EU Council Scales Back Sustainability Reporting Rules

In a landmark move that reshapes the trajectory of corporate sustainability regulations in Europe, the European Union Council has officially adopted a negotiating position that dramatically reduces the scope and burden of sustainability reporting and due diligence requirements. The changes exceed even the deregulatory ambitions laid out in the European Commission’s earlier Omnibus proposal, signaling a major shift in how the EU approaches environmental, social, and governance (ESG) obligations for businesses.

The revised position focuses on amending two key legislative frameworks: the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). By adjusting thresholds and scaling back requirements, the Council aims to alleviate compliance pressures for smaller and mid-sized companies while keeping ESG expectations intact for the largest firms operating within the bloc.

According to the Council, the goal of this strategic recalibration is to create a more favorable business climate across the EU by simplifying regulations, reducing red tape, and enabling businesses to focus on growth and innovation. “Today we delivered on our promise to simplify EU laws. We are taking a decisive step towards our common goal to create a more favorable business environment to help our companies grow, innovate, and create quality jobs,” said Adam Szłapka, Minister for the European Union of Poland.

One of the most significant aspects of the Council’s proposal is the further narrowing of the CSRD scope. While the European Commission’s February proposal had already raised the employee threshold from 250 to 1,000, the Council added an additional requirement of €450 million in net turnover. This new dual threshold effectively removes approximately 80% of currently covered firms from the directive’s scope, relieving them from the obligation to provide detailed sustainability disclosures. The Council justified this move by emphasizing the disproportionate administrative and financial burdens smaller firms face in meeting complex reporting standards.

In a nod to future policy flexibility, the Council included a review clause that mandates a future assessment of whether sustainability disclosures have proven effective in mobilizing private investment and enhancing EU competitiveness. This clause also leaves open the possibility of a “simplified reporting regime” in the event of a future expansion of the CSRD’s scope.

Equally transformative are the changes proposed to the CSDDD. While the Commission had not originally proposed changes to its scope, the Council introduced strict applicability thresholds, limiting its obligations to companies with at least 5,000 employees and €1.5 billion in turnover. The Council justified this decision by stating that only large companies possess the scale and resources necessary to effectively manage and implement due diligence processes. These businesses are also believed to exert the most influence over their global value chains, making them the most impactful actors for sustainability outcomes.

The Council’s approach also marks a shift in methodology—from an entity-based model to a risk-based one. Instead of requiring full supply chain mapping, the new risk-based approach allows companies to conduct scoping exercises using reasonably available information. Under this model, due diligence responsibilities would largely be confined to direct, first-tier (tier 1) partners. Deeper supply chain investigations would only be necessary if there is concrete evidence indicating elevated risks further down the chain. This redefinition could dramatically reduce compliance complexity for many firms, particularly those with sprawling international supplier networks.

Changes were also made to the requirements for corporate climate transition plans. Under the Council’s new position, companies would no longer need to prove execution of such plans but would instead be required to outline implementing actions. Furthermore, the obligation to adopt these plans has been delayed by two years, and supervisory authorities will now play a more active role in advising companies on how to design and implement them effectively.

In terms of legal liabilities, the Council upheld the Commission’s earlier proposal to abandon the introduction of an EU-harmonized civil liability regime. This means that decisions on liability frameworks will remain at the discretion of individual member states, allowing for continued national sovereignty over enforcement.

Additionally, the Council agreed to extend the transposition deadline for the CSDDD by one year, pushing the implementation date to July 26, 2028. This extension provides national governments and affected companies more time to prepare for the changes and align internal systems with the new risk-based model.

The Council’s position now sets the stage for upcoming trilogue negotiations with the European Parliament. Notably, the Parliament is also considering more modest revisions to these directives, indicating a possible alignment between the two bodies. If these changes are adopted, they will mark a definitive shift in the EU’s sustainability regulatory framework, emphasizing proportionality, feasibility, and business-friendliness over comprehensive oversight for all.

While critics may argue that these rollbacks risk undermining the EU’s climate and sustainability goals, the Council insists that the revised rules preserve core ESG principles for major corporations, which are best positioned to lead by example. The overarching narrative, however, is one of recalibration: maintaining ambitious sustainability aims while reducing burdens on smaller firms to promote economic resilience and competitiveness across the Union.