Potential CSRD, CS3D and Taxonomy merger may ease regulatory burden

The Corporate Sustainability Reporting Directive (CSRD) is part of the European Union’s broader strategy to improve corporate transparency on sustainability issues. It aims to provide investors and stakeholders with reliable and comparable ESG data to make informed decisions, ensuring companies contribute to the EU's environmental and social goals. The directive will also assist the European Union in its goal to become the first climate neutral continent by 2050.

Recently, news has emerged that the EU are considering merging the Corporate Sustainability Due Diligence Directive (CS3D), the Corporate Sustainability Reporting Directive (CSRD) and the Taxonomy. CS3D and Taxonomy represent an additional directive and regulation that the European Commission have developed to further encourage efforts, due diligence and reporting of sustainability for businesses across the EU.

What’s behind the proposed merger of the CSRD, CS3D and Taxonomy?

Ursula von der Leyen, President of the European Commission, recently noted the European Commission would propose an omnibus legislation – effectively merging all three – in a bid to “reduce bureaucracy [and] reduce reporting burdens”.

While she made clear “the content of the laws is good” and wouldn’t be changed, this potential merger does in fact open the door for all three regulations to be revised. This is because the new merged legislation is likely to need approval not only from the Commission but also from the European Parliament and the European Council.

This also builds on recent discussions within the European Commission on the topic of the CSRD, that indicated that the EU may relax some of the implementation and reporting measures within the Directive. This was indicative of a desire to ensure that European companies that fall under the remit of the Directive are not at a competitive disadvantage to their international peers.

A recent letter from European Commissioner for Financial Services, Financial Stability and the Capital Markets Union, Mairead McGuinness, highlighted the importance of Member States taking practical steps to minimise the burden on companies associated with the new reporting requirements. In particular, she highlighted the importance of Member States engaging with supervisory authorities and assurance providers to stress the need for a proportionate approach.

The Commissioner emphasised the need to recognise that there will be a learning curve, and that reporting will improve over time as companies gain experience of applying the new rules.

Merger or not, the CSRD still applies

From 1 January 2025, large companies in Ireland who meet the scoping criteria will be required to comply with the CSRD. This builds on the 1 January 2024 deadline for public interest entities with over 500 employees. Following this, in scope listed small to medium enterprises must begin reporting by 2026, with an opt-out option until 2028.

There is of course a cost to businesses when it comes to complying with any new regulation - specifically building internal capacity, both human resources and data collection. However, this increases significantly when there is a condensed timeline. Companies who invest early by building up knowledge and process gradually will facilitate a smoother transition and allow for implementation challenges to be minimised.

The potential relaxation of how CSRD is implemented should not be seen as a reason for taking the foot off the pedal. Instead, it should be seen as a shift to a more efficient approach that ensures that compliance is not an unnecessary burden, while the benefits are still capitalised on.

Ultimately, the CSRD, or indeed this new three-pronged sustainability Directive, is a response to society’s changing needs and priorities. Investors are looking increasingly towards sustainable investments, and consumers too are interested in the impacts companies have on the environment.

Longer term, companies that adopt proactive sustainability measures will be better positioned to attract green investment, increase consumer trust, and gain a competitive advantage in the evolving global marketplace.