Are two of the most far-reaching sustainability reporting regulations in danger of being derailed before they even get started? Not quite, but some new challenges have emerged over the past couple of weeks, which will most certainly slow the pace of implementation.
January 1, 2025 was supposed to be a tipping point when sweeping sustainability regulations – notably the Corporate Sustainability Reporting Directive (CSRD) and the EU Deforestation Regulation (EUDR) – changed the game for companies around the globe. But on the eve of their implementation, multiple factors are threatening to throw a wrench into those plans.
CSRD
First, let’s look at the CSRD. As I’ve discussed before, EU directives like the CSRD need to be incorporated by each Member State into their own national legislative frameworks before they can be enforced. This crucial step is called transposition, and the EU’s transposition deadline for the CSRD was July 6, 2024. However, many countries missed that deadline. Now that the implementation date is closing in, the European Commission (EC) has sent a formal notice to Belgium, Czechia, Germany, Estonia, Greece, Spain, Cyprus, Latvia, Luxembourg, Malta, the Netherlands, Austria, Poland, Portugal, Romania, Slovenia, and Finland for their failure to fully transpose the new rules into their own regulatory frameworks.
While many of these countries have already introduced proposed legislation and others are in the process of doing so, their failure to fully transpose the new directives on time, or to the standard required, is not acceptable to the EC. In a statement accompanying the infringement notice, the EC explained their rationale: “In the absence of transposition of these new rules it will not be possible to achieve the necessary level of harmonization of sustainability reporting in the EU, and investors will not be in a position to take into account the sustainability performance of companies when making investment decisions.”
The Member States now have two months to provide detailed responses to the EC and complete their transposition. If the Commission remains unsatisfied, it could escalate to a reasoned opinion and even referral to the Court of Justice, potentially leading to penalties for the affected Member States.
The specter of penalties should be enough to spark timely responses from these Member States, but, what, exactly, will this look like, and will the new rules still take effect in January? That part is not yet clear.
EUDR
Meanwhile, it appears that the standoff the EU was having with the United States and other countries over the EUDR may have had some major consequences. The legislation – which was set to become effective on December 30 across all EU Member States – will require companies selling cattle, cocoa, coffee, palm oil, rubber, soya and wood and their derived products into the EU, to prove their supply chains do not contribute to the destruction of forests anywhere else in the world. But last week, the European Commission proposed a one-year delay to the law, just weeks after telling the World Trade Organization that the law will become enforceable as scheduled.
In an explanatory memorandum, the European Commission explained that the EUDR “should be postponed by 12 months to allow Member States, exporting partner countries, operators and traders to be better prepared and for the latter to fully establish the necessary due diligence systems covering all relevant commodities products, as laid down in [the] Regulation.” Notably, the explanation also added: “The extended timeline will also allow for further engagement with third countries, where relevant, several of which have expressed concerns related to the too short implementation time.”
This delay must be voted on, but because of the strong opposition the EUDR has faced both from abroad from the U.S. and China, and within its own Member States – most notably from Germany and Sweden – it is likely that a delay will happen.
This doesn’t mean that the delay is being embraced around the world. In fact, some advocacy organizations are crying foul, citing the danger of procrastinating and attributing the delay to the power of special interest groups. While the EUDR is unlikely to go away, the idea that it could be temporarily sidelined by seemingly political pressures has sparked a passionate response around the world.
Planning with No Road Map
It’s clear that companies preparing for the implementation of these new mandates have been left in a somewhat challenging position. Vigilant business leaders have been preparing to comply with these regulations for years, and now, they’re tasked with getting ready to meet the requirements of something that may potentially look different to what they had originally anticipated, or they may even continue to face additional delays. It could be argued that there’s a diminished urgency on the part of the regulators, or it could be viewed as a strong signal that these same regulators are so set on making this happen that they are willing to give a little to get a lot. Whatever the driver, businesses must resist the temptation to become complacent.
The best and most prudent strategy is to stay the course. CSRD and the EUDR are coming in some form or fashion, and there will be significant external pressure on the EU to make sure that these regulations do not become toothless or watered down. Whatever the timeline, businesses are going to need to gear up for a whole new level of scrutiny in the new year, despite these recent bumps in the regulatory road.