On 26 February 2025, the European Commission (the EC) adopted a new package of proposals aimed at simplifying the EU’s ESG reporting and compliance requirements. The EC published two separate proposals for directives to make changes to the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CS3D) and the EU Taxonomy Regulation.
The proposed changes to ESG reporting and compliance requirements sit alongside a number of other related proposals, including a proposed regulation to amend the Carbon Border Adjustment Mechanism Regulation and InvestEU and European Fund for Strategic Investments (EFSI) Regulations. This alert focuses on the proposed changes to the CSRD, CS3D and the EU Taxonomy Regulation.
As discussed in our November 20204 article on the proposed omnibus simplification package, these proposals are part of a wider EC effort to ease administrative and compliance burdens on companies operating in the EU.
Key Elements of the New Proposals
- Delayed reporting deadlines. The proposals would delay the upcoming deadlines and implementation dates for the CSRD and CS3D. The first CSRD reports due in 2026 would be due in 2028 and the implementation date for the CS3D would be delayed to 2027, with the due diligence obligations thereunder commencing in 2028. Although the obligations under each directive will eventually apply, companies would have more time to prepare their reports, amend their contracts and implement necessary internal and external data gathering systems and controls.
- Higher CSRD reporting thresholds. The proposals increase the minimum employee threshold for large EU-established undertakings to 1000 employees and triple the net turnover threshold for non-EU undertakings with “substantial activity” in the EU. According to the EC’s explanatory memorandum, this would reduce the number of companies in scope of the CSRD by about 80%.
- Fewer CSRD reporting points. If implemented, the proposals would reduce the number of data points that a reporting entity would have to disclose under the CSRD reporting standards.
- Streamlining of the CS3D. The updates propose simplifying the CS3D due diligence requirements by extending the interval for periodic assessments by four years, streamlining stakeholder engagement and limiting in-depth due diligence to direct business partners in high-risk areas. Also, information requests to small and medium-sized enterprises (SMEs) and small midcap companies would be subject to only the CSRD voluntary sustainability reporting standards.
- Simplified taxonomy disclosure. The EC has launched a consultation on amendments to the Taxonomy Disclosures Delegated Act and the Taxonomy Climate and Environmental Delegated Acts, aiming to condense reporting templates by eliminating more than half of current data points, exempting companies from certain evaluations, and increasing the materiality threshold to exclude activities not exceeding 10% of a company’s turnover, capital expenditure or total assets.
When Will These Proposals Take Effect?
The proposals put forward by the EC are subject to consideration by the European Council and the European Parliament (EP). Consequently, the proposals may be amended to either further simplify the requirements or leave some of the current requirements unchanged. The timeline for implementing the package is unclear, but the EC is urging the EP and European Council to act on these proposals quickly, particularly the postponements to the CSRD reporting obligations in 2026, in order to provide legal clarity for businesses.
Proposed Changes to the CSRD
1. Revised Reporting Schedule
The current reporting deadlines for CSRD are as follows:
i. First wave: Large public-interest entities1 must publish the first reports under the CSRD in 2025 for the 2024 financial year.
ii. Second wave: All large undertakings and parent undertakings of large groups must report in 2026 for the 2025 financial year.
iii. Third wave: SMEs with securities listed in EU-regulated markets must report in 2027 for the 2026 financial year.
iv. Fourth wave: Non-EU companies that carry out “substantial activity” in the EU above certain thresholds must report in 2029 for the 2028 financial year.
The omnibus package proposes to postpone the application of the reporting requirements for large undertakings and parent undertakings of large groups and EU-listed SMEs by two years. Consequently, the second wave would have to first report in 2028 and the third wave would have to first report in 2029. Waves one and four will adhere to the current schedule.
2. Reduction in Scope of Reporting Companies
The CSRD currently applies to all large companies and SMEs listed on EU-regulated markets. The EC proposes that the CSRD should only apply to large undertakings with more than 1,000 employees (while maintaining the same net turnover and balance sheet total thresholds).
The proposal also seeks to increase the thresholds for when non-EU parent undertakings are subject to reporting requirements in 2029. The net turnover threshold would be raised from €150 million generated in the EU to €450 million. For consistency, for non-EU parent undertakings (i) the threshold for the EU branch limb of the test would also be raised from €40 million to €50 million while (ii) the threshold for the EU subsidiary is limited to large undertakings as defined in the Accounting Directive.
These changes would align the CSRD thresholds more closely with the CS3D, which also has a threshold of 1,000 employees and €450 million turnover.
3. Value Chain Reporting
For companies not in the scope of the CSRD (those with fewer than 1,000 employees assuming the proposals are adopted), a voluntary reporting standard based on the EFRAG Voluntary Sustainability Reporting Standard for Non-Listed SMEs (VSME) is proposed.
Under the CSRD, reporting entities must report on their value chain, including products, services, business relationships and supply chains. However, information requests to value chain partners with fewer than 1,000 employees would be limited to voluntary standards, reducing the burden on smaller partners. This means companies reporting under the CSRD can only request the level of information specified in these voluntary standards from value chain partners with fewer than 1,000 employees, except for additional sustainability information commonly shared within the sector.
4. Streamlined European Sustainability Reporting Standards (ESRS)
The EC proposed that six months after the proposal’s entry into force, a delegated act would streamline the ESRS by reducing the number of mandatory data points, prioritising quantitative data points over narrative texts and clarifying the line between mandatory and voluntary data points.
The EC also proposes abandoning plans to introduce sector-specific standards.
5. Removal of the Reasonable Assurance Standard
Under the CSRD, reporting entities are required to disclose their sustainability information along with the opinion of a statutory auditor or, if permitted by member states, an independent assurance service provider. Presently, the requirement is for limited assurance, but the CSRD indicates that this could potentially evolve into a requirement for the higher threshold of “reasonable assurance” under specific conditions.
The EC’s omnibus package seeks to remove the option for the EC to propose transitioning from a limited assurance to a reasonable assurance threshold.
Proposed Changes to the CS3D
1. Extended Preparation Time for Companies
The proposal seeks to postpone the deadline for member states to transpose the CS3D into national law by one year to 26 July 2027, and to delay the initial phase of applying sustainability due diligence requirements for the largest companies to 2028. In parallel, the timeline for the EC to issue guidelines would be brought forward, with the first guidelines released by 26 July 2026 rather than January 2027.
2. Simplified Due Diligence Requirements
To reduce unnecessary complexities and costs, the EC proposed extending the intervals between regular periodic assessments and updates of a company’s value chain from one year to every five years. Companies must still assess and update their due diligence measures whenever there are reasonable grounds to believe the measures are inadequate or ineffective. Additionally, proposed updates would streamline a company’s obligations for stakeholder engagement and generally limit in-depth due diligence to the company, its subsidiaries and, where related to their chains of activities, those of their direct business partners, in the areas where adverse impacts were identified to be most likely to occur and most severe. Finally, the requirement to terminate business relationships as a last resort would be removed.
3. Limited Information Requests to SMEs and Small Midcaps
The information that companies covered by CS3D could request from their SME and small midcap business partners (those with no more than 500 employees) would be limited to what is specified in the proposed CSRD voluntary sustainability reporting standards (VSME standard). Additional information could only be requested if it is necessary for mapping impacts not covered by the standards and that cannot be obtained through other reasonable means.
4. Deferring to National Civil Liability Regimes
Proposed updates would delete the harmonised EU conditions for civil liability and revoke the obligation for member states regarding representative actions by trade unions or NGOs. This would leave national law to define whether its civil liability provisions override otherwise applicable rules of the third country where the harm occurs. Additionally, the penalty regime would no longer be tied to a company’s net worldwide turnover. Instead, member states would have discretion to determine penalties, following the issuance of guidance by the EC.
5. Harmonized Climate Mitigation Transition Plans
The requirements for adopting transition plans for climate mitigation would align with the CSRD.
Key Proposed Changes to EU Taxonomy
The EC has published a consultation for proposed amendments to the Taxonomy Disclosures Delegated Act and the Taxonomy Climate and Environmental Delegated Acts. These amendments aim to simplify the reporting templates, potentially reducing the number of data points by nearly 70%. Additionally, the amendments would exempt companies from evaluating taxonomy eligibility and increase a materiality threshold for the evaluation of such activities, such as excluding activities that do not exceed 10% of a company’s total turnover, capital expenditure or total assets.
What Should Companies Do Next?
The EC’s proposals to simplify ESG reporting requirements represent a significant step toward reducing administrative burdens for companies operating in the EU. By delaying implementation dates, reducing the scope of reporting companies and streamlining reporting standards, the EC aims to create a more manageable and efficient reporting environment for businesses operating in the EU. The commission has acted in response to feedback from member states and key stakeholders regarding the significant obligations that are imposed by the CSRD, CS3D and EU Taxonomy Regulation. In addition, the EC appears to have considered diverging ESG reporting and compliance requirements across peer jurisdictions given the importance of economic growth and business competitiveness in the current narrative.
Overall, we expect these proposals to be welcomed by the business community, particularly non-EU corporations with significant operations in the EU where their first CSRD reports would be delayed by two years to 2028 or businesses that would not exceed the increased thresholds for reporting in 2029. These changes are expected to provide companies with the increased time and guidance to prepare for their reporting and compliance obligations. However, many EU and non-EU businesses have already invested a significant amount of time and resources into conducting their double materiality assessment in preparation for publishing their CSRD reports in 2026, as well as their due diligence obligations under the CS3D applying from 2027.
Given that the EC’s proposals remain subject to consideration by the EP and the European Council, businesses may not feel able to immediately cease all work in preparation for the current deadlines, even though only preparing the first CSRD report and instating CS3D procedures in 2028 is a realistic possibility. Some businesses may even seek to voluntarily publish their CSRD reports in 2026. However, we expect most businesses to take advantage of the potentially delayed timetable, and the costs incurred so far in preparation for a 2026 report should be regarded as early preparation for their 2028 reporting and due diligence obligations. Businesses should continue to monitor developments of EU ESG requirements amid the EC’s decision to adopt a flexible and fast-paced approach in this area.
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1 Public-interest entities are defined as undertakings that meet one of the following criteria: (i) governed by the law of a member state and have transferable securities admitted to trading on an EU regulated market; (ii) credit institutions; (iii) insurance undertakings; or (iv) designated by member states as public interest entities. Large companies are defined as companies that meet two of the three following thresholds: (i) €50 million net turnover; (ii) €25 million balance sheet total; or (iii) 250 employees.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.