Current changes to supply chain due diligence obligations, sustainability reporting and CO2 offsetting mechanism

An Omnibus package has been making its way through the legislative process in the EU since 26 February 2025.

The European Directive on due diligence obligations in the supply chain is to be toned down and harmonised with the German Supply Chain Act. However, neither will kick in until 2028 since German politicians are likely to suspend the German law in 2025. At the same time, the recently intensified EU Sustainability Reporting Standards (ESRS) are to be significantly reduced again (80% fewer companies and up to 35% fewer submissions) whilst the information on the taxonomy will also affect fewer companies in future and be designed more pragmatically. Finally, the CO2 border adjustment mechanism (CBAM) will only affect 10% of importers (but 99% of emissions).

Here is the link to the EU website.

Supply Chain

The political path to the European CSDDD (Corporate Sustainability Due Diligence Directive - CSDDD) was accompanied by intensive discussions before a compromise was reached in March 2024. The “elephants in the room” at the time were primarily liability, fines, the climate target, the length and depth of the supply chain to be considered and, of course, the scope of application. In the end, a compromise was initially reached by raising the thresholds (at least 1,000 employees and turnover of 450 million in a three-stage, size-related phase-in period from 2027). However, the extension to the entire supply chain, liability and high fines were retained.

The German Supply Chain Due Diligence Act (LkSG) has also affected companies with 1,000 employees since 2024 (and those with 3,000 employees since 2023) but does not have a turnover threshold. In addition, the LkSG has a tiered relationship from own business division, direct supplier (tier 1) to indirect supplier (tier n) in the event of special cause (substantiated knowledge). However, the German law has been under pressure since the end of 2022 due to the associated perception of bureaucracy; there have been five approaches in the Bundestag and many election campaign announcements by (almost) all parties to abolish or suspend it (in addition to the postponement of the reporting obligation to the end of 2025, which has already taken place).

In view of the economic and political momentum, it is to be expected that the LkSG will be suspended until the new CSDDD comes into force. According to the current proposal, this will take effect in 2028 for companies with 3,000 employees and 900 million turnover and then in 2029 for companies with 1,000 employees and 450 million turnover (the originally planned largest threshold of 5,000 employees and 1.5 billion turnover from 2027 will then no longer be needed).

The German law directly affects at least 4,000 German companies, while the European Directive would only affect a good 5,000 companies across the EU due to the turnover thresholds. In this respect, the EU regulation would make it easier for the German economy in terms of the scope of application, which will not change as a result of the innovations in the Omnibus package, but is likely to result in a change to the German legal situation anyway.
It is interesting to note, however, that the new CSDDD will then also reflect the stage relationship in terms of content and will not take a “risk-based” approach to the entire supply chain as before, whereas the BAFA published a new handout on the risk-based approach in the LkSG on 19 February 2025.

There is a new link between sustainability reporting (CSRD) and the supply chain due diligence obligation, as it is now stipulated that suppliers with fewer than 500 employees may not be required to provide more extensive information than as part of sustainability reporting, more specifically in the proposal there is a voluntary sustainability reporting standard for non-listed SMEs.

It is also interesting to note that the CSDDD, like the LkSG, no longer provides for liability, allows for lower fines once again and pursues the 1.5-degree climate target with less rigour. In addition, it is no longer necessary to terminate cooperation.
Nothing stays the same and we will be holding a webinar on 10 March 2025. 

Sustainability reporting

Sustainability reporting for large listed companies and those in the financial industry has been in place since 2014 (Non-financial Reporting Directive or NFRD). In 2022, the related Accounting Directive was amended by the CSRD (Corporate Sustainability Reporting Directive) (CSRD=Directive - 2022/2464 of 14 December 2022 and Delegated Act 2024/90457 of 9 August 2024, as a corrigendum to Commission Delegated Regulation 2023/2772 of 31 July 2023 - ESRS (European Sustainability Reporting Standards) ) have led to significantly intensified and highly standardised reporting, uniform reporting standards (European Sustainability Reporting Standards - ESRS) with 82 disclosure requirements on 95 topics and 1,150 data points in 287 pages plus thick handouts. Around 50,000 companies in the EU are expected to prepare corresponding reports through a size-related phase-in, which will then be collected in an EU-wide electronic database (in ESEF format) to facilitate sustainability-specific payment and financing flows.

In Germany, this would have affected around 550 companies for 2024 and for a report in 2025 and for 2025 with a report for 2026 around 14,000 companies, as the thresholds were initially 25/50/500/+ or 25/50/250 for total assets/turnover/employees/listed companies. However, Germany, like six other EU Member States (Directive, there are probably further plans in the meantime and further laws are expected) did not by the end of 2024 transpose this into the national German Commercial Code (HGB) (due to the lack of CSRD-RUG - although there were draft laws from March 2024 and July 2024 (RefE_CSRD_UmsG.pdf (bmj.de) and RegE CSRD RUG (bmj) ). This means that we have no CSRD reporting obligation for 2024 (IDW circular dated 14 November 2024 and DRSC briefing paper dated 18 December 2024) and EU-wide comparability has failed in the first year anyway.

In addition, there was understandably a strong sense of bureaucracy in this respect, especially as sector-specific successors and supplements to the complex ESRS had already been announced and a massive consulting and software machinery had been created around the implementation.

The economic and political momentum led to the announcement of the Omnibus procedure at EU level by Commission President von der Leyen on 8 November 2024. It was announced that reporting obligations would be reduced by 25% for larger companies and 35% for smaller companies and that there would be general simplifications and relief. Discussions included aligning the CSRD thresholds with the CSDDD thresholds, postponements and even the abolition of the double materiality analysis in favour of a return to the materiality assessment in accordance with the NFRD.

The first outcome is a postponement of two years for so-called large companies with thresholds of 25/50/250, with a simultaneous increase in the number of employees from 250 to 1,000 (i.e. now 25/50/1000) from 2025 to 2027, with the first reporting obligation in 2028. What has also emerged - even if this is widely publicised differently and is based on a rather small deletion in the drafts, which may still be unclear - is the EU-wide reduction for listed companies, which already have to report for 2024 in 2025; the new threshold of 1,000 employees and a reporting obligation in 2028 also apply to these companies and a reporting obligation according to the CSRD/ESRS logic for 2027 and for the first time in 2028 (although this is not yet entirely clear - especially if national implementation law already exists). However, these companies will still be subject to NFRD reporting, as is the case in Germany anyway due to the lack of German implementation through a CSRD-RUG. Of course, this gives rise to many detailed questions, for interfaces between EU-wide groups and their reports or individual exemptions, etc.

According to Commission estimates, a total of 80% of the companies previously subject to CSRD would be excluded from the original scope of application, leaving "only" around 10,000 companies in the EU.

At the same time, it has been announced that the ESRS will be shortened and that there will be no sector-specific changes at all. However, this will probably take some time, as the complex texts of the EFRAG (European Financial Advisory Group) are not easy to pick apart, as they are highly interconnected. This structure therefore gives rise to change in equal measure as it makes such a change complicated.

We wait in anticipation and will be holding a webinar on 26 March 2025.

Taxonomy

With the CSRD, the taxonomy delegated  has also become part of the reporting of companies that previously had no contact with it due to their lack of affiliation with the financial industry. This complex subject matter with its large number of regulations (taxonomy Regulation 2020/852 plus delegated acts and communications; such as Regulation 2021/2139 = criteria on climate protection (Annex I) and climate change (Annex II) for forestry, environmental protection, processed goods, energy, water, waste water, waste, environment, transport, construction and real estate, information and communication, services and Regulation 2023/2485 = further criteria (Annexes I-II) on climate protection and climate change for mobility, rail, electricity, air transport, desalination, software, consulting and Regulation 2023/2486 = criteria (Annexes I-IV) on water, circular economy, pollution, biodiversity for environmental protection, processed goods, water, wastewater, waste, disaster prevention, transport, construction and real estate, information and communication, services, accommodation and Regulation 2021/2178 = KPI for transparency - was also slightly changed by Regulation 2023/2486: Turnover, Capex, Opex). (around 700 pages) conducts searches based on six overarching environmental objectives for taxonomy-capable and taxonomy-compliant economic activities To do this, companies have to enter a large number of figures in predefined tables after a time-consuming investigation.

This has now been made easier in that the Omnibus proposals stipulate that companies below a threshold of 1,000 employees and 450 million turnover only have to provide this information voluntarily. A materiality threshold is also to apply here.

CO2 border adjustment - CBAM

The Cross Border Adjustment Mechanism addresses CO2-intensive products that are imported from non-EU countries and are intended to lead to an obligation to purchase corresponding certificates via a notification in centralised systems. Due to the previously low threshold value of EUR 150, this became widely relevant and led to a massive sense of bureaucracy.

The Omnibus proposal now provides for an increase in the threshold values of 50 tonnes per year, which means that around 90% of the companies originally affected will be excluded, but 99% of the emissions will still be included.

Tabular presentation