ESG regulations could soon be simplified by the new EU Omnibus Proposal

At the end of February, the European Commission published its omnibus legislative proposal ("Omnibus Proposal") for the Corporate Sustainability Reporting Directive ("CSRD"), the Corporate Sustainability Due Diligence Directive ("CSDD") and a number of important changes to the EU taxonomy, i.e. the classification and nomenclature of sustainability activities, aimed at simplifying and making ESG rules more transparent. We have summarised the key points.

The main objectives of the proposal are:

• simplifying and reducing costs for businesses

• harmonise existing sustainability requirements

• protect small and medium-sized enterprises (SMEs) from disproportionate burdens

At the same time, the European Union remains committed to sustainability in line with the above rules, so this is not a step backwards, but essentially a simplification and harmonisation. In addition, some reporting deadlines have been postponed to allow companies to focus on the environmental and social aspects of their operations.

The current rules on sustainability reporting and other ESG reporting requirements can also be a headache for many companies. Meeting the current requirements, which are new to almost everyone, will require considerable time to prepare and change their organisational and financial information systems. As a result, many companies are not yet fully prepared to prepare financial statements that are not just financial and do not just contain historical information, simply because they have many years of experience in preparing financial statements.

As HLB Global, the world's eighth largest accounting and advisory network, said at its ESG Forum in London, the changes in the new omnibus proposal may tempt companies to postpone their ESG commitments until the precise obligations they will have are clear. However, it is important to remember that regardless of the legislation, there is a fundamental business case for all companies to integrate sustainability issues into their business strategy. This can shift the focus from compliance to adding value, increasing flexibility, improving efficiency and creating long-term growth, i.e. competitive advantage.

Key elements of the new proposals

• Delayed reporting deadlines. The proposals would delay the upcoming deadlines and implementation dates for the CSRD and CS3D. The first CSRD reports due in 2026 (from 2025) would be due in 2028 (from 2027) and the CS3D implementation deadline would be postponed to 2027, with the resulting due diligence obligations starting in 2028. Although the obligations under each directive would apply in full, companies would have more time to prepare reports, amend contracts and put in place the necessary internal and external data collection systems and controls.

• Higher CSR reporting thresholds. The proposals would raise the minimum employee threshold for large EU-based companies (those with a net turnover of more than €50 million or a balance sheet total of more than €25 million) from the current 500 to 1,000 employees, and triple the net turnover threshold for non-EU companies with "significant activities" in the EU. It is expected that this new legislation will significantly reduce the number of companies covered by the CSRD by around 80%.

• Fewer CSRD reporting points. If implemented, the proposals would reduce the number of data points, i.e. the information and data specified in the standards, that reporting entities would be required to disclose under the CSRD reporting standards.

• Simplification of CS3D. The updates propose to simplify the due diligence requirements of CS3D by extending the interval for periodic assessments to four years, streamlining stakeholder engagement, and limiting detailed, comprehensive due diligence to direct business partners in high-risk areas. In addition, disclosure requirements for small and medium-sized enterprises (SMEs) and small private equity firms would be subject only to the CSRD's voluntary sustainability reporting standards.

• Simplified taxonomy disclosure. The European Commission also plans to amend the rules on taxonomy, i.e. the classification and organisation of sustainability activities. The changes aim to simplify the reporting templates by eliminating more than half of the current data points, exempting companies from certain assessments and raising the materiality threshold to exclude activities that do not exceed 10% of a company's turnover, cost of capital or total assets.

When will the new proposals enter into force?

The EC proposals still have to be considered by the European Council and the European Parliament (EP). It is therefore expected that the proposals will be amended to further simplify the requirements or to leave some of the current requirements unchanged. The timetable for implementation of the package has not yet been set, but the ECJ is urging both the EP and the Council to take a decision.

However, it is important to underline that, based on the above, the original requirements for ESG reporting rules implemented in the domestic legal order still apply in Hungary.

In the changing regulatory environment, it is vital for companies to stay informed on ESG issues and to shape their business strategy in a way that enables them to adapt to new regulations, while at the same time providing a competitive advantage and increasing employee engagement.

It is essential that companies not only focus on complying with the new ESG requirements, but also exploit their potential. It is worth developing a business strategy that focuses on sustainable growth, not just compliance.