European Commission Proposes Key Amendments to ESG Reporting and Due Diligence Regulations

Revamping ESG: EU’s Simplified Reporting and Due Diligence Proposals

On February 26, 2025, the European Commission introduced a series of amendments aimed at refining and simplifying the ESG (Environmental, Social, and Governance) reporting and due diligence requirements under the Corporate Sustainability Reporting Directive (CSRD), the Taxonomy Regulation, and the Corporate Sustainability Due Diligence (CS3D) directive. These proposed changes are part of a broader strategy addressing concerns over EU competitiveness to reduce the administrative burden on businesses and to improve the practical implementation of sustainability regulations.

Overview of Proposed Measures

The Commission’s proposal includes three primary measures that will reshape the current ESG landscape. The first is directive and it is aimed at amending the substantive requirements of the CSRD, Taxonomy Regulation, and CS3D, referred to as the “substantive directive.” This will provide significant updates to the reporting requirements and due diligence obligations of companies. The second measure, known as the “delay directive,” seeks to postpone the application of certain reporting and due diligence obligations under CSRD and CS3D, offering companies additional time to prepare for compliance. Lastly, the Commission has introduced a proposed delegated act that would modify the Taxonomy Regulation’s reporting obligations, particularly in terms of scope and the level of detail required.

Alongside these proposals, the Commission has committed to revising the European Sustainability Reporting Standards (ESRS) under CSRD. These revisions are designed to reduce the number of mandatory data points, clarify existing ambiguities, and enhance alignment with other EU regulations. The changes to the ESRS are expected to be adopted within six months of the substantive directive’s entry into force.

Legislative Process and Timeline

For the substantive and delay directives, the proposals now enter the ordinary EU legislative process, which involves further negotiation and potential amendments by the European Parliament and the Council of the European Union. The substantive directive, being more complex, is expected to face lengthy negotiations and may be adopted by late 2025 or early 2026, with transposition into national law taking place within 12 months after adoption. In contrast, the delay directive is anticipated to be adopted more quickly, likely within three to six months, with transposition expected in 2025.
The proposed Taxonomy delegated act, which is currently open for public consultation until March 26, 2025, is expected to be adopted by the Commission by the second quarter of 2025.

Key Changes to CSRD

The proposed changes to the CSRD are aimed at reducing the reporting burden on smaller companies while simplifying the requirements for those that remain subject to the directive. The Commission has proposed excluding most small and medium-sized enterprises (SMEs) from reporting obligations, as well as raising the thresholds for large companies required to report. Under the new proposals, only large companies with at least 1,000 employees and a turnover of €50 million or more (or assets exceeding €25 million) will be required to comply with CSRD reporting requirements.

For companies that remain subject to CSRD, the timeline for initial reporting would be delayed by two years, with the first reports expected in 2028 for financial years starting on or after January 1, 2027. Similarly, non-EU parent companies with significant activities in the EU would also face changes. The reporting threshold for non-EU parent companies would be raised from €150 million to €450 million in EU turnover, although the reporting timeline for these companies would not change.

Another significant shift concerns the principle of “double materiality.” The Commission has confirmed that companies will still need to report on both the sustainability risks they face and their impact on the environment and society. However, clearer guidance will be provided to ensure that only material information is disclosed, streamlining the reporting process and reducing complexity.

In terms of reporting on the value chain, the Commission has proposed reducing the burden on companies by limiting the information they can request from suppliers with fewer than 1,000 employees. This will ease the reporting requirements for smaller businesses that form part of a company’s supply chain.
Moreover, the requirement for companies to secure limited assurance over their CSRD reports will remain, but the Commission has proposed removing the deadline for transitioning to reasonable assurance, simplifying the reporting process for companies.

Adjustments to the Taxonomy Regulation

While the Commission has not proposed any fundamental changes to the Taxonomy Regulation itself, the scope of the regulation will be indirectly affected by the CSRD amendments. As the CSRD thresholds are raised, fewer companies will be required to report under the Taxonomy Regulation. Additionally, for the large companies that remain subject to Taxonomy reporting, the Commission has introduced a significant change—Taxonomy reporting will no longer be mandatory for companies with turnover below €450 million. These companies will have the option to “opt in” to Taxonomy reporting if they choose to claim that their activities align with the EU Taxonomy for sustainable activities.

For companies that opt in, the reporting requirements will be lighter. Companies will only need to report the Taxonomy alignment of their turnover and capital expenditure (CapEx), with operating expenditure (OpEx) becoming optional. Furthermore, these companies will also be allowed to report partial alignment with the Taxonomy.

Proposed Amendments to the Taxonomy Delegated Act

The proposed amendments to the Taxonomy Delegated Act are set to significantly simplify the reporting process. Key changes include the introduction of “de minimis thresholds”, meaning that companies will not need to assess Taxonomy eligibility for activities that represent less than 10% of their total turnover, capital expenditure, or operating expenditure. This will reduce the reporting burden for companies with smaller-scale activities.

Additionally, the Commission has proposed simplifying the reporting templates, reducing the required data points by nearly 70% for non-financial undertakings and 90% for credit institutions. The new, streamlined templates will focus on decision-useful information, removing certain complex and detailed requirements, such as reporting on activities that do not qualify for Taxonomy alignment and providing detailed information on the “do no significant harm” (DNSH) criteria.

The Commission also acknowledges the challenges companies face in complying with the DNSH criteria, particularly for activities that fall under the environmental objective of “Pollution prevention and control.” To address these concerns, the Commission has proposed clarifications to make the DNSH criteria easier to apply, with further reviews planned to simplify these rules across other environmental objectives.

Changes to CS3D Due Diligence Obligations

The CS3D directive, which mandates corporate due diligence to address adverse human rights and environmental impacts within supply chains, has also been subject to proposed changes. One of the key amendments is the proposed delay in the timeline for certain companies to begin reporting under CS3D. For instance, the application of CS3D to EU companies with over 3,000 employees and €0.9 billion in turnover will be postponed to 2028, with reporting expected in 2030. The Commission has also proposed reducing the scope of due diligence obligations regarding indirect business partners, particularly for companies that deal with smaller suppliers.

Additionally, the proposed amendments offer more flexibility in how companies handle adverse impacts within their supply chains. Companies will no longer be required to conduct in-depth assessments for indirect business partners unless there is “plausible information” indicating potential issues, which will make the due diligence process more manageable. However, companies will still be required to ensure that their direct business partners enforce compliance with the company’s code of conduct.

Impact on Stakeholder Engagement and Termination of Business Relationships

Under the revised CS3D proposals, the Commission has also sought to make stakeholder engagement more proportional. Companies will be required to engage with fewer stakeholders, limiting engagement to employees, subsidiaries, business partners, and affected communities. Engagement will not be required with broader stakeholders like consumers or civil society organizations. The scope of engagement will also be restricted to specific stages of the due diligence process, reducing the burden on companies.

The rules surrounding the termination of business relationships have also been modified. Companies will no longer be obligated to terminate relationships immediately when adverse impacts cannot be mitigated, but will instead be required to refrain from renewing or extending relationships and to adopt preventive measures if possible.

In conclusion, the European Commission’s proposed amendments to the CSRD, Taxonomy Regulation, and CS3D reflect a concerted effort to streamline and simplify the ESG regulatory landscape. These changes are designed to ease the reporting and due diligence burden on companies, particularly smaller enterprises, while ensuring that the core principles of sustainability and transparency remain intact. As the legislative process moves forward, businesses should closely monitor these developments to assess how the changes will impact their ESG strategies and reporting obligations.