- Introduction
The European Parliament, pursuant to its 2019 European Green Deal, adopted the Corporate Sustainability Due Diligence Directive (“CSDDD”) and Corporate Sustainability Reporting Directive (“CSRD”), constituting EU’s corporate sustainability regulation regime. The CSDDD was radical in its supply chain sustainability approach, mandating identification and rectification of potential and actual adverse human rights and environmental impacts in the corporate body’s own operations, their subsidiaries and where related to their value chains, those of their business partners. This approach received two negative opinions from the Commission’s Regulatory Scrutiny Board. Firstly, there was insufficient evidence demonstrating that the EU businesses do not sufficiently address sustainability opportunities, risks and impacts. Secondly, the methods being chosen were considered disproportional. Nonetheless, following intense political lobbying and Member states threatening to withdraw support, the scope of CSDDD was narrowed down. The Omnibus I package raised the company thresholds to those with more than a thousand employees and with a turnover of €450 million, removing high risk sector-based thresholds. This effectively meant that only around 6000 companies are directly bound by CSDDD obligations while in comparison, the CSRD’s extensive sustainability reporting requirement through double materiality, covers approximately 50,000 companies. This results in a regulatory divergence where approximately 88% of companies subject to reporting obligations face no corresponding mandatory due diligence enforcement. The assumption is perhaps that reporting mechanisms and the related reputational concerns would resolve the issue of enforcement. However, this is merely an inference of the author.
The Omnibus I package aims to simplify sustainability rules to reduce the administrative, regulatory, and reporting burdens across existing sustainability legislation to create a clearer, simpler regulatory framework for businesses, especially SMEs. This simplification initiative aimed to resolve EU’s regulatory burdens and fragmentation. The amendment fundamentally restructured corporate accountability, creating a disclosure based governance model wherein, with no statutory duty to act against unsustainability.
- Deletion of Article 22: Risk of Boilerplate Climate Impact Reporting
Article 22 of the CSDDD was the only provision of the directive dealing with combating climate change and was considered a novelty for crystallising climate change due diligence obligations on board of directors while the main force behind climate protection for the longest time had been climate reporting, which merely has a nudging force. It requires the corporation to adopt and “put into effect” a climate-change transition plan and such plan must ensure “through best efforts” the conformity to goals of sustainable economy and climate neutrality.
The CJEU in Commission v. France distinguished between “obligation de résultat” i.e., obligation of result and “obligation de moyens” i.e., obligation of means, in the context of environmental law directives. An obligation of means only requires reasonable efforts and no results while an obligation of result requires the success. The type of obligation established in Art.22 was one of obligation of result as evidenced by the phrase “put into effect” with regards to adoption and implementation of the plan, notwithstanding the obligation of means with regards to achieving the goals. However, the Omnibus I package has completely ridden CSDDD of Article 22, leaving only non-mandatory transition plan reporting obligations under the CSRD, specifically Art.19a and Art.29a.
It must be noted that disclosures under CSRD are subject to double materiality assessment i.e., both impact and financial materiality. As per Art.19a, if the company’s assessment concludes that climate change is not material to its business either as a financial risk or environmental risk then it is not required to disclose a plan. While this could lead to companies claiming that climate change is immaterial to its business. However, CSRD prevents this by mandating a detailed, auditor approved explanation for reaching such a conclusion. Since it is impossible to prove that a large corporation has zero material impact or risk as climate change is a global systemic issue, corporations are forced to report on climate anyways, creating a de-facto mandate. However, this merely mandates the disclosure of a plan. There is no check on the substantive content as CSRD only requires limited assurance of the transition plans i.e., whether the company has complied with ESRS requirements as well as the disclosure requirements of the transition plan. This leads to boilerplate or compliance-driven reporting as evidenced by the fact that 98% of the first-wave CSRD reports deemed climate material, while failing to provide meaningful details and vague “ongoing assessment” narratives and data gaps rather than actionable strategies.
- Maximum Harmonisation: Non-creation of Level Playing Field
Omnibus I has expanded the scope of maximum harmonisation clause, under CSDDD, to core due diligence obligations to “better ensure level playing field across the EU.” Maximum harmonisation clause prohibits gold-plating by Member states which means that Member states cannot introduce higher thresholds or requirements than the ones prescribed by the CSDDD. Article 4(1) of the amended Directive prohibits Member States from introducing national provisions that diverge from CSDDD.However, this prohibition is explicitly made “without prejudice to Article 1(2) and (3)” of the Directive i.e. the non-regression clause. Article 1(2) provides that the CSDDD “shall not constitute grounds for reducing the level of protection… provided for by the national law of the Member States… applicable at the time of the adoption of this Directive” i.e. 13 June 2024. The implication of this expansion of maximum harmonisation clause may be illustrated through the example of France’s Duty of Vigilance Law (Loi de Vigilance). The French law imposes a duty to adopt and effectively implement a vigilance plan on companies,identifying and mitigating human rights and environmental risks across their value chains. It essentially imposes an obligation of results with respect to implementation of a plan, similar to the pre-omnibus I obligation under Article 22 of CSDDD. The French law covers all “serious violations of human rights and fundamental freedoms, health and safety and environmental damage” in comparison to the specific list of human rights and environmental conventions annexed in the CSDDD.
Now as per Article 4(1) read with Article 1(2), the French Law would not be forced to impose a weaker form of corporate sustainability obligations, in order to comply with the harmonization directive. However, the second sentence of Article 1(2) states that “the first sentence of this paragraph shall not prevent Member States from adjusting any national corporate sustainability due diligence laws applicable at the time of the adoption of this Directive, in particular their scope, with a view to aligning them with this Directive.” Thereby, permitting member states to reduce the existing protections to be in line with CSDDD, indirectly overriding the principle of non-regression. As per this principle, States are prohibited from weakening their domestic levels of environmental protection. Furthermore, such a clause is in violation of Article 193 of the TFEU and is antithetical to the original goal of ensuring a level playing field across the EU as countries such as France would still be able to enforce higher penalties and obligations on the companies. Instead of creating a level playing field, this would create a fragmented sustainability framework with regulatory divergences within the EU.
- CSRD’s Lone Efforts Enough?
i) Failure of NFRD
With 88% companies within the scope of CSRD, the reporting mechanism, not within the scope of CSDDD, the due diligence mechanism, the question that arises is whether the reporting mechanism can drive the corporate sustainability efforts by itself. The answer to this question lies in a study on EU’s Non-Financial Reporting Directive, succeeded by the CSRD. The study dealt with the issue of whether mandating social and environmental disclosures improves environmental and social performance. It found that neither the EU companies show any significant improvement in environmental and social performance post-NFRD nor did they perform better than US companies that do not face any mandatory non-financial disclosures. Rather, US companies outperformed EU companies. The study highlights three issues with the NFRD that led to such an outcome; firstly, lack of specific disclosure guidelines meant that EU companies did not disclose information in a meaningful manner, secondly, lack of effective auditing requirements increased the risks of greenwashing and finally, the weak sanctions for non-disclosure undermined the quality of disclosures.
CSRD, compared to the NFRD, is more sophisticated with the specific ESRS disclosure and stronger auditing requirements. However, as discussed earlier, CSRD still faces similar issues as the ones identified in the study, in the form of boilerplate disclosures leading to non-meaningful and vague reports and weaker sanctions compared to national laws. This shows that mere reliance on a mandatory reporting mechanism cannot drive the corporate sustainability efforts, without an accompanying due diligence mechanism ensuring substantive corporate action.
ii) Investor-led Enforcement
It might be argued that in absence of a formal accountability mechanism, investor activism may drive sustainability efforts. Article 3 of the Sustainable Finance Disclosure Regulation imposes mandatory ESG disclosure obligations on asset managers and financial market participants. As per SFDR, mutual funds operating in the EU must categorize themselves into one of three regulatory groups based on their level of “greenness” i.e. brown funds under Aritcle 6, light green funds under Article 8 and dark green funds under Article 9. Around 59% of funds now categorise themselves as either light green or dark green funds, up from 46% at the regulation’s launch in 2021.This figure certainly fares well for an argument in favour of investor activism.Although it must also be noted that nearly all of this growth has been absorbed by the Article 8 category, while Article 9 funds, which is the only category requiring a genuine sustainable investment objective, have shrunk to just around 3% of the market. This collapse followed a major reclassification wave in late 2022, when over 300 Article 9 funds were downgraded to Article 8 or Article 6, representing roughly 40% of Article 9 assets at the time, driven by regulatory scrutiny over unsubstantiated sustainability claims, and the trend has continued through 2023–2025 as stricter naming and disclosure guidance took hold. This pattern of “greenness” migrating toward the least stringent, least scrutinised label as enforcement pressure rises mirrors the same underlying weakness identified in CSRD’s boilerplate disclosures i.e., labelling can proliferate even as substantive commitment weakens. It is true that disclosure data may be used by investors to influence corporate behaviour, perhaps through threats of capital withdrawal, however this is not enough to replace a formal enforcement mechanism in the form of due diligence provisions.
Omnibus I has the potential to create a data crisis for the SFDR as it has reduced the number of companies within the scope of CSRD by 80%, raising the threshold to €450M and 1,000 employees. This essentially would mean that investors managing light and dark green funds would have to rely on estimates for a large portion of their portfolios, degrading the quality of capital allocation, as they would not be able to distinguish between a company with poor performance and one with simply no data. Further, investor engagement with corporate sustainability is primarily concentrated on financially material risks i.e., factors directly affecting company’s financial performance and investor returns. This implies that environmental materiality or impact that have no immediate bearing on financial risks of the company do not lead to any meaningful investor engagement or activism. Moreover, passive index funds have been witnessing significant growth with EU’s share reaching approximately 30%. Such funds have no financial incentives for stewardship engagement, the value created by active stewardship is insignificant to the cost of experts they need to bear.
- Conclusion
The Omnibus I simplification package exposes a gap between global competitiveness and environmental responsibility. The administrative streamlining while attempting to protect the European businesses from “regulatory fragmentation”, still creates a gap between the transparency and the action taken. Through limiting the application of the CSDDD and abolishing Article 22, the EU has transferred the responsibility of climate governance from legal obligations to the “nudging force” of disclosures. The sole reliance on the CSRD is bound to be a failure without a corresponding obligation to act, leading to boilerplate compliance. The ambitious purposes of the European Green Deal can be met only if the regulatory framework ceases to regard reporting as an end and restores a vigorous, enforceable link between corporate transparency and the behaviour of the corporate sector.
Aashi Goyal is a fifth year student at National Law School of India University.
PC: European Parliament Historical Archives
