Overview
Last week, the EU parliament voted to delay implementation of the bloc’s landmark sustainability reporting laws, the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). The delay, which was first proposed in February, comes amid several EU moves to pump the brakes on its world-leading corporate ESG framework, and the US beginning a wholesale pivot away from ESG regulations and requirements imposed by past administrations – not to mention a brewing trade war that has put significant pressure on US trading partners to remain competitive. As the global environment for sustainability requirements and regulations shifts, the EU’s moves will likely continue to set the global ESG standard – even in relative retreat.
ESG Simplification in the EU
The vote to delay reporting timelines the CSRD and CSDDD is a significant step back from the EU’s ambitious sustainability regime. On April 3, the European Parliament voted 531 to 29 to approve the stop-the-clock proposal, which impacts two major sustainability reporting measures: the CSRD, which requires large and listed companies to publish regular reports on the social and environmental risks that they face, and the CSDDD, which requires large and listed companies to conduct human rights and environmental due diligence into their own operations, as well as the operations of their subsidiaries and business partners. With regard to the CSRD, the omnibus simplification package gives the second wave of CSRD reporting companies until 2028 to comply with the law, and the third wave of companies until 2029. Further, the omnibus simplification package increases the employee threshold for CSRD reporting companies from 250 to 1,000 employees (removing approximately 80% of companies from the law’s scope), and “substantially” reduces the number of data points reporting firms would have to collect. With regards to the CSDDD, the delay will give the largest reporting companies until 2028 to begin the application phase and lengthen the intervals at which companies are required to conduct supply chain assessments. Further, the package will limit the scope of required due diligence that companies must do beyond their own supply chains and direct partners, requiring due diligence on elements of their supply chains that they do not directly control (such as third-party suppliers) only when “the company has plausible information suggesting that adverse impacts have arisen or may arise there.”
The move follows several smaller moves in recent weeks for the EU to cut back on its large-scale ESG reporting infrastructure and simplify the bloc’s business environment. On April 1, the European Commission proposed a rule change that would allow automakers three years, rather than one, to comply with the bloc’s 2025 CO2 emissions reductions targets for cars. In the proposed rule (which must still be adopted by the European Parliament), regulators would base compliance with the CO2 rules for 2025 on a carmaker's average emissions over the period 2025-2027, rather than just this year. Just last week, media reported that EU Climate Commissioner Wopke Hoekstra is considering options to soften a soon-to-be cemented EU goal to cut 90% of greenhouse gas pollution by 2040. Hoekstra is reportedly weighing ways to add flexibility to that goal, including allowing countries to defer steeper cuts to allowing them to incorporate carbon credits.
The ESG Rollback in Context
The EU’s efforts to simplify their ESG reporting structures comes amid rising global tensions around the role of ESG considerations in business and government. President Trump campaigned on his opposition to ESG reporting requirements and has moved decisively in his first few months in office to reverse sustainability and social governance-related regulations. After several months of declining to defend it in court, the SEC last month formally abandoned the Biden-era climate disclosure rules that required large companies to disclose climate-related risks and greenhouse gas emissions. In early March, the EPA rolled back some 31 environmental rules in a mass action dubbed “the day of deregulation,” including limits on pollution from tailpipes and smokestacks, protections for wetlands, and the legal basis that allows it to regulate the greenhouse gases that are heating the planet. The Trump administration’s ESG policies are being mirrored in broader business retreat from ESG focused policies; in recent months, major American companies have largely softened or eliminated their net-zero targets, sustainability commitments, and DEI policies.
Further, the EU’s reconsideration of stringent ESG guidelines coincides with the brewing trade war between the US and its trading partners. In last week’s “liberation day,” the White House imposed 20% tariffs on the EU, and in the weeks before imposed more targeted tariffs on imported vehicles and raw materials like steel. In February, House Committee on Financial Services Chair Rep. French Hill (R-AR) referred to the CSDDD as a “non-tariff barrier,” signaling that Washington now sees these more stringent reporting regulations as an undue burden on American companies and even potentially hostile.
Beyond reading western sentiment on ESG in a new political reality, the EU’s push to simplify its ESG regime is a bid to maintain competitiveness against historic economic headwinds. Meeting the now-delayed 2025 emissions target for automakers, for example, relies upon projections requiring significantly higher production of electric vehicles – a sector facing global pressure amid trade barriers and supply chain disruptions. Analysts assess that the overwhelming European parliamentary support for the omnibus simplification package passed last week demonstrates the understanding that reducing burdens on companies may be an economic imperative, despite the fact that debates reveal member states are split on how much the sustainability reporting regime should be cut down.
Business Risks and Implications
Amid rapid policy changes in the US, shifting Western sentiment on ESG, and changing considerations in the EU, global business is looking ahead to a fractious year for ESG reporting and sustainability disclosures. However, despite significant regulatory turmoil emanating from Washington and Brussels, the business community must look beyond the West when considering their future ESG reporting risks and requirements: while the US and EU are reconsidering their regulations, momentum towards sustainability reporting has grown across Asia. China made significant steps toward formalizing ESG reporting requirements in 2024, finalizing Basic Guidelines for Corporate Sustainability Disclosure in December which mandate ESG disclosures for in-scope large A-share listed companies. Japan’s Sustainability Standards Board published draft disclosure standards last March, with an eye to potentially making reporting mandatory reporting by 2027. Since 2022, Singapore’s stock exchange has required all listed companies in most sectors to provide climate-related disclosures. Companies in Australia were required to begin reporting on their climate risks from January 1 of this year. All of these standards are based on the International Sustainability Standards Board, upon which the US also based its now-defunct disclosure rules. While Western apprehension over ESG guidelines certainly do not constitute a global retreat, the global business community must remain adaptable to an ever more fractious patchwork of sustainability sentiments and regulations.
