Brussels retreats on ESG rules—80% of firms to skip mandatory reporting

The European Commission has unveiled sweeping changes to sustainability reporting requirements under its Omnibus Simplification Package, a move that would exempt around 80% of companies from mandatory disclosures under the Corporate Sustainability Reporting Directive (CSRD).

The proposals also push back implementation deadlines, aligning them with the Corporate Sustainability Due Diligence Directive (CSDDD) in what policymakers say is an effort to maintain EU competitiveness.

The package, aimed at easing regulatory pressure on businesses, has drawn mixed reactions from sustainability and finance professionals. While large multinationals will still be required to report, the proposals raise the CSRD thresholds to companies with over 1,000 employees and either €50 million in turnover or €25 million in assets, removing obligations for thousands of SMEs.

Additionally, the reporting timeline has been pushed back by two years to 2028.

Balancing Compliance and Competitiveness

The European Commission framed the move as a necessary response to rising energy costs, geopolitical instability, and diverging global sustainability policies. In a statement, the Commission said, “The ability of the Union to preserve and protect its values depends amongst other things on the capacity of its economy to adapt and compete in an unstable and sometimes hostile geopolitical context.”

For businesses that have already invested heavily in sustainability compliance, the announcement introduces uncertainty. Mark Lumsdon-Taylor, Partner & Head of Sustainability ESG at accountants MHA, acknowledged the potential relief for some firms but emphasized the risks posed by regulatory backtracking.

“Regulation has been fundamental to business action and their associated ESG approach in the mitigation of climate risk,” Lumsdon-Taylor said.

“A number of companies in the first wave of adoption have already published their CSRD reports and are now embedding the principles of the EU Taxonomy in their business. The proposed approach retains the principle of double materiality, and whilst only businesses with 1,000 staff and either €25 million balance sheet or €50 million turnover are mandated to report in the next two years—smaller businesses will nonetheless remain part of the value chain.”

Potential Legal and Market Ramifications

Although the revised directive has yet to be approved by the European Parliament and EU Council, it has already sparked concerns over its legal implications. Some member states, such as France and Ireland, have already transposed CSRD into national law. Reversing or modifying these frameworks may create further compliance complexities for companies operating across multiple jurisdictions.

“The legal ramifications surrounding any unwinding of such comprehensive frameworks could be material, and businesses need certainty for their ESG financial planning,” Lumsdon-Taylor added.

CSDDD and CBAMs Also Under Review

The Corporate Sustainability Due Diligence Directive (CSDDD), which mandates that companies monitor and mitigate environmental and human rights risks across their supply chains, is also set for revision.

The leaked draft suggests that supply chain due diligence obligations could be weakened, potentially limiting the requirement to direct suppliers rather than full value-chain assessments.

Additionally, the Carbon Border Adjustment Mechanism (CBAMs)—designed to impose carbon tariffs on imports—may see up to 90% of importers exempted from current rules.

What This Means for Business Leaders

For companies already in the process of implementing CSRD-compliant reporting, the changes raise questions about whether to scale back compliance programs. Sustainability expert James Hay of Pinsent Masons cautioned against an outright rollback of ESG commitments.

“Where companies may fall out of scope of regulatory requirements under new thresholds, it’s not as simple as just abandoning compliance activities,” Hay said. “A company should consider the expectations of investors or customers, potential litigation risks, and business value where mitigating sustainability risks can prevent financial loss.”

Lumsdon-Taylor reinforced this sentiment, noting that the responsibility still lies with actors within the entire value chain to ensure validated ESG impact. “Our work with business leaders and regulators indicates that the value gained from double materiality assessments has been significant from both a financial and operational perspective. Our view is that streamlining the CSRD framework in a proportionate and orderly manner should not put climate risk mitigation in jeopardy.”

The Road Ahead

With European elections looming, the fate of the Omnibus Simplification Package will depend on political negotiations in the European Parliament and among member states. The legislative process is still in its early stages, and amendments are likely.

For now, companies that remain within CSRD’s scope must proceed with their 2024 sustainability reporting obligations, while those at risk of falling out of scope will need to assess whether voluntary reporting remains strategically beneficial.