In a surprising regulatory pivot, European Union (EU) countries have given final approval to scale back current corporate sustainability requirements, narrowing the scope of upcoming sustainability reporting and supply chain due diligence laws. The decision now means that far fewer companies will be legally obliged to report on environmental and social impacts, including climate-related and human rights-related risks, within their supply chain. For businesses operating in the EU (including UK- or US-based firms with European operations), this policy shift could significantly adjust compliance plans.
What’s changed?
European lawmakers have raised the size thresholds for companies that must comply with two landmark sustainability initiatives, effectively exempting many mid-sized firms. Notable changes include:
1. Sustainability Reporting (CSRD)
Fewer companies will need to file detailed sustainability reports under the Corporate Sustainability Reporting Directive (CSRD). The reporting mandate now covers only firms with more than 1,000 employees and €450 million in annual net turnover, again including non-EU companies with at least €450M in EU turnover. With the previous threshold at 250 employees, this change exempts roughly 90% of companies that would have been subject to reporting under the old rules. Many small and medium enterprises (SMEs) and mid-cap companies are effectively carved out, although they can continue to voluntarily report in accordance with the CSRD, or opt into simplified reporting standards for smaller firms (the EU’s “voluntary sustainability reporting” framework for SMEs).
2. Supply Chain Due Diligence (CSDDD)
The Corporate Sustainability Due Diligence Directive (CSDDD) now applies only to the largest companies, those with more than 5,000 employees and €1.5 billion in annual turnover (including non-EU companies with over €1.5B in EU revenue). This is a far higher bar than the original 1,000-employee threshold, removing the vast majority of companies from the law’s initial scope.
The deadline for compliance has been pushed by roughly two years, to July 2029. Requirements for firms to adopt climate transition plans have been dropped, and an EU-wide liability regime was eliminated, meaning enforcement will be implemented by individual nations in line with local laws, rather than at an EU-level. Maximum fines are now capped at 3% of a company’s global turnover for violations, lower than some earlier proposals.
Why the rollback?
EU officials frame the Omnibus simplification package as a way to boost European competitiveness by reducing onerous compliance burdens. Many industries, and some foreign governments, had argued that stringent ESG rules would strain companies and put European businesses at a disadvantage globally. The approved changes reflect a compromise: streamlining regulations to address these concerns. For example, the United States and other trading partners lobbied against the original EU due diligence rules, fearing impacts on critical supply chains like energy. European regulators responded by scaling down the requirements, insisting that “simpler, more targeted and more proportionate rules” will help companies remain competitive.
At the same time, loosening these rules could reduce transparency and the urgency for companies to address long-term sustainability risks and opportunities. With far fewer companies reporting on ESG performance or monitoring suppliers, it could become harder to identify truly sustainable businesses and supply chains.
“Despite this change, the expectations of investors, consumers, and business partners haven’t gone away. If you have operations in Europe, whether you’re based in the US, Great Britain, or elsewhere, you should view this as a chance to refine your sustainability data collection and reporting processes, not a free pass to ignore them. Use this time to improve your ESG reporting and align with international standards, because pressure for credible sustainability information will only increase.” - Shanayia Munoz, ESG & Sustainability Reporting Lead
Next steps
In the wake of this policy change, the best approach is to stay informed and proactive.
“Many small and mid-sized companies will breathe a sigh of relief at these scaled-back requirements, but it’s not a signal to step away from responsible sourcing. The largest firms still face legal obligations to police their supply chains for environmental and human rights issues, and they will likely continue to push expectations down to their suppliers and business partners. Despite the rollback, companies of all sizes should continue strengthening supply chain due diligence as the long-term business and supply chain risks unaddressed ESG issues remain.” - Kimberly Rodriguez, Sustainable Supply Chains Lead
This means ensuring internal systems can meet higher reporting requirements when needed, as part of a company’s long-term strategy, engaging with industry standards and global best practices, and remaining vigilant about critical ESG risks across the business.
If you need help understanding how these regulatory changes affect your organization or guidance on navigating the new ESG and CSRD regulations, our team is here to support you. Contact us today.
