Members of the European Parliament have agreed to drastically reduce the number of companies across the EU required to undertake sustainability reporting alongside due diligence on environmental and human rights in their supply chains.

The Parliament voted on Monday to back a measure that would force only companies with 1,000 or more employees and revenues of at least €450m to report under the Corporate Sustainability Reporting Directive (CSRD), using European Sustainability Reporting Standards (ESRS) that have been drastically pared back.

As for due diligence, the European Parliament says only the very largest companies, with 5,000 workers and turnover of €1.5bn should be subject to the Corporate Sustainability Due Diligence Directive (CSDDD).

Parliamentarians have also voted for a ‘no civil liability’ regime for the directives which would, if enacted, curtail the ability of claimants to pursue companies for failures against the legislation.

The changes represent a substantial shift on the EU’s original scope for the CSRD and CSDDD which were to have applied to many more companies. The original CSRD would have applied to 50,000 companies but many now believe the revised legislation will cover around 4,700 businesses, according to academics.

Regulatory simplification

Jörgen Warborn, parliamentary rapporteur and member of the majority European People’s Party (EPP), said the vote confirmed “support” for regulatory simplification.

“We are delivering predictability for European companies, with a report that cuts costs, strengthens competitiveness and keeps Europe’s green transition on track,” Warborn said.

The parliament’s recommendation will now enter “tripartite” negotiations with the European Commission and the Council of the European Union to finalise the changes. However, it is almost certain CSRD and CSDDD will apply to far fewer companies than at the time they were first enacted.

A consultation on amending the green reporting legislation was launched in February, following a report from the former European Central Bank president Mario Draghi in which he described them as a “major source of regulatory burden”.

Many observers believe the scope has been cut too far and too few companies will report according to CSRD to make Europe’s green legislation effective.

‘Less transparency, less accountability’

Andreas Rasche, a business professor at Copenhagen Business School, told the Frankly Speaking podcast: “We are moving into a world of less transparency, less accountability and I think the decision, or the agreement that we have on the table, and where we will likely land with the CSRD, is absolutely not satisfactory, neither from the perspective of investors, nor from the perspective of companies themselves.”

On the CSDDD, Julia Otten, senior policy officer at campaigning law firm Frank Bold, says there is disappointment at the changes, which will likely mean the law will apply to fewer than 10 companies or groups.

“The scope is really limiting the effects at scale that we will see on this law,” says Otten.

Divisive debate

The changes have proved controversial, resulting in what some describe as “turmoil” after the EPP threatened to vote with far right anti-EU groups if it could not persuade the Parliament to vote for its own preferred position.

One Dutch MEP, Lara Wolters, the Socialist and Democrat lead negotiator on CSRD and CSDDD, resigned her role in protest at the EPP’s approach.

One issue that remains unresolved is the extra-territorial effect of CSRD and CSDDD—will they apply to non-EU companies operating inside the single market?

The White House has been piling pressure the EU to ensure US companies are exempt from the laws. It is also understood Beijing is concerned about Chinese companies being affected. However, the European Parliament so far remains silent on the question and some reports suggest Brussels is unwilling to abandon the extra-territorial impact.

Julia Otten says: “It is unacceptable if we don’t set the same standards for everyone selling goods here in the single [market].”

The parliament’s proposals now go forward to trilogue negotiations with the European Commission and the Council of the EU. Those are expected to conclude by 8 December, setting up a Christmas conclusion to the current amendment process.

Experts do not expect the Commission to exert much pressure to change the Parliament’s position.