, partner and sustainability lead at KPMG Luxembourg, spoke with Paperjam about the EU’s , which aims to streamline sustainability reporting, ease implementation timelines, and reduce the burden on companies while enhancing the availability of sustainable data.
Kangkan Halder: Could you briefly explain what the EU Commission’s ‘Omnibus package’ on sustainability reporting and due diligence entails?
Julie Castiaux: The Omnibus package aims to improve consistency and make environmental, social and governance (ESG) transparency rules easier to understand. It focuses on several key regulations, including the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), the EU Taxonomy regulation and the Carbon Border Adjustment Mechanism (CBAM). The goal of this proposal is to enhance the competitiveness of the EU and encourage economic growth. It addresses concerns in the market regarding the heavy regulatory load and possible costs that come with ESG reporting, as well as the confusion surrounding the proposed standards for what needs to be reported.
The new [CSRD] reporting requirements will apply only to large companies with over 1,000 employees and either a turnover exceeding €50m or total assets above €25m
What are the key changes introduced in this package compared to previous regulations?
- “Stop the Clock” for CSRD and CSDDD: The European Commission has suggested delaying the specific reporting requirements for the CSRD and the CSDDD. Large companies required to report under CSRD for the fiscal year 2025 as well as small and medium-sized enterprises for the fiscal year 2026 (so-called CSRD wave 2 and wave 3 companies) will need to start reporting two years later, focusing on their performance for fiscal years 2027 and 2028. Additionally, the deadline for implementing the CSDDD will be pushed back by a year to 2028.
- Review of CSRD thresholds: The proposal also includes a reassessment of the thresholds for the CSRD to align it with the CSDDD. The new reporting requirements will apply only to large companies with over 1,000 employees and either a turnover exceeding €50m or total assets above €25m. For companies below this threshold, the commission plans to introduce a voluntary reporting standard based on the voluntary standard for SMEs (VSME) created by Efrag.
- Revision of the ESRS Delegated Act: The commission will update the delegated act that outlines the European Sustainability Reporting Standards (ESRS). This revision aims to significantly reduce the number of data points required, clarify unclear provisions, ensure consistency with other legislation, and simplify reporting requirements. The proposal includes removing the need for sector-specific standards requirement.
- Adjustment of EU Taxonomy thresholds: Furthermore, the proposed Omnibus package addresses the obligations related to the EU Taxonomy, suggesting that large companies with more than 1,000 employees and revenues exceeding €450m should be required to report under the EU Taxonomy. In contrast, reporting will remain voluntary for other companies.
You mentioned that the package is expected to affect Luxembourg companies with over 1,000 employees. What are the main challenges these companies might face?
The Omnibus package will greatly affect Luxembourg, as more than 1,500 companies are included under the Corporate Sustainability Reporting Directive (CSRD) in its second phase, particularly those that meet two financial criteria: having over €50m in turnover and more than €25m in net assets. However, due to updated thresholds, many of these companies might not have to meet these obligations anymore, as the requirements will only apply to Luxembourg companies with more than 1,000 employees, which represents between 150 and 250 based entities in Luxembourg.
While the move towards simplification may reduce the reporting burden on companies, significant challenges remain.
Even if these requirements are lifted, companies are still anticipated to collect and provide ESG data to their customers and investors, as banks and insurance companies are utilising this information in their risk evaluations. With a clearer understanding of companies’ sustainability practices, banks may adjust their lending criteria, potentially favoring businesses that demonstrate strong ESG performance.
Moreover, companies continue to face challenges in streamlining the collection of ESG data, identifying the reporting topics that are most important to stakeholders, and guaranteeing the delivery of high-quality ESG information. The emphasis is increasingly on generating value through sustainability and enhancing efficiency, rather than solely fulfilling ESG compliance obligations.
The streamlined regulations may draw in asset managers and financial institutions that prioritise ESG factors
Luxembourg is known for its leadership in sustainable finance. How could this regulation impact its position in the global financial market?
Over the last four years, since the introduction of the Sustainable Finance Disclosure Regulation (SFDR), we have seen significant changes in the market, especially regarding SFDR article 9 and the idea of “sustainable investment,” along with alignment with the EU Taxonomy. Asset managers have been preparing for the implementation of the CSRD, expecting to gather more detailed and accurate ESG data from their portfolios to fulfill their reporting requirements.
However, with the arrival of the Omnibus proposal, both investors and asset managers are beginning to voice concerns about a possible shortage of ESG data coming from companies. This could make it more difficult to measure impact and effectively monitor and report on sustainability efforts.
On the positive side, the streamlined regulations may draw in asset managers and financial institutions that prioritise ESG factors, further solidifying Luxembourg's reputation as a center for sustainable investment.
How might the new requirements affect banking loans and insurance companies, given their increasing focus on sustainability?
Banks and insurance companies are now required to report on ESG factors and have been collecting more ESG data over the past few years to include in their risk assessment and solvency calculations. A lack of sufficient data can pose difficulties, not only in creating comprehensive reports but also in making well-informed decisions about lending and providing appropriate insurance products, which are crucial for managing solvency risks.
Firstly, we acknowledge that many market participants in Luxembourg are impacted because they do not fulfill the threshold of having 1,000 or more employees or other criteria that postpone the implementation of the CSRD report. This situation can be viewed as a relief for these organisations, as they are no longer, or to a lesser extent, legally obligated to disclose the complete set of requirements outlined by the CSRD. They can now concentrate on expanding their existing business, taking the time to enhance their internal ESG strategies and modifying their commercial offerings to align with market needs. For instance, banks can respond to the demand for ESG loans or continue providing traditional loans without the immediate pressure to alter operational processes and ESG data requirements. Likewise, insurance companies gain advantages when marketing their insurance policies.
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Secondly, even though reporting requirements have been simplified, there remains a necessity for the collection and reporting of ESG data to clients and investors. As the global market increasingly emphasises ESG disclosures, numerous institutions in countries such as France, Italy, Spain, the Netherlands and the United Kingdom have already started publishing their CSRD reports. Consequently, banks and insurance companies in Luxembourg are also subject to ESG reporting requirements like the SFDR. They initiated the collection of ESG data a few years ago to incorporate it into their clients’ processes and risk and solvency models. It is essential for them to confront the issue of insufficient ESG data, not only to provide comprehensive reports but also to make informed decisions regarding financing and offering suitable insurance products in the long run. Therefore, gathering CSRD data points on their counterparties could help address the challenge of data availability that they need to overcome.
Could you elaborate on how the package might change audit scope and reporting standards?
The draft Omnibus proposes to simplify the ESRS. The suggested revisions include a more straightforward framework with fewer required data points and the option for some of these points to be optional.
As for external assurance, the proposal maintains the requirement for limited assurance, meaning that external auditors will still need to examine the report’s content and confirm the overall information provided, which includes both quantitative and qualitative data related to double materiality. Notably, the current draft eliminates the future requirement for mandatory reasonable assurance for non-financial information.
As auditors face an increasingly complex reporting landscape, they play a vital role in upholding the integrity of financial information. The new requirements may introduce challenges, such as ensuring the quality and completeness of data, clarifying the expectations of limited assurance, and managing heightened stakeholder demands for transparency. In this evolving environment, auditors must view these challenges as opportunities to enhance their methodologies and deliver deeper insights. By striving for consistency and reliability in ESG reporting, auditors can build trust and foster a culture of accountability that benefits all stakeholders.
In the absence of standardised reporting, external stakeholders will find it increasingly difficult to evaluate the impact of companies and customers will struggle to thoroughly investigate.
Some worry that simplifying regulations could weaken sustainability efforts. What’s your perspective on balancing simplification with meaningful impact?
Regulatory simplification can be viewed as a positive development, particularly in light of the regulatory challenges faced by European companies. Although the primary objective of the ESG reporting obligation was to address greenwashing and enhance the measurement of companies' contributions to sustainability, the Omnibus proposal goes further than just simplification. It is to exempt 80% of EU companies from reporting obligations, according to the EU parliament communication.
The growing emphasis on sustainability and responsible business practices has led many organisations to recognise that ESG factors play a crucial role in long-term success and risk management. Boards and management teams may have realised the importance of accessing ESG information and incorporating this data into financial metrics to make informed decisions.
In the absence of standardised reporting, external stakeholders will find it increasingly difficult to evaluate the impact of companies and customers will struggle to thoroughly investigate and evaluate the information and practices of companies in a consistent manner. Furthermore, companies themselves will face challenges due to insufficient ESG data, which ultimately hampers their sustainability efforts and the adoption of sustainable business practices.
In light of the Omnibus proposal, there is however a possibility that many mid-sized and small businesses will start to take steps towards complying with the CSRD regarding ESG practices. These companies have come to understand the advantages of conducting double materiality assessments, which help them identify how their operations impact sustainability in terms of risks and opportunities and how sustainability issues can affect their business As a result, these companies can continue to advance their ESG efforts, even if they are not yet required to follow mandatory standards, by adopting voluntary standards instead. Essentially, the proposal may encourage more smaller businesses to engage in sustainability practices and reporting.
What practical steps should businesses take now to adapt to the new reporting and due diligence requirements?
For companies that will still be subject to potential obligations in two years, the delay should be seen as a chance to reassess their internal policies, procedures and control frameworks. It provides an opportunity to reach a consensus on the key sustainability messages they wish to convey to a broad audience of stakeholders. This extra time will enable them to gather data, evaluate its quality, and reconsider their overall strategies, facilitating the integration of sustainability into their operations.
For those companies that are no longer subject to these obligations, the collection, monitoring and reporting of ESG data remains crucial for effective communication with customers, banks, insurance companies and shareholders. These firms can also examine their activities and value chains from a more comprehensive viewpoint, which will enhance the incorporation of ESG factors into risk management, strategy development and priority setting. Additionally, from an efficiency standpoint, establishing a standardised ESG reporting framework will help address the diverse ESG requests from external stakeholders and streamline the scope of ESG due diligence. Ultimately, leveraging ESG data aims to promote more sustainable and resilient business practices.