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Running up that hill

30 Jun 2025 environment Print

Running up that hill

The European Commission has published its proposed Sustainability Omnibus Directive, aimed at boosting competitiveness and reducing excessive regulatory burdens on companies. Richard Lee wuthers those heights

Sustainability issues – which include climate change and environmental, social, and governance (ESG) concerns – are increasingly becoming an important feature of legal practice.

Sustainability is an evolving concept and, in its simplest form, concerns itself with balancing the needs of the short term with the requirements of the long term.

Sustainability issues include climate change, pollution, water and marine resources, biodiversity, circular resources and economy, working conditions, supply chains, communities, consumers and end users, business conduct and culture, and diversity, equality and inclusion (DEI).

The increasing level of legislation and regulation requires the input of legal practitioners for its interpretation and practical implementation

Much of the recent relevant legislation and regulation originates in the EU. For example, the Corporate Sustainability Reporting Directive (CSRD) came into force in the EU on 5 January 2023 and, through SI 336/2024, was transposed into Irish law on 6 July 2024, resulting in the insertion of part 28 into the principal Companies Act.

The Corporate Sustainability Due Diligence Directive (CSDDD) came into force in the EU on 25 July 2024 and, for the time being, is due to be transposed into Irish law in July 2026, which the proposed Sustainability Omnibus Directive will defer for a year.

Somewhere in between

The focus of the CSRD and CSDDD is to place sustainability considerations at the core of large companies operating in the EU through mandatory reporting and due-diligence obligations.

SMEs, other than listed SMEs, were deliberately excluded from the legislation, but a substantial trickle-down effect is occurring.

Large companies, to comply with their reporting and due-diligence obligations, must identify and collect relevant sustainability information that, in turn, involves their suppliers and stakeholders, many of whom are SMEs.

Sustainability contract clauses and ‘requests for information’ are the means being used by large companies to achieve this and, increasingly, SMEs find themselves having to comply with evolving contractual obligations and information requests to provide detailed sustainability information.

The CSRD, together with its European Sustainability Reporting Standards (ESRS), and the CSDDD (together with the Sustainable Finance Regulations) impose significant and complex obligations on large companies, which require time, expenditure, and resources to address.

Indirectly, through contract clauses and detailed information requests, SMEs doing business with large companies are also having to address these sustainability obligations.

The proposed Sustainability Omnibus Directive aims to ensure that companies are not stifled by excessive regulatory burdens, and shield SMEs from excessive sustainability information requests.

The commission explained that, while commitment to securing the green transition has not wavered, it has come at a cost, generating a large regulatory burden on people and businesses – and that the accumulation of rules and increased complexity were limiting economic potential and prosperity.

The proposed directive relates primarily to amendment of the CSRD, CSDDD, Taxonomy Regulation, and the Carbon Border Adjustment Mechanism Regulation.

Analysis of the proposed directive suggests that, while sustainability remains a priority, European competitiveness has now taken centre stage in the EU.

I’m still waiting

As part of the EU Sustainability Omnibus, urgent amendments to the CSRD and the CSDDD came into force in the EU on 17 April 2025 with the ‘Stop the Clock Directive’, which is to be transposed by 31 December 2025.

The effect of the directive is to defer by two years the reporting obligations for ‘Wave 2’ companies, due to commence reporting in respect of their 2025 financial year, and on ‘Wave 3’ companies for reporting in respect of their 2026 financial year.

In addition, the directive defers the transposition of the CSDDD by one year, to 26 July 2027.

The Stop the Clock Directive allows time for the proposed substantial changes of the Sustainability Omnibus Directive to be agreed and put in place.

It serves to avoid a situation whereby some companies would be in scope for a short period of time before being taken out of scope by the proposed changes set out in the Sustainability Omnibus.

The commission explains that the proposed amendments will substantially reduce the number of companies that fall within the scope of the CSRD.

One of the substantial amendments means that the CSRD would apply to large companies with over 1,000 employees and that exceed either €50 million in turnover or a balance sheet in excess of €25 million.

The commission indicated that, with the amendments, the number of companies currently in scope will be reduced by 80%.

Difficulties are likely to emerge for large companies in and around this 1,000 employee threshold – for example, the addition of an employee could trigger a company coming within scope of the CSRD, which would necessitate significant preparation and expense.

Another significant amendment to the CSRD is the imposition of a limit on the sustainability information that can be sought by large ‘in-scope’ companies from companies that are ‘not in-scope’.

The wording of the proposed Sustainability Omnibus Directive stipulates that ‘requests for information’ should not exceed the sustainability information specified in the sustainability reporting standards for voluntary use.

Straight down the middle

EFRAG (European Financial Reporting Advisory Group) released Voluntary Sustainability Reporting Standards for SMEs (VSME) in December, which are more than a simplified form of the ESRS that apply to in-scope companies, as they follow on from a detailed analysis by EFRAG of the ‘requests for information’ being directed to SMEs.

The proposed Sustainability Omnibus Directive signals that the commission will initially endorse by way of recommendation the VSME, which is expected shortly, and then more formally adopt, by way of delegated act, voluntary sustainability reporting standards for companies not in-scope of the CSRD.

For legal practitioners in the areas of practice affected by sustainability considerations, it is expected that mandatory and voluntary sustainability standards will become a key element of practice.

Particularly relevant is the emphasis on metrics, which will assist in the quantification of the value created by sustainability practices and policies and their possible inclusion as a tangible or intangible asset.

A company that can demonstrate its sustainability through metrics is more likely to be able to increase its value and reduce its litigation risk.

Further significant amendments to the CSRD include the discontinuance of sector-specific standards, together with the postponement of the reporting dates for the scheduled second and third waves.

In addition, the commission has signalled that it will review the complex ESRS for the purposes of making them easier for companies to use, and has confirmed that sustainability assurance will remain at the level of limited assurance.

Warm and soothing

Significant proposed amendments to the CSDDD include the dilution of the climate-change obligation for in-scope CSDDD companies.

The CSDDD as it stands requires companies to adopt and put into effect a transition plan for climate-change mitigation, but the proposed amended wording drops the words ‘put into effect’ and, instead, requires that a company, as part of its climate-change mitigation plan, include implementing actions – but without the obligation to put these implementing actions into effect.

Legal practitioners will appreciate the distinction being made, and the implications for accountability.

A further significant proposed amendment is the curtailment of the definition of a CSDDD stakeholder from the broad wording currently adopted to a more restricted wording and, as such, it is further distanced from alignment with the definition of a CSRD stakeholder.

A key amendment is the clarification that, in general, due-diligence assessment is not required beyond direct business partners, unless a company has plausible information of adverse impacts at the level of indirect business-partner operations or where artificial arrangements are put in place to insulate direct business partners.

In the legal context, the deletion of civil liability for a company’s intentional or negligent failure to comply with the CSDDD is noteworthy, but civil liability is confirmed in other respects with the focus moving to memberstate legislation.

Nevertheless, you’ll do

The Sustainability Omnibus reduces the level of mandatory obligation in favour of voluntary reporting and due diligence.

The disclosure and reporting under the VSME consist of three specific categories: environment metrics, social metrics, and governance metrics. It is expected that, in future, many ‘not in-scope’ companies will use voluntary sustainability standards for reasons that include:

  • Having a standard response to requests for sustainability information,
  • Providing sustainability information to banks, investors, and asset managers,
  • To create and build sustainability value,
  • To respond to procurement requirements, and
  • To have a basic tool for addressing sustainability issues and stakeholder relations.

Relevant considerations of the VSME, where applicable, include energy and greenhouse-gas emissions, climate transition and risks; pollution of air, water and soil; biodiversity; water withdrawal and consumption; resource use and circular economy; workforce characteristics; health and safety; remuneration; collective bargaining, training and human rights; corruption and fines; and gender diversity ratio.

The big sky

There is a growing recognition that companies that are invested in sustainability assets and sustainability know-how have a greater value than companies with unsustainable assets with high carbon and greenhouse-gas emissions or buildings with poor building-energy ratings.

The inclusion of sustainability value in the financial statements and on the balance sheet of a company can enhance its attraction to investors and sale value. Sustainability practices and policies, together with reporting and due diligence, will assist in achieving this end.

There is a growing expectation from business partners and stakeholders that sustainability practices and policies should be implemented – partly driven by legislation and regulation, and partly driven by the concerns of responsible business.

Sustainability issues, including climate change, have become a permanent feature of the legal landscape.The level of sustainability reporting and due diligence will increase, be it mandatory or voluntary, which will increasingly have an impact on legal practice.

The sustainability impact of businesses on people and on the local and global environment, in addition to the sustainability risks that confront businesses, are giving rise to greater scrutiny, which will drive the continued development of sustainability law and legal practice.

Dr Richard Lee is an expert in the developing area of sustainability law and principal of Lee Solicitors. 

Richard Lee
Dr Richard Lee is an expert in the developing area of sustainability law and principal of Lee Solicitors

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