EU agrees on sustainability reporting and due diligence rules cutback

The European Union Council has formally adopted its position to scale back and simplify corporate sustainability reporting and due diligence requirements. The decision comes amid growing concerns about regulatory overreach and its impact on business competitiveness, particularly for smaller firms, reshaping the landscape of sustainability governance across the region.

Let's explore the cutback by the EU in detail. 

Background

The Council's move is part of the European Commission's 'Omnibus I' package, adopted in February 2025, which aims to streamline existing EU sustainability legislation. This package amends several cornerstone directives, including:

• The Corporate Sustainability Reporting Directive (CSRD)
• The Corporate Sustainability Due Diligence Directive (CSDDD)
• The Accounting Directive
• The Audit Directive

The reforms reflect mounting political pressure following the 2024 EU elections, where business concerns about compliance costs, administrative complexity, and the competitiveness implications of the EU Green Deal came to the fore.

Key changes to Sustainability Reporting (CSRD)

The Corporate Sustainability Reporting Directive (CSRD) saw significant revisions to its scope and requirements, including:

As a result of these changes, approximately 80% of companies previously in scope will now fall outside the reporting requirements. The inclusion of a review clause ensures future evaluation of whether ESG reporting drives private investment and supports competitiveness.

The Council’s decision to cap value chain data collection at direct (Tier 1) suppliers reflects a more pragmatic approach to due diligence, intended to reduce the cost and complexity of compliance.

Revisions to Due Diligence requirements (CSDDD)

The Corporate Sustainability Due Diligence Directive (CSDDD) also underwent substantial transformation. The Council’s position moves away from the original entity-based, full supply chain model toward a risk-based approach focused on direct business partners.

The scope reduction dramatically decreases the number of companies required to conduct mandatory due diligence. The obligation to adopt climate transition plans has been softened, requiring only a general outline of actions, not demonstrated execution, and the deadline pushed out by two years.

Additionally, the removal of a harmonized EU civil liability regime means companies now face a patchwork of enforcement approaches across member states, adding a layer of legal complexity and uncertainty.

Industry impact and private market implications

The Council’s changes may have far-reaching implications for investors, fund managers, and portfolio companies. With fewer companies subject to formal reporting and due diligence obligations, the regulatory burden for many firms, particularly mid-market private companies, has significantly eased.

However, the divergent implementation by member states and the shift to risk-based frameworks require investors to stay vigilant. Legal, compliance, and ESG teams will need to:

• Reassess internal due diligence frameworks and supplier oversight
  
  
• Adjust investment documentation and ESG disclosures to reflect new materiality thresholds
  
  
• Monitor jurisdiction-specific transposition timelines and liability regimes

The softening of climate-related requirements may also impact how sustainability-linked financial products are structured, rated, or marketed across the EU.

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