In the Competitiveness Compass, the Commission clarified that the set burden reduction targets of at least 25% and at least 35% for SMEs refer to the cost of all administrative burdens, and not only reporting requirements.
Environment vs Social
So far, there have been no signals that social matters would be less prioritized than environmental for EU companies.
On the contrary, the Commission’s work program 2025 published on 11/2 states that “Europe’s unique and highly treasured social model constitutes both a societal cornerstone and a competitive edge”, and that “a key focus of this Commission will be to strengthen social fairness”.
In the work program we can read that prioritizing “continued implementation of European Pillar of Social Rights is crucial to tackle shared challenges in employment, skills and social issues”, and that the “Commission will intensify its efforts”.
In the section “protecting our democracy, upholding our values” the work program states that “Europe has made progress on gender equality, from pay transparency and gender balance on company boards to work-life balance, and adequate minimum wages” – but that “more needs to be done”. And that “discrimination based on gender, sexual orientation or race has no place in our society”.
SMEs and smaller ‘large’ companies are likely to be prioritized
On a more global level, there are indications that simplifications and additional phase-ins for SMEs and smaller ‘large’ companies are likely to be prioritized, together with digitalization, as the digital transition supports the green/clean transition and the ESRS were designed to be digital-first from the start.
Smaller ‘large’ companies are likely to benefit from a new ‘mid-caps’ category and information requests directed at value chain actors are expected to be capped to address excessive trickle-down effects on smaller companies along the supply chains.
This first Simplification Omnibus package will target sustainable finance reporting, sustainability due diligence and green taxonomy – while ensuring that investors’ needs to mobilize investment in the clean transition are met.
The Competitiveness Compass specifically mentions
- obligations proportionate to the scale of activities of different companies,
- proportionate timelines,
- addressing trickle-down effects to prevent smaller companies along the supply chains from being subjected in practice to excessive reporting requests that were never intended,
- financial metrics that do not discourage investments in smaller companies in transition.
The Competitiveness Compass stresses that “digitalisation will go hand in hand with simplification to reduce the reporting burden”:
“Wherever possible, reporting must move to digital formats based on standardised data.”
The work program also specified that “we will accelerate our path to a digital regulatory environment, and will propose to remove inefficient requirements for paper formats”.
On a more detailed level, what could be expected?
These options seem likely to us, in short and with the information at our disposal today:
- Creation of a small mid-caps category for non-PIE companies with less than 1,000 employees and €450m turnover, a reduction in reporting by extending the LSME ESRS standards to these companies, and a delay in the application by 1 to 2 years (FY 2027 at the latest, with publication in 2028).
- Maintaining a 500-employee and €50m turnover threshold for listed / PIE, who are already included in the 1st wave of reporting companies.
- Increasing the size threshold for ESRS Set 1 appendix C phase-in provisions (now set at 750 employees), allowing companies to omit the information required by E4, S2, S3 and S4 for the first 2 years of application, and S1 as well as E1 scope 3 and total GHG emissions for the 1st year of application – even if the company has assessed these matters to be material.
- Extension of the current transitional arrangements provided for in the ESRS – allowing for omission of information on monetary financial effects of material risks and opportunities for first 3 years of application, as well as several S1 disclosure requirements for the 1st year of application – by an additional year to allow for adjustment to changes.
- A value chain cap limiting the information that CSRD companies are allowed to request from SMEs to information required to information communicated in LSME ESRS and VSME for smaller SMEs.
- Simplification of Green Taxonomy reporting, reducing the reporting of non-financial companies by over 1/3 compared to the current state according to the proposal from Platform on Sustainable Finance.
- Simplification of the Carbon Border Adjustment Mechanism (CBAM) for smaller market players.
- Voluntary sector specific standards, developed more as guidelines than as regulation in a first step.
- Inclusion of a new option in the ‘N-ESRS’ standard aimed at non-EU companies doing significant business in the EU, allowing these companies to limit the disclosures for matters other than climate, to impacts that are connected with products and services destined to EU customers.
One could argue that these measures would significantly water down the CSRD. But it’s not so sure. Yes, it will take more time, but we will get there, and more likely sooner than later.
An increasing number of large companies will be reporting, and this will elevate expectations and showcase best practices. Practices will merge.
Transparency is expected. Not responding to expectations will not be good for business. And transparency will drive change.
👉 It’s therefore best to prepare now, on a best-effort basis, even for ‘mid-caps’.
Let’s deep-dive and explore these options more in detail.
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How can ‘proportionality’ in sustainability reporting obligations be further increased?
By increasing the size threshold defining ESRS Set 1 in-scope non-PIE companies, and creating a new category of small mid-caps to take into account the specificities of “intermediate-sized” companies.
Since this was already done for CSDDD, it would be reasonable to expect that EU adopts the same thresholds, meaning 1,000 employees and €450m turnover (instead of 250 employees and €50m turnover).
This proposal is backed by both German and French authorities.
While maintaining a 500-employee and €50m turnover threshold for listed / PIE companies, who are also part of the 1st wave of ESRS reporters.
The German DRSC wrote that approx. 550 German 1st wave CSRD companies are currently in the final phase of their first preparation of ESRS sustainability reports on financial year 2024.
This is also coherent with the NFRD, so these companies could be expected to be more mature when it comes to sustainability reporting.
The German DRSC and the French government do not really mention these companies in their proposals, while the German government argues in favor of reduced standards for this group, and French ANC argues for a status quoi.
By reducing the reporting scope for the “intermediate-sized” non-PIE company group (to be created) by adapting and extending the LSME ESRS standards to these companies.
Compared to the current ESRS Set 1, the LSME draft standards for listed SMEs simplify reporting by reducing the number of potential disclosures.
Given the broader scope of the companies concerned, they would then likely need to be subject to a review and to a consultation, as the French ANC also specified, which would also argue in favor of extended deadlines.
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How can ‘proportionality’ in timelines be increased?
By postponing the application of mandatory sustainability reporting by 1 to 2 years (FY 2027 at the latest, with publication in 2028), for the “intermediate-sized” non-PIE company group (to be created).
This proposal is backed by both German and French authorities, and would be logical given the need for a review and a consultation of the LSME draft standards, if to be applicable.
By increasing the size threshold for ESRS Set 1 appendix C phase-in provisions.
We have not read anything about this, but given that ESRS Set 1 already integrates proportionality and allows for phase-ins (brought to the table by Germany) for companies not exceeding 750 employees, it would not make sense to keep this threshold if a 1000-employee threshold were to be adopted for ESRS Set 1.
ESRS Set 1 allow companies with less than 750 employees to omit the information required by E4, S2, S3 and S4 for the first 2 years of application, and S1 as well as E1 scope 3 and total GHG emissions for the 1st year of application – even if the company has assessed these matters to be material.
This is already a significant reduction of reporting burden to allow for proportionate preparation, while prioritizing environmental objectives in step one.
Given the call for reduction, adopting an increased threshold for these phase-in provisions would make sense, and would not require significant rewriting of ESRS Set 1.
One option is to align this threshold on one of the first two thresholds applicable for EU Corporate Sustainability Due Diligence Directive, CSDDD, (3000 or 5000 employees) – to further align the CSRD and CSDDD directives, which are complementary.
And since the French government has proposed to limit the CSDDD to EU companies with over 5 000 employees and sales of over 1,5 bn € (‘in the absence of a level playing field in relation to non-EU companies’), we could get a 5000-employee phase-in threshold also in ESRS Set 1.
By extending the current transitional arrangements provided for in the ESRS by an additional year.
This was a proposal advanced by the French ANC, and would also not require significant rewriting since the provisions are already laid out in ESRS Set 1.
In-scope companies are today allowed to omit information on monetary financial effects of material risks and opportunities for first 3 years of application, as well as several S1 disclosure requirements for the 1st year of application – even if material.
By developing sector specific standards as sector guidelines rather than as reporting obligations.
In April last year, it was decided to postpone the adoption of sector-specific standards to 30 June 2026, to allow companies to focus on the implementation of the first set of ESRS and limit the reporting requirements to a necessary minimum.
German authorities have now called for the development sector specific standards (ESRS Set 2) to be paused, to reduce burden but also because they are not convinced that they are really needed.
The French ANC does not agree. In their opinion, well-conceived sector specific standards alleviate the burden of complying with the sector agnostic standards, bringing answers to the double materiality assessment and improving the relevance of the sustainability statement: “The sooner the better.”
I reasonable compromise would be to develop the standards, but not make them obligatory in step one.
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How can ‘trickle-down’ effects in the value chain be addressed?
Trickle-down effects are inevitable as companies are stepping up sustainability reporting and transparency.
This will trigger change also amongst companies that are not in the scope of CSRD – and those allowed to postpone their reporting.
Market and stakeholder expectations will increase, and practices will merge over time, which is also what’s intended. It will drive change at all levels.
But CSRD never intended for large companies to drown their supply chains with never-ending questionnaires to be filled in manually, one by one. This would, for sure, crush EU SMEs.
Paragraphs 132-3 of ESRS 1 already set out transitional provisions that limit the value chain information that CSRD companies have to report and/or collect from actors in their value chain during the first 3 years.
Therefore, smaller SMEs, that are not connected with severe negative impact, should, at least during the first years of application of the reporting requirements, be less exposed to expectations to have and share sustainability information, according to the EC FAQ published last August.
EFRAG has also developed two sustainability reporting standards specifically for SMEs:
- a mandatory one for listed SMEs (LSME ESRS) and
- a voluntary one for non-listed SMEs (VSME).
The VSME was published in December last year, while LSME is still in draft mode.
LSME ESRS is likely to establish the maximum level of sustainability information that ESRS can require a CSRD company to obtain from SMEs in its value chain.
As a complement, VSME has been designed to become a reference point for all actors in the market, to ensure that the reporting effort of CSRD and non-CSRD companies is proportionate.
Smaller SMEs can use VSME as a one-stop-shop solution to report information once and in one place, effectively relieving them from the burden of having to fill in multiple questionnaires throughout the year.
These provisions were already in place before the Omnibus, but can be expected to be reinforced to protect EU SMEs.
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And what about sustainability reporting other than the ESRS?
We can expect both Green Taxonomy reporting (article 8) and the Carbon Border Adjustment Mechanism to be simplified, especially for smaller market players.
A simplification of Green Taxonomy reporting was proposed on 5/2 by the Platform on Sustainable Finance, an advisory body to the Commission.
The recommendations would contribute to reducing the reporting burden of non-financial companies by over one-third compared to the current state.
The proposal includes:
- simplified reporting templates, with a clear reduction of datapoints to limit the reporting to information that is relevant for making business decisions,
- making the OpEx KPI voluntary (except for R&D),
- introducing a materiality threshold for reporting Turnover, OpEx, CapEx KPIs,
- allowing for estimates and proxies for reporting, in conjunction with safe harbours to protect against greenwashing allegations,
- a lighter and more practical ‘Do No Significant Harm’ (DNSH) compliance assessment process, making it easier to assert that green activities are not causing collateral environmental damage,
- a simplified approach to the taxonomy for listed SMEs,
- prioritizing SME’s access to sustainable finance, by adopting simplified approaches for banks and non-financials,
- a simplified Green Asset Ration (GAR) that encourages green and transitional lending.
While the EU Taxonomy was designed to direct capital towards sustainable activities, its complexity has been a concern for businesses.
These proposed changes are aimed at accelerating green investments by cutting through the bureaucracy – without compromising on environmental integrity.
The shift marks an important step towards balancing sustainability goals with business efficiency in today’s evolving regulatory landscape.
A simplification the Carbon Border Adjustment Mechanism (CBAM) for smaller market players was also advanced in the Competitiveness Compass published on 29/1.
CBAM is the EU’s tool to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries.
It will apply in its definitive regime from 2026, while the current transitional phase lasts until 2025.
This gradual introduction of the CBAM is aligned with the phase-out of the allocation of free allowances under the EU Emissions Trading System (ETS) to support the decarbonisation of EU industry.
As of 1 January 2025, a new portal section of the CBAM Registry will allow installation operators outside the EU to upload and share their installations and emissions data with reporting declarants in a streamlined manner, instead of submitting it to each declarant separately.
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And non-EU companies doing significant business in Europe?
In April last year, it was decided to postpone the adoption of standards for non-EU companies, to 30 June 2026.
The CSRD states that non-EU companies with significant business in Europe should have their own ESRS standard (‘N-ESRS’) to report on – for all business they do worldwide, and not just in Europe.
They would only be required to report on Impacts, and not on Risks and Opportunities, since these do not concern the EU as non-EU countries are not directly involved in driving EU’s transition agenda.
The extra-territorial scope of the reporting requirements that the CSRD implies for non-EU companies, is creating tensions with trade partners and allies who are not keen on letting Europe dictate reporting conditions, and are resorting to means such as tariffs and other means to put pressure on the EU to drop this.
It is similar to the debate we also see surrounding the CSDDD.
The following information regarding NON-EU GROUP ESRS (N-ESRS) was released in EFRAG’s January update published on 17/2:
Waiting for indications of possible changes to the CSRD deriving from … the Omnibus, the EFRAG SRB could not vote on the formal approval of the N-ESRS Exposure Draft on 15/1. However, the EFRAG SRB Chair, to conclude the technical activities, asked members to express their support on the technical content of the Exposure Draft.
Differently from the version approved by EFRAG SR TEG in December, the approved Exposure Draft includes the option to limit the disclosures for matters other than climate, to impacts that are connected with products and services destined to EU customers.
A majority of the members approved the technical content of N-ESRS.
Several members expressed reservations on this option, including on the basis of its technical feasibility and auditability.
The European Commission recommended consulting on this option. A formal vote on the issuance of the standard will be considered at a later stage. The next steps include incorporating these editorial changes to the ED, preparing the consultation package to be sent for review and finalization, and carry out the public consultation upon receival of the green light from the European Commission.
And here’s an idea that could perhaps be worthwhile exploring to close the extra-territorial debate at this stage:
By issuing N-ESRS while postponing the obligation to adopt them – in essence making them voluntary in stage one – markets, investors and consumers in the EU would be able to differentiate between companies respecting European values and those who don’t. Not communicating is also communicating.
And what about the CSDDD in all this?
CSDDD does not involve reporting – the information will be published in the ESRS sustainability statement. The ‘burden’ here is not the reporting, but the doing.
Contrary to CSRD, CSDDD is not an obligation to publish, but to act. The directives are complementary.
Join us tomorrow to explore the difficulties surrounding the EU Corporate Sustainability Due Diligence Directive.
#getCSRDready, #Omnibus, #ESRS, #SustainabilityReporting
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