EU makes more cuts to ESG compliance rules

It’s the spookiest time of year: when compliance regulations mysteriously disappear. After months of campaigning by the largest member states of the EU, the lawmakers working on the ESG regulations have consented to “major cuts to a set of sustainability directives,” Bloomberg reported.

The threshold for companies that will have to comply with the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) was increased from 250 employees to 1,000 employees for the CSRD and 5,000 for the CSDDD. A previous increase to the CSRD threshold cut the number of in-scope companies by 80%; now it’s closer to 90%. And for the CSDDD, the increase cuts the number of companies that need to adhere to the rules by 70%.

The CSRD requires these companies to show how their business activities affect the environment and their own financial status using the European Sustainability Reporting Standards, disclose energy usage and emissions metrics, and complete due diligence on labor issues like human rights abuses in their supply chains. However, the current cut removes the human rights reporting requirement for companies or their supply chain partners with under 1,000 employees.

While the CSRD regulates ESG reporting, the CSDDD requires that companies actually address issues as well as create transition plans for climate change mitigation in accordance with the Paris Agreement’s goal of climate neutrality by 2050. Under the CSDDD, in-scope companies have to dive into supply chains to root out human rights abuses and limit environmental impacts.

Critics of the directives believed the requirements were too onerous and would stymie European businesses, decreasing their global competitiveness. French and German businesses have been among the most outspoken critics, and the US Chamber of Commerce called the directives “unprecedented regulatory overreach” that could impact American companies.

This year, the US also backed away from federal climate regulations, as the SEC decided in March not to defend its own rule in court. David Peavler, a partner at Jones Day, told CFO Brew last year that US companies would probably default to the European regulations, as they’re among the most rigorous. But with this rollback overseas, more businesses will be free from disclosure requirements both at home and across the pond.

Sustainability-focused groups feel the “cuts have gone too far.” In a statement to Bloomberg, Beate Beller, EU senior campaigner at Global Witness, wrote, “EU lawmakers have handed big business a free pass.”

Discussions on the final agreement are scheduled to begin next week, with the goal of concluding by year’s end.