EU Commission proposes exempting 80 percent of companies from sustainability reporting rules

The European Commission has unveiled a sweeping rewrite of the European Green Deal's corporate rulebook, proposing to exempt roughly 80 percent of companies from mandatory sustainability reporting and to dilute supply chain due diligence requirements in what it calls a simplification drive. The omnibus package, presented on 26 February, targets four pillars of the EU's sustainable finance architecture: the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), the EU taxonomy for sustainable investments, and the Carbon Border Adjustment Mechanism (CBAM).

Under the proposed changes, the CSRD would apply only to companies with more than 1,000 employees and either at least €50 million in turnover or a balance sheet exceeding €25 million. That threshold would slash the number of businesses captured by the directive from an estimated 50,000 to around 10,000, according to an EU official briefed on the proposal. Implementation would also be delayed by two years. An earlier leaked draft had set the turnover threshold at €450 million, which would have narrowed the scope even further.

Double materiality survives but data burden halved

The Commission has retained the principle of double materiality, requiring companies to disclose both their exposure to climate risks and the impact of their activities on the environment, after an earlier draft seen by reporters had removed it. However, the number of data points companies must collect would be cut by half, and sector-specific reporting standards that were due to take effect in 2026 would be dropped entirely. The changes aim to address complaints that the reporting burden has become disproportionate, particularly for mid-sized firms.

The CSRD entered into force in January 2023 and began applying to large public-interest entities already subject to the Non-Financial Reporting Directive for the 2024 financial year. The scope was set to expand to all large companies in 2025 and to listed SMEs in 2026. The proposed delay and threshold increase would effectively pause that expansion, leaving the vast majority of European businesses outside the mandatory regime for the foreseeable future.

Supply chain due diligence narrowed to direct suppliers

The CSDDD, which was adopted in 2024 after contentious negotiations and requires companies to identify and address human rights and environmental harms in their value chains, would be significantly watered down. The proposal limits the obligation to direct suppliers only, known as tier one, rather than the full chain of activities. Monitoring frequency would drop from annual checks to once every five years. Implementation, originally phased in from 2027, would be postponed until the legislative process concludes.

Business groups had argued that the original text imposed unworkable obligations on companies with complex, multi-tiered supply chains, particularly in sectors such as textiles, automotive and electronics. Civil society organisations counter that limiting scrutiny to direct suppliers ignores where the most severe abuses, forced labour, deforestation, water pollution, typically occur.

Taxonomy voluntary for most, CBAM exemption for 90 percent of importers

The EU taxonomy, a classification system that defines which economic activities can be labelled environmentally sustainable, would become voluntary for up to 85 percent of companies. Currently, firms subject to the CSRD must report the share of their turnover, capital expenditure and operating expenditure aligned with the taxonomy. Making it optional for the majority of businesses removes a key transparency tool for investors trying to allocate capital to green activities.

On the Carbon Border Adjustment Mechanism, the Commission proposes exempting roughly 90 percent of importers of goods covered by the tax, sectors such as steel, aluminium, cement, electricity, hydrogen and fertilisers. Those importers account for only about 1 percent of embedded emissions in imported goods. The Commission is not proposing to delay CBAM's implementation; the definitive regime begins in 2026 after a transitional reporting phase that started in October 2023.

Commission claims €6.3 billion in savings and €50 billion in investment

The executive argues the package will save businesses around €6.3 billion per year in administrative costs and mobilise an additional €50 billion of public and private investment capacity. Valdis Dombrovskis, the commissioner responsible for simplification, insisted the Green Deal's targets remain intact. "We have been very clear that our simplification agenda is not deregulation, and we are not changing our Green Deal goals and targets," he said at the press conference. "The bill would help deliver the aims of the European Green Deal in a more efficient and less costly way."

Maria Luís Albuquerque, the commissioner for financial services, offered a semantic defence of the CSRD changes. "This does not mean that 80 percent of companies will no longer report, it just means they won't have to, which is a substantial difference," she said. The distinction matters politically: the Commission wants to frame the changes as giving companies choice rather than removing obligations, even though the practical effect is that most will stop reporting.

Parliament and NGOs accuse the Commission of dismantling its own agenda

The reaction from the European Parliament and environmental groups was immediate and scathing. Pascal Canfin, the French MEP who chairs the environment committee and belongs to the centrist Renew group, called it a contradictory day for European climate action. While welcoming the Clean Industrial Deal announced the same morning, he said the omnibus package "weakens certain foundations of the Green Deal." Preserving double materiality was a victory, he acknowledged, but "the drastic reduction of its scope weakens our ability to attract transition capital." On the CSDDD, he was blunter: "looks like massive deregulation."

Beate Beller, a campaigner at Global Witness, went further: "Commission President von der Leyen's attack on her own sustainability agenda is disgraceful." The criticism reflects a broader fear that the simplification agenda, launched in response to competitiveness concerns raised by the Draghi and Letta reports, is being used to unpick the regulatory architecture of the Green Deal before it has fully taken effect.

Legislative path and political arithmetic

The proposal now goes to the European Parliament and the Council of the EU for negotiation under the ordinary legislative procedure. Both institutions must agree on a final text before it becomes law. The Parliament's environment committee, which Canfin chairs, will play a central role in shaping the CSRD and CSDDD amendments, while the economic and monetary affairs committee will handle the taxonomy and CBAM elements. In the Council, member states are split: northern and eastern capitals have pushed for lighter burdens on business, while France, Spain and others have defended the Green Deal's integrity.

The Commission has signalled this is the first in a series of simplification packages. A second omnibus, expected later in 2025, will target energy, transport and agriculture legislation. The political test will be whether the Parliament's centre-right majority, which backed the original Green Deal laws, holds together to defend them, or whether the competitiveness narrative carries enough weight to pass the cuts.