How Australian boards can avoid costly mistakes under rising sustainability reporting measures

Recent developments in Europe show how difficult it is to balance social and environmental protection with the direct and indirect costs of increased corporate transparency and sustainability reporting.

Australia is not the only jurisdiction grappling with balancing the direct and indirect costs of enhanced sustainability reporting with the environmental and human rights dividends it can produce. 

Earlier this year, the European Commission (EC) decided to delay — and likely descope — parts of its new sustainability reporting and due diligence regime. The EC was responding to a report by former European Central Bank president Mario Draghi that argued an excessive regulatory and administrative burden was hindering the competitiveness of EU companies.

Strengthened sustainability reporting and mandatory due diligence have been hard won in Europe. They are seen as key to implementing the European Union’s Sustainable Finance Action Plan (2018) and the European Green Deal (2019). “Sustainability” is broadly understood in Europe to encompass a range of environmental, social and governance factors. Environmental factors include climate change, pollution, resource use, water and marine resources, and biodiversity and ecosystems. Social factors include workforce and diversity, workers in the value chain, communities and affected people, and human rights.

Sustainability reporting in Europe occurs under the Corporate Sustainability Reporting Directive (CSRD), which commenced in January 2023. CSRD disclosures aim to inform investors about the risks companies are exposed to from climate change and other sustainability issues, and to give investors and other stakeholders information about the impacts of companies on people and the environment. This form of reporting is known as “double materiality”, requiring in-scope companies to report on how sustainability risks affect their business and about their own societal and environment impact.

The Corporate Sustainability Due Diligence Directive (CSDDD), which commenced in July 2024, goes further. It requires in-scope companies to have adequate governance and management systems.  They must take appropriate measures to identify and address adverse human rights and environmental impacts in their own operations. The operations of their subsidiaries and their global value chains must be addressed in the same manner. The directive also includes a requirement to adopt and put into effect a transition plan for climate change mitigation.

The costs of regulation

Almost as soon as they came into force, the costs of implementing CSRD and CSDDD came under intense scrutiny. Following Draghi’s report, European heads of state released a statement calling for “a simplification revolution, ensuring a clear, simple and smart regulatory framework for businesses and drastically reducing administrative, regulatory and reporting burdens, in particular for SMEs”.

Sustainability reporting and due diligence directly affect companies that are within scope and indirectly impact on SMEs and small mid-caps (SMCs) in their value chains. In February 2025, the EC issued the Simplification Omnibus package to reduce that impact. The first proposal in the package, known as “stop-the-clock”, has already been actioned and postpones some of the implementation dates for CSRD and CSDDD.

The second proposal, seeking to introduce substantive changes to CSRD and CSDDD, is still working its way through the European lawmaking processes. The plan is to change CSRD, including by revising the reporting standards to reduce the number of data points on which companies must report, and providing for limited (rather than reasonable) assurance. In CSDDD, the proposed changes include limiting the chain of activities covered by the due diligence obligations to direct business partners rather than the whole value chain, and making other changes to limit the trickle-down indirect costs on SMEs and SMCs.

How large is large?

A key part of the second Omnibus proposal is descoping CSRD by lifting the thresholds that determine whether a company is in scope. This raises the important question — equally relevant to Australia — of when an enterprise is considered large enough to be able to shoulder the cost of sustainability reporting without an unacceptable impact on competitiveness. The proposal aims to reduce the number of entities required to report under CSRD in Europe by 80 per cent. CSRD applies to companies based in Europe and some non-EU parent entities that generate significant revenue in the EU. The proposal is to limit CSRD reporting to “large” European undertakings with more than 1000 employees. An undertaking is treated as large if it has net turnover of more than €50m or a balance sheet total of €25m. Listed entities will no longer be automatically caught. The threshold for reporting by non-EU parent companies is proposed to increase from €150m in EU-generated net turnover to €450m.

Modelling by the EC predicts the change will reduce the number of CSRD reporting entities from 45,000 to around 10,000. It concludes that, “Overall, the combined cost savings resulting from the proposed changes to the CSRD scope” along with other aspects of the proposal, “have been estimated to amount to €4.4b per year”.

This compares with the climate reporting thresholds currently being finalised by the California Air Resources Board (CARB), which will apply to companies doing business in California. It requires annual disclosures of scope 1, 2 and (eventually) 3 greenhouse gas emissions by entities with annual revenue exceeding US$1b, and biennial disclosures of climate-related financial risk from entities with annual revenue above US$500m. CARB currently estimates the number of entities in scope at 2596 and 4160 respectively.

And in Australia?

Unlike Europe, Australia does not have a single framework for sustainability reporting. For now, the new mandatory sustainability reporting regime in Chapter 2M of the Corporations Act 2001 (Cth) only covers climate-related financial disclosure prepared on a single-materiality basis. Other forms of sustainability reporting are mandated by the Modern Slavery Act 2018 (Cth) and the Workplace Gender Equality Act 2012 (Cth).

When the Chapter 2M regime is fully implemented, it will apply to entities required to lodge audited financial reports with ASIC if they satisfy at least two out of three threshold tests — consolidated revenue of $50m, consolidated gross assets of $25m and 100 or more employees. That is orders of magnitude below the threshold in California or proposed for Europe, and there is no clear consensus on how many Australian entities will eventually be impacted. Modern slavery reporting in Australia kicks in when annual consolidated revenue reaches $100m. Reporting to the Workplace Gender Equality Agency applies to relevant entities with 100 or more employees.

The EC’s second Omnibus proposal — to drastically cut the number of companies subject to CSRD reporting and make related changes including to CSDDD — is still under consideration. It faces significant opposition. But if the Europeans go ahead, Australia risks being significantly out of step globally on reporting thresholds.

This article first appeared under the headline 'The pain threshold' in the October 2025 issue of Company Director magazine.