The CSRD has been thrown under the Omnibus – but it will still advance sustainability reporting, argues Michael Hurley
The reduced scope of the EU Corporate Sustainability Reporting Directive (CSRD), via the infamous Omnibus package, has rightly been mourned as a major loss for investors – who for years have demanded more sustainability-related information but are now left facing a situation in which they will have less than they previously expected.
At the same time, let's recognise that what remains after the cuts is a globally unrivalled framework, in terms of the breadth of information it will require of the largest companies.
It is estimated that about 5,000 companies across the EU will remain in scope of mandatory CSRD reporting post-Omnibus, as they have an annual average of at least 1,000 employees and net annual turnover of €450 million.
Below this threshold it can be hoped that swathes of corporates will report voluntarily.
Many of these companies will have already published CSRD reports as part of the 'first wave', when they were previously in scope, and may see value in continuing to do so.
By comparison, about 11,700 companies were in scope of the CSRD's predecessor, the Non-Financial Reporting Directive (NFRD).
However, the NFRD operated on a comply-or-explain basis, which meant that not all companies under its scope reported meaningful data.
Plus, the European Sustainability Reporting Standards (ESRS) that underpin the CSRD cover more topics than the NFRD – such as biodiversity – and other topics in much greater detail – such as climate.
The NFRD lacked a harmonised approach to measurement and reporting, with corporate disclosures often mixing national and international reporting frameworks and metrics, such as those by the Global Reporting Initiative (GRI) and International Organization for Standardization (ISO).
This contributed to major variation in quality of reports.
The Climate Disclosure Standards Board (CDSB) found in 2020 that about four-fifths, or 78%, of the bloc's 50 largest companies failed to adequately report environment- and climate-related risks, and two-fifths (42%) omitted potentially material information.
In this context, and compared with five years ago, corporate reporting on sustainability has made huge advances, and so too has the regulatory framework supporting it.
Turning to implementation
While the overhauled ESRS presented to the European Commission this month by the European Financial Reporting Advisory Group (EFRAG) proposes cutting the number of mandatory datapoints by 61%, initial feedback from investors to the EFRAG drafts has been largely positive.
Assuming the Commission agrees with EFRAG, its independent advisory body, and meets its objective of adopting the changes by mid-2026, attention can turn to implementation.
"That multi-disciplinarity, that coming together of finance and sustainability is going to be one of the great achievements of the CSRD" – Camilla de Nardis, BearingPoint
Many commentators hope there will be a trickle-down effect, with investors and companies still in scope of mandatory CSRD reporting demanding information from those in their value chain, thereby incentivising voluntary disclosures that contain sustainability information users find most useful.
Lara Wolters, a Member of European Parliament in the Socialists and Democrats grouping and a vocal advocate of more stringent CSRD reporting, called the Omnibus cuts "a costly mistake" but said "the silver lining is that there are many in business and civil society that will drive forward responsible business above and beyond the legal requirements".
Camilla de Nardis, a manager for ESG compliance at consultancy BearingPoint, said that, while the cuts to CSRD were disappointing, the "CSRD is not dead ... its role is changing".
EU companies that fall out of the scope of the CSRD face a "strategic choice" between voluntary CSRD reporting, using other standards such as GRI or those by the International Sustainability Standards Board (ISSB), or "abandoning" structured reporting and relying on ad-hoc disclosures.
If they chose the latter, EU companies risked falling behind international peers including in Asia, she predicted.
To understand what benefits CSRD can bring above other frameworks, it is also worth considering insights from preparers of the first wave of CSRD reports.
The 'double materiality assessment' at the core of the CSRD, which determines what information must be reported, has been labelled a "great tool" to ensure sustainability risk management becomes core to businesses, alongside finance, risk, internal control and operations functions.
"That multi-disciplinarity, that coming together of finance and sustainability is going to be one of the great achievements of the CSRD," De Nardis said.
The post-Omnibus CSRD will still require transition plan disclosure or explanation of why one does not exist – even if a requirement to implement plans was removed from the Corporate Sustainability Due Diligence Directive.
Those searching for the positives amid the slash-and-burn of sustainability regulation can legitimately hope that a 'simplified' CSRD will nonetheless provide more of the information investors need in an overhauled Sustainable Finance Disclosure Regulation – and if not, make it easier to identify gaps where investors can focus engagement.
Notably, this could be the case where the SFDR introduces a category for 'transition' funds which lists 'credible' corporate transition plans among eligible selection criteria.
With attention turning to CSRD implementation, sustainability-minded investors will hope a period of much-needed policy stability provides a platform on which to build.