ESG: SMEs can breathe a sigh of relief, but large companies must take action
The current amendment to the EU Directive on Corporate Sustainability Due Diligence, CS3D, means simplification for small and medium-sized enterprises. Large companies that are still affected by the directive should assess whether the information available about their supply chain is adequate to meet their legal obligations, warns international law firm Baker McKenzie.
ESG (environmental, social and governance) is a framework used to measure and evaluate an organization’s sustainability and ethical performance. The related EU ESG legal acts aim to enable companies to assess and present the impacts and risks of their operations from an environmental and social perspective to investors, business partners, authorities and the public.
The European Commission has recently been trying to simplify its sustainability-related regulations in order to strengthen the EU’s competitiveness by reducing the administrative burden on companies. This includes the so-called Omnibus legislative package, which simplifies the EU’s requirements for due diligence (CS3D) in addition to reporting (CSRD). The current amendment to CS3D primarily reduces the obligations on smaller companies.
On the one hand, the scope of the directive has been narrowed: it now only covers large companies in the EU with more than five thousand employees and a turnover of at least EUR 1.5 billion (the threshold was previously one thousand employees and EUR 450 million). The thresholds apply to the entire company – i.e. net worldwide turnover and the number of employees combined with affiliated companies. For non-EU companies, the revised threshold is increased to a net turnover of EUR 1.5 billion at EU level, without an employee threshold.
It is important to note, however, that different thresholds may apply to parent companies of networks operated through franchise or licensing agreements: they are still subject to the Directive if the amount of royalties exceeded EUR 75 million in the EU, provided that their net worldwide turnover reached EUR 275 million (previously this was EUR 22.5 million in EU royalties and EUR 75 million in net worldwide turnover). This ancillary rule applies to both EU and non-EU companies.
The Commission estimates that the current amendment will reduce the number of companies affected by the Directive by about half – from 7,000 to 3,500-4,000.
When identifying adverse impacts, companies should focus on the riskiest points in their chain of activities, and if they find risks of equal importance in several areas, they should first assess the impacts on their direct business partners. It is sufficient to base this assessment only on reasonably accessible information, and data from business partners with fewer than 5,000 employees can only be requested if it cannot reasonably be obtained from other sources. This significantly reduces the data burden on smaller partners, but at the same time places greater responsibility on large companies, as they will have to base their compliance on their own estimates rather than on accurate information collected from others.
“The issues of the correctness of estimates and the reasonableness of information carry the potential for legal interpretation disputes and can also lead to fragmented legal application. It may happen that different Member State authorities draw the boundaries of reasonableness in different places or place emphasis on different risks within the sub-areas of ESG. In order to ensure uniform legal application, in addition to amending the directive, it is also necessary for the Commission to create appropriate guidelines.”– said Dr. Tamás Szkiba, M&A and energy law partner at Baker McKenzie.
“The primary goal of the current change is to make the regulation as favorable as possible for small and medium-sized enterprises. However, it is important for large companies that are still affected by the directive to map out whether they have information of sufficient quality to fulfill their obligations and how to collect the missing data.” – said Dr. Máté Laczkó, regulatory lawyer at Baker McKenzie.
According to the original directive, if a company’s partner posed a significant risk to sustainability, the business relationship with that partner should have been terminated or suspended. This obligation has also been relaxed: the obligation to terminate has been removed, and the decision to suspend must also consider whether it would cause greater harm – for example, by the supplier in question being exposed to a risk due to the breakdown of the business relationship.
Source: trademagazin.hu
