A twisty ride for European Union’s ESG laws

Two important EU directives meant to advance corporate ESG due diligence obligations have gone through rollercoaster developments, which cast doubt on the region’s political commitment to address the harmful impacts of businesses on people and the environment.

Last year, the business world heralded two EU directives designed to improve corporate ESG responsibility. The Corporate Sustainable Due Diligence Directive (CSDDD) mandates companies to conduct environmental and human rights due diligence across their operations, including their supply chains. The Corporate Sustainability Reporting Directive (CSRD) requires companies to file annual sustainability reports identifying their ESG performance in their annual reports.

Everything seemed on track for both directives: the CSRD took effect in January 2023, while the European Parliament and European Council negotiators informally approved the CSDDD in December 2023.

But as 2024 rolled around, things drastically changed for both directives.

In January, EU lawmakers agreed to delay the CSRD’s sector-specific corporate disclosures for the oil, mining, and energy industries by two years – from June 2024 to June 2026 – to give companies more time to comply. The delay also applies to the reporting timeline for companies based outside of the EU. 

On 28 February 2024, the CSDDD ran into an even bigger roadblock when it failed to get the majority vote from the European Council. Germany abstained from voting on it, which triggered similar abstention by Italy, France and other member states. As a result, the directive failed to advance to the legal affairs committee (known as JURI) of the European Parliament, a necessary step before the law can be adopted. However, on 15 March, the European Council finally came to an agreement after the CSDDD was significantly diluted. Under the watered-down version of the directive, companies with at least 1,000 employees and worldwide turnover of €450 million ($489 million) will be affected by the law instead of the original proposal of at least 500 employees and turnover of €150 million ($163 million).

As a result, the number of impacted companies will be smaller under the approved directive, up to 30 per cent fewer than the regulation’s original scope, which is about .05 per cent of the total number of companies doing business in the EU, according to Forbes. The last-minute vote in favour of the weaker CSDDD happened as the current European Parliament’s mandate was about to end in April, and the region is scheduled to elect new parliamentary members in June.

Let’s take a closer look at what these recent developments mean for your organisation and thousands of EU and non-EU companies affected by the two directives.

Why CSDDD and CSRD are important

The CSDDD and CSRD both require companies to be transparent about their environmental and social impacts. The two directives complement each other.

The CSRD provides a framework for ESG reporting, while the CSDDD ensures that companies take concrete actions to implement their ESG policies. They both mandate reports, although they have different approaches. Both directives affect EU companies and non-EU companies operating in the region that meet certain thresholds.

The CSRD gained wide support as the replacement for the sustainability reporting requirements under the Non-Financial Reporting Directive (NFRD), whose deficiencies were well-known. Under the NFRD, companies chose their own reporting frameworks, which meant it was hard for investors and stakeholders to readily compare the reports of different companies.

The CSRD resolves those issues by standardising sustainability disclosure across companies. The directive also reduces reporting costs by streamlining the process. The CSDDD earned the support of the EU business community as well as ESG advocates for its many strengths. The directive requires companies to identify the current and potential adverse impact on the environment and human rights, not only from their operations but also the operations of their subsidiaries and suppliers. Companies are required to mitigate such risks and to create an action plan and accompanying timeline to address those risks.

What this means for your company

While the CSRD remedied the shortcomings of NFRD, it also increased the reporting burden for businesses covered by the directive. Companies are mandated to provide much more detailed disclosures of their sustainability efforts. The CSRD has a wider scope than NFRD. The number of affected companies increased from about 11,700 under the NFRD to an estimated 49,000 under the new directive.

Consider the CSRD’s two-year delay a good thing. It means you have additional time to implement the directive’s other (non-sector specific) sustainability reporting requirements. The delay will boost European competitiveness by reducing the administrative burden on companies, according to Vincent Van Peteghem, Belgian deputy prime minister and minister of finance. If and when the European Parliament adopts the weakened CSDDD, ESG advocates will be disappointed while smaller companies that dodged a bullet will be relieved. The fact that the process of the directive’s approval has been bumpy and fraught with political manoeuvrings shows the EU’s diminished political leadership in the ESG arena.

What to do now

Whether it’s the clothes or cars consumers buy, or the stocks investors put their money into, there’s a greater demand for corporate transparency today. People want to spend their money on companies with ethical supply chains, sustainable practices and compliant operations.

Germany’s Lieferkettengesetz (LkSG), which took effect in January 2023, is a result of such a demand for corporate transparency. The law requires companies to perform due diligence on human rights throughout their third-party networks and take measures to prevent and mitigate any violations. The law raised the bar in the fight against unethical global supply chains. Through reporting and disclosures, you can show consumers, investors, stakeholders and regulators that your brand is trustworthy.

It behoves you to take advantage of the CSRD’s two-year delay. It’s a respite best taken in preparation for compliance with non-sector-specific reporting requirements. Get a head start before the 2026 deadline for comprehensive sector-specific disclosures arrives. Even a less powerful CSDDD is arguably better than nothing. Don’t underestimate the underlying reasons why the legislation was proposed to begin with. Hundreds of businesses and other types of organisations had demanded a directive that would “require robust ongoing due diligence from financial and non-financial companies, throughout the value chain,” according to the Business and Human Rights Resource Centre.

You must embrace the core principles the CSDDD stands for: transparency and sustainability through vigorous due diligence and reporting across your company and third-party network.

Learn how Ethixbase360 can help you improve and streamline inefficient or complex and ineffective manual reporting processes. A purpose-built third-party risk management platform is essential in navigating a changing ESG landscape in the EU.

Speak to us for expert guidance on how to leverage proportionate risk-based due diligence in managing and mitigating third-party risks for your entire value chain.