Post # 86
March 5, 2025
Claire Bodanis
On the day when Christians the world over start their Lenten fast, Claire wonders what the EU may be giving up this Lent, through the first of its promised ‘Omnibus packages of simplification measures’, which set out how it aims to ‘cut red tape and simplify the business environment’.
‘Oh for beep’s sake – why couldn’t they just have done it properly in the first place?’
I’m sure I’m not the only one who had this reaction to last week’s announcement by the EU on how they’re pulling back on many of the reporting requirements we’ve all been tying ourselves in knots to prepare for – namely, big changes to three things:
The Corporate Sustainability Reporting Directive (CSRD) and its attendant environmental, social and governance (ESG) reporting standards, the European Sustainability Reporting Standards (ESRS). These standards have been perhaps the biggest headache for reporters, not least because the CSRD should have been transposed into law by member states for companies with years beginning 1 January 2024, but is still languishing untransposed all over Europe…
The EU Taxonomy Regulation – a tiny headache for reporting compared with ESRS, being a classification system that defines criteria for economic activities aligned with a goal of reaching net zero by 2050; plus a few other environmental issues.
The Corporate Sustainability Due Diligence Directive (CS3D) – which basically extends companies’ responsibilities for their impacts on ESG issues across their supply chains. Thereby creating a massive headache for companies in managing said supply chains, even before it hits us reporters.
It’s perhaps no surprise that the EU itself in its press release refers to all these requirements as ‘overlapping, unnecessary or disproportionate rules that create barriers for EU companies.’ Although it does beg my question…!
Anyway, on a happier note, my irritation was soon followed by a sigh of relief that at last the EU has recognised how convoluted, complicated and confusing all these rules and regulations are, and is doing something about it before companies spend a fortune producing heaps of reporting that serves little purpose because it’s well-nigh impossible to follow. Leaving aside for a moment how much said companies have already spent preparing for something that they may no longer need to do… more on that below.
What’s changing, and what does it mean for UK companies?
As ever with EU pronouncements, we have an indication of what is likely to change with all three of these requirements, but we don’t know exactly what the practical implications will be for reporting just yet – we still need to wait for those. But I was able to get a shortcut on some of this by way of two things:
A useful paper analysing the changes from my friends at City law firm, Ashurst (Florian Drinhausen, a partner in their Frankfurt office, is also a great brain on this subject, as well as being a kindred spirit when it comes to FW’s purpose-driven approach to reporting!).
A very good 45-minute webinar from KPMG’s German team (thank you KPMG German team!). It’s well worth a listen and you can also find the slides here.
The key takeaways as I see them for UK companies in particular are as follows, but do read the detail:
You may no longer have to report against CSRD/ESRS at all. The number of companies in scope has been slashed from c.50,000 to c.10,000. Which means that most companies not listed in the EU, unless they’re really large, will probably no longer be in scope.
If you do, it should be less onerous in terms of time, content and assurance – but you still have to do double materiality (maybe). Companies that are still in scope will probably have two years longer to report than expected; the ESRS are being revised with lots of detail taken out (although not the double materiality requirement*); and companies will no longer have to go beyond limited assurance (the eventual step-up to reasonable assurance having been taken out). And in other good news, in November the IAASB published a new standard for sustainability assurance, ISSA 5000, which, we hope, will be the starting point for any EU standard on assurance. *Having said that, there is a separate proposal under consideration for non-EU parent companies, the NESRS, which are less demanding than the original ESRS, not least in that they require companies only to report on ‘impact’ rather than financial materiality. However, since the ISSB is likely to require companies to report on the equivalent of the ESRS’s financial materiality, you may end up having to do both anyway. In any case, at the time of writing, we’re still waiting to hear the fate of the NESRS.
You can (probably) stop worrying – or at least worry less – about your liabilities under CS3D. Due diligence now only applies to tier 1 suppliers, and a variety of other aspects have been watered down, but do check the detail on this.
Your investment so far won’t be (all) wasted, since IFRS S1 and S2 are just around the corner. Returning to my point above about the money companies have already invested in preparing for EU requirements, which may no longer be needed: don’t forget that we will be required to report on many of these issues anyway under IFRS S1 and S2 – which, signs are, should become a requirement for UK companies for years beginning as soon as 1 January 2026. And, if you did your double materiality analysis properly, then you should have covered all the material issues relevant for IFRS S1 and S2 as well (although do check!), so you’ve made a good start.
Is the EU giving up too much?
While simplifying stultifyingly complex – and therefore expensive – reporting requirements can only be a good thing, I am rather concerned, looking at the implications of the changes, about what the EU is really trying to achieve here. As noted in the Ashurst paper, is what it’s doing actually deregulation dressed up as simplification? If so, it doesn’t take a genius to wonder why the EU might be doing this – although my reflections on that subject would take a blog all to itself.
Suffice to say that I hope not. The EU is not going to beat anyone else at their game, it can only win by playing its own. And as regular readers will know, I’m a big fan of the EU’s game, namely its aim to ‘green’ the economy. The EU wanted – and I hope still does want – companies to engage in activities that are more inherently sustainable, both environmentally and socially. Hence the EU Taxonomy, and the requirements through the ESRS and CS3D for companies to understand, and thus be able to account for, their societal and environmental impacts, risks and opportunities.
An easy win for the EU – take a leaf out of the ISSB’s book, and write for your audience
To quote Sir Donald Brydon, and the first two words of his excellent review of the audit profession (whose recommendations from 2019 we’re still waiting to see enacted…): ‘Language matters’. Never has that statement been more true than when it comes to creating reporting standards. Clear language is the product of clear thought, and of an understanding that you must write from the question ‘what do I want my readers to understand and do’, not ‘what do I want to tell them’.
In 2023, the ISSB standards, IFRS S1 and S2, came out at about the same time as the ESRS. I duly got them all printed out and bound so I could sit down and read them properly. I started with ISSB, and spent an intense but fairly straightforward afternoon on the sofa, scribbling down a few notes. The fact that jurisdictions have had no more than the usual trouble endorsing these standards and bringing them into practice, is, I would argue, thanks to their clarity of structure, language and expression, which is a product of the clarity of thought behind them, and the understanding of what companies will have to do to put them into practice.
Turning to the ESRS, I’m afraid it took me a train journey up to Scotland, a few days working in Scotland, and a train journey back again to London to force myself through them. I appreciate that writing standards like these, including, no doubt, negotiating between zillions of people’s views, is an incredibly challenging task as well as an enormous piece of work. But even so, it’s a real shame that all this great effort that went into the standards required me to perform considerable mental gymnastics trying (only partially successfully) to work out what the language meant, let alone what that would mean for companies putting them into practice. It’s no surprise, then, that companies and countries have struggled with them, and they are now being revised wholesale, quite aside from the broader political context. I think it’s quite likely that, had the ESRS been as clear and straightforward as the ISSB standards, they may well have been adopted far more quickly, while the political context was still generally in their favour.
An Ash Wednesday prayer for the EU
So here’s my Lenten prayer for the EU’s standard setters: that in revising all these standards they 1) remain true to their own game, and 2) write down the rules clearly and as succinctly as possible so that this time, we can all understand them and start playing.