What the EU’s Sustainability Reporting Directives and Potential Changes Mean for Your Business: CSRD, CS3D, and the Proposed Omnibus Simplification Package

Co-Authored by Aimee Simpson, CEO of Sustainability Law & Strategies

The EU is reshaping the corporate sustainability landscape with regulations that have far-reaching consequences for businesses globally and are striving to increase environmental, social, and governance reporting transparency, accountability, and consistency. Among these regulations, the Corporate Sustainability Reporting Directive (CSRD) (and its supporting standard, the European Sustainability Reporting Standards (ESRS)) and the Corporate Sustainability Due Diligence Directive (CS3D) present some of the most impactful reporting mandates on the horizon. Now, the EU is proposing to reshape these transformational policies and frameworks with the Omnibus Simplification Package. Let’s take a closer look at each of these directives, some of the proposed amendments to these frameworks, and what they might mean for your business. 

What is the CSRD (Corporate Sustainability Reporting Directive)?

The Corporate Sustainability Reporting Directive (CSRD) is part of the EU’s broader sustainability agenda and mandates businesses to disclose detailed information about their environmental, social, and governance (ESG) practices.This framework significantly expands on the EU's previous Non-Financial Reporting Directive (NFRD), setting higher standards for transparency and reporting. 

Why It Matters

Entered into force on January 5, 2023, CSRD ensures that companies’ sustainability efforts are transparent and measurable. This not only promotes trust among stakeholders but also aligns businesses with long-term sustainability goals. It also makes companies more accountable in the eyes of investors, regulators, and consumers.

Who Needs to Comply Under the Current Directive?

CSRD designated four waves of compliance deadlines based on certain “undertaking” (a.k.a. business or company) categories and thresholds:

• First Wave: Includes large public-interest undertakings, including subsidiaries of foreign parent companies. A “public interest entity” refers to a company or undertaking listed on a regulated EU stock exchange, insurance companies, credit institutions, or a member-state-designated public interest entity. A “large undertaking” means having an annual turnover (net revenue) of over €50 million or total assets exceeding €25 million, and more than 250 employees. Only undertakings with over 500 employees and already reporting under the Non-Financial Reporting Directive (NFRD) are considered “first wave” large undertakings and must report in 2025 for the previous financial year (2024).
• Second Wave: Large undertakings (see above) that are also listed with less than 500 employees (but above 250), and not previously reporting under the NFRD, are required to begin reporting in 2026. This may include non-EU listed companies and subsidiaries.
• Third Wave: Listed small and medium-sized enterprises (SMEs) must report by 2027 with some opt-out potential until 2028**.** The requirement excludes micro-entities, which are those entities with less than 10 employees and either a net turnover of above €900 thousand or above €450 thousand in assets.
• Fourth Wave: Non-EU companies with over €150 million in EU turnover for each of the last two consecutive years and an EU subsidiary that qualifies as a “large undertaking” (see first bullet) or an EU branch generating more than €40 million net turnover in the preceding financial year. This “fourth wave” must report in 2029.

What Are the Key Reporting Requirements?

• Annual sustainability reporting is required, detailed within the accompanying European Sustainability Reporting Standard (ESRS).
• Double materiality: Companies must report on both:

How sustainability risks (like climate change or social issues) impact their business, and

• The impact the company has on the environment, society, and governance.
• Reports must be audited by a third party to ensure credibility and accuracy. Initially, the audit must meet limited assurance standards and later may need to meet reasonable assurance standards.
• The reports must cover a wide range of ESG topics, including environmental impact, human rights, labor practices, governance, community involvement, and sector-specific requirements.
• Requires value-chain (a.k.a. supply chain) reporting if necessary for understanding sustainability-related impacts, risk, and opportunities, but also establishes a “value-chain cap” on obtaining information outside the disclosure scope established for SMEs.

What are the Key Changes to CSRD if the Omnibus is Finalized as Published?

• An estimated 80% fewer companies must report. The Omnibus would more closely align CSRD with CS3D and only require large undertakings with over 1,000 employees and a net turnover exceeding €50 million or assets of €25 million to report. Non-EU undertakings would need to generate €450 million in EU turnover and have an EU subsidiary that meets the current “large undertaking” definition or an EU branch generating more than €50 million of turnover. Listed SMEs (third wave) would not be required to report, but could voluntarily report under a separate standard.
• The value-chain cap would be expanded beyond SMEs to those undertakings not required to report under the proposed thresholds. Both SMEs and those outside the updated CSRD would only need to voluntarily report under the to-be-adopted VSME.
• Sector-specific standards and reporting would be** eliminated**.
• Auditing requirements would remain at limited assurance.
• A two-year delay on reporting for second and third wave undertakings would be enacted.
• EU Taxonomy disclosure requirements would be reduced to only companies or groups within the scope of CSRD and with a net turnover exceeding €450 million.
• The** ESRS may be revised,** but the double materiality standard will remain.

What is the Corporate Sustainability Due Diligence Directive (CS3D)?

The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) is a directive aimed at improving human rights and environmental protection in global supply chains. It mandates that companies identify, assess, prevent, and mitigate negative impacts on human rights and the environment across their value chains.

Why It Matters

The CS3D addresses global challenges like human rights abuses and environmental degradation, which are often overlooked in supply chains. It compels companies to take a proactive role in ensuring that their operations do not contribute to social or environmental harm.

Who Needs to Comply?

• EU companies and parent companies of groups that have more than 1000 employees and more than €450 million of net worldwide turnover. 
• Non-EU companies and parent companies of groups generating more than €450 net turnover in the EU during the preceding financial year.
• EU and non-EU franchising or licensing companies (both parents and franchisees) with royalties of more than €22.5 million and individual or consolidated net worldwide turnover of more than €80 million.

Much like the CSRD, the initial compliance deadlines will take place in waves, beginning in 2027 with the largest companies.

What Are the Due Diligence Obligations?

Companies must develop systems of due diligence (taking into account their upstream and downstream partners’) that include:

• Integrating due diligence into corporate policies and management systems.
• Identifying actual and potential adverse impacts on human rights and the environment.
• Preventing or mitigating potential impacts.
• Ending or minimizing actual impacts.
• Establishing and maintaining a complaints procedure.
• Monitoring the effectiveness of due diligence measures.
• Publicly communicating on due diligence efforts annually.

What are the Key Changes to CS3D if the Omnibus is Finalized as Published?

• Transposition (adoption into member state laws) and compliance deadlines would be delayed by one year to July 26, 2027 and July 26, 2028, respectively.
• In-depth assessments and reporting would be limited to direct value-chain, but full value-chain mapping would still be required.
• Monitoring assessments would be required every five years rather than annually.
• EU-wide civil liability regime requirements would be eliminated, leaving enforcement options more to the discretion of the member states.
• The requirements to implement climate transition plans would be removed.
• There would be less autonomy for member states to impose stricter due diligence standards.
• Termination of business relationships as a last-resort obligation would not be required.
• There would be reduced stakeholder engagement requirements.

What Reporting Standard Should Our Company Use?

For CSRD, companies must apply the European Sustainability Reporting Standards (ESRS). However, many longstanding voluntary reporting standards align with numerous components of the ESRS, offering valuable guidance as companies prepare to comply and adapt to potential changes.

These include standards developed by well-respected organizations, such as:

• Global Reporting Initiative (GRI)
• International Financial Reporting Standard (IFRS) Foundation and the International Sustainability Standards Board (ISSB)
• International Organization for Standardization (ISO)
• Sustainability Accounting Standards Board (SASB), now managed by ISSB
• Task Force on Climate-related Financial Disclosures (TCFD), now integrated within IFRS S2
• World Resources Institute (WRI), developer of the Greenhouse Gas Protocol

These frameworks can provide a solid foundation for building CSRD/ESRS compliance, as they cover critical ESG (Environmental, Social, and Governance) factors. Additionally, many of these organizations and other leading eco-certifications are diligently working to update their standards to support companies in transitioning smoothly to the new mandatory regulations.

To ensure a seamless transition, it's crucial to reach out to these experts, speak with legal counsel, and collaborate with your primary suppliers and business partners to determine the reporting framework that best suits your company’s needs.

How Do These Sustainability Reporting Regulations Present Commercial Opportunities for Businesses?

Whether adhering to the current EU sustainability reporting directives or adapting to the proposed changes, new avenues for businesses to capitalize on sustainability-driven innovation and transparency lay ahead.

Opportunities Include:

• Enhanced Brand Reputation: Transparency and responsible practices create trust, which can boost consumer loyalty and attract conscious customers.
• Risk Management: Proactively aligning with these regulations and standards, even if voluntary, helps mitigate risks related to environmental, social, and governance issues. Even if amended, companies may face financial penalties, litigation, or reputational damage if they fail to comply.
• New Revenue Streams: Businesses can seize new opportunities by innovating with circular economy models, such as recycling and upcycling, and offering circular products and services.
• Investment Attractiveness: ESG innovation and advancement in alignment with leading policies often supports planet, people, and profit, making it attractive to investors.
• Additional Reporting Preparedness: CSRD and CS3D are not the only mandatory ESG reporting frameworks coming online. Investing in consistent, accountable, and transparent reporting processes and standards often increases compliance efficiency and success across the ESG reporting and compliance spectrum. 

Seizing the Moment for Sustainability Success

Even with potential amendments, the CSRD (+ ESRS) and CS3D represent a paradigm shift in how many businesses must operate and report on sustainability. Companies that align with these frameworks are not only staying ahead of regulatory compliance but also embracing opportunities that can drive long-term growth, innovation, and resilience.

Adopting sustainable practices is no longer optional—it's a business imperative. To succeed, companies must take a proactive stance, not just in reporting but in commercializing sustainability across their operations, supply chains, and products.

While these and many other frameworks may grow and evolve, they all play a critical role in shaping the future of sustainability reporting and due diligence for businesses across sectors. To further unpack these guidelines and understand how they can directly impact your operations, compliance, and growth opportunities, be sure to check out our debut whitepaper, Policy to Profit: How New Rules Can Create Commercial Wins for Fashion. Informed by expert legal counsel and expert interviews, it provides a comprehensive overview of the current key regulations, actionable insights, and strategies to help your company navigate this evolving landscape effectively. 

Disclaimer*: This article’s information is intended for educational purposes only and does not constitute legal counsel.*