of the CSRD. Differences mostly affect the question of who will be mandated to audit sustainability reports (formally trained auditors or further professions) and the applicable national violations and sanctions regimes.

The obligation to submit sustainability reports under the CSRD and its national transpositions is cascaded. Prior to the amendments presented in the Omnibus Packages proposal, public interest undertakings with more than 500 employees were required to start reporting in 2025 on financial years beginning on or after 1 January 2024. All other large undertakings (as defined in the Accounting Directive by balance sheet total, net turnover and/or number of employees) were to report starting in 2026 on financial years beginning on or after 1 January 2025. Remaining in-scope companies (specific capital market-oriented SMEs) were to report starting in 2027 on financial years starting on or after 1 January 2026.

Imposing uncertainty

The Omnibus Packages are substantially altering the Green Deal instruments. With view to the CSRD, the Commission has announced a revision of the delegated act establishing the ESRS, with the aim of substantially reducing the number of data points. Additionally, between 75-82% of companies in scope of the CSRD will fall out of scope, as the employee threshold will be raised to 1,000 employees. Furthermore, for companies due to report in 2026 and 2027, the start for reporting will be pushed back by two years.

With view to the original timeline, it becomes evident that the Omnibus Packages, at this point, bring major legal uncertainty. The deadline for national transposition has passed mid-2024, most Member States have transposed the law and the period for reporting has, for part of the in-scope companies, already begun. Should the Omnibus Packages be adopted, this would alter who has to report when and on what – impacting past and present reporting periods and confronting in-scope companies with impending changes on an unclear timeline.

Due to their uncertainty, these changes increase the bureaucratic burden on companies. Some which are already within scope will have to alter or take back newly built reporting structures. Others do not know if they soon will fall within scope, as this depends on the legislative process of the Omnibus Packages in Council and Parliament – at a time when the financial year of those who need to collect data has already begun. It is doubtful if this approach lives up to what Ursula von der Leyen claims to be “Simplification promised, simplification delivered!”.

A conditional green future

By shrinking the CSRD and other Green Deal instruments, the Omnibus Packages significantly impede the EU’s progress towards a just socio-ecological transformation. The Green Deal’s promise of a green future for Europe has become conditional upon whether going green is in line with the Commission’s new principal goal of competitiveness. While, at least in its newly announced “Clean Industrial Deal”, the Commission seemingly seeks to align the two, the Omnibus Packages suggest that primacy is given to an economic approach. The proposed cuts to Green Deal instruments are substantial while it appears, with view to the CSRD, at best speculative that revising the reporting standards, diminishing scope and delaying implementation will contribute to competitiveness of EU companies.

Most likely, the Council and Parliament will support the regulatory U-turn induced by the Omnibus Packages regardless. Some opposition is set to arise in Parliament as the European Greens stated they will not support “such a short-term, ill-considered back and forth”. As this is the minority, the Commission’s new prioritization of competitiveness is bound to soon take effect – at substantial cost to the urgently needed sustainability transformation to safeguard a livable future for all.