The EU Grand Plan to Cut Red Tape

Key points

• In line with the recently released Competitiveness Compass, the European Commission has initiated its drive to cut red tape for businesses with the proposal of companion “Omnibus” packages of simplification measures that are designed to streamline and simplify rules on sustainable finance reporting, reduce reporting burdens, facilitate access to funding sources and encourage investment in the EU market.
• Negotiations and lobbying by a range of stakeholders will now ensue in Brussels as the European Parliament, and member state governments have the final say in passing, amending or rejecting these proposals. Until then, current rules remain in force.
• The proposals pertain most importantly to CSRD, CSDDD and CBAM and would mostly narrow scope to larger companies, extend implementation periods and ease administrative burden within a company’s supply chain.

On February 26, the European Commission released a series of key proposals and communications to reshape the European Union’s (EU) regulatory framework. Alongside the overall framework communication Clean Industrial Deal, the EU executive proposed two “omnibuses”—one for investment and one for sustainability. The former is relatively uncontroversial, aiming to boost public and private investment and simplifying bureaucracy linked to it. The latter is apt to prove quite controversial as it aims to simplify, some say dismantle, the hard-fought obligatory framework of environmental, social and governance (ESG) reporting by the private sector. Additionally, the Commission proposes to simplify the Carbon Border Adjustment Mechanism (CBAM). According to the Commission, this package of measures is intended to streamline and simplify rules on sustainable finance reporting, reduce reporting burdens, facilitate access to funding sources and encourage investment in the EU market, ultimately increasing competitiveness of EU businesses.

So, what does all this mean for businesses?

Sustainability Simplification Package

The Omnibus (EU “red tape simplification package”) has been a major topic of discussion in Brussels for some time. It was triggered by the Budapest Declaration of November 2024 through which the leaders of the EU member states instructed the Commission to make “concrete proposals on reducing reporting requirements by at least 25 % in the first half of 2025.” The Commission delivered by proposing a package that cuts in reporting requirements in the Corporate Sustainability Reporting Directive (CSRD), in the Corporate Sustainability Due Diligence Directive (CSDDD), and focuses CBAM only on the largest importers. Major changes to the EU Taxonomy, a classification system to establish definitions of “environmentally sustainable economic activities,” were seen as too controversial in the last days of internal Commission negotiations to make it into the final proposed package. After months of behind-the-scenes debates and public statements, what are the key proposed changes?

Corporate Sustainability Reporting Directive

The key proposed change to the CSRD is to narrow its scope, aligning it with the CSDDD. Only large companies with above 1,000 employees and either a turnover above 50 million or a balance sheet above 25 million would be required to report according to the European Sustainability Reporting Standards (ESRS), which will also be revised and simplified. Sector-specific standards requirement would be cancelled, and the possibility of moving from a requirement for limited assurance to a requirement for reasonable assurance would be removed. The value-chain cap would apply directly to the reporting company and protect all undertakings with up to 1,000 employees rather than just small and midsize enterprises as is currently the case. These changes would reduce the reporting burden and limit the trickle down of obligations on smaller companies.

Furthermore, instead of an obligation for the Commission to adopt standards for sustainability assurance by 2026, the Commission will issue targeted assurance guidelines by 2026. The proposal also allows companies with over 1,000 employees but a turnover below 450 million to voluntarily report on the Taxonomy. The Commission intends to craft a simplified voluntary standard for Companies no longer in scope of the CSRD and choose to report on sustainability issues on a voluntary basis.

The application of all reporting requirements would be postponed for companies that are due to report in 2026 and 2027 (“wave 2 and 3”). There is no postponement for companies that must report in 2025 for financial year 2024 (“wave 1”). The application timeline for non-EU ultimate parent companies would remain within the original timeline from 2029 (in respect of financial periods commencing on/after 1 January 2028), subject to the new proposed thresholds.

Corporate Sustainability Due Diligence Directive

The proposed changes to the CSDDD are inspired to an extent by the existing German Supply Chain Act (LkSG) and are multifaceted. Notably, the Commission proposes to:

• Delay the application—transposition deadlines for member states as well as application of due diligence obligations for businesses would shift by one year, i.e. transposition by July 2027, the first group of companies required to report in July 2028, etc. The Commission would have to present guidelines for implementation by July 2026.
• Abolish the CSDDD’s EU-wide civil liability for companies, looking instead to national laws to determine whether its civil liability provisions override applicable rules of the third country where the harm occurs; however, companies should not be overly penalized.
• Limit the tiers of supply chain required to report. A company would be required to report due diligence measures of its own operations, those of its subsidiaries and those of its direct business partners. The proposal would require full due diligence with respect to the value chain beyond direct business partners only in cases where the company has plausible information suggesting that adverse impacts have arisen or may arise.
• Lift the requirement to terminate business relationships. Companies would no longer be obliged to terminate their business relationship with suppliers as a last resort measure.
• Extend the intervals in which companies need to regularly monitor due diligence measures—from one to five years.
• Limit the affected “stakeholder” definition only to those that are adversely impacted directly.
• Introduce further considerations in enforcing the legislation. National authorities would consider gravity of infringement and severity of impact, as well as actions taken by the infringer, when considering penalties.
• The current obligation for in-scope companies to implement climate mitigation transition plans is to be removed. Companies would only be require to outline planned measures for meeting climate goals.

Carbon Border Adjustment Mechanism

The CBAM puts a price on the carbon emitted during the production of carbon intensive goods that are imported into the EU. The stated objective of CBAM is to encourage cleaner industrial production in non-EU countries. Its scope covers cement, aluminum, fertilizers, iron and steel, hydrogen and electricity. By the end of this year, a mandated CBAM review will decide whether to expand the scope of CBAM to other goods and sectors covered by the EU Emissions Trading System (EU ETS). In this package, the Commission proposes some changes to the functioning of CBAM, including:

• Increased de minimis threshold based on embedded emissions—companies whose imported products fall below a cumulative annual threshold of 50 tonnes per importer would be exempt. According to the Commission, 90% of importers would be exempt from reporting obligations, while 99% of emissions would continue to be in scope.
• Reporting by third parties allowed—authorized CBAM declarants would be able to delegate CBAM reporting to a third party but remain liable for all CBAM obligations. For example, consultancies could be commissioned with the reporting. Measures to simplify the procedure to grant importers the status of authorized CBAM declarants are also proposed, e.g. by making the consultation procedure optional.
• Expanded use of default values—declarants would be allowed to freely choose between actual embedded emissions and default values with a mark-up. The protection against the risk of carbon leakage would be ensured “by setting default values and proportionately designed mark-ups at appropriate levels.”
• Reduced burden to prove a carbon price paid in a third country—the CBAM regulation sets a high burden on the CBAM declarant for allowing a deduction for a carbon price paid in a third country. Under the proposal, the Commission may determine default carbon prices per country based on the average carbon price paid over a year. Any rebate or other form of compensation available in that country that would reduce the default carbon price would be considered.
• Delay of one year of the first CBAM payments—to give sufficient time for the first year of CBAM financial adjustment, declarants would be able to purchase CBAM certificates from February 2027 to cover the emissions embedded in the CBAM goods they will have imported during 2026.
• Exclusion of some downstream goods and manufacturing processes that are not covered by EU ETS.
• Simplified emissions calculations—to reduce burden on operators in third countries, emissions arising during the final production steps of certain aluminum and steel goods would be excluded from the boundaries of the calculation of emissions for these aluminum and steel goods. In addition, precursors produced in the EU, which are exported to third countries for the production of CBAM goods, would no longer need to be accounted for in the determination of the embedded emissions of CBAM goods when imported into the EU.

Next Steps

This proposed package now proceeds under the EU legislative process—the European Parliament and the Council (member state governments) need to sign off before any changes apply. January 1, 2026, is a key date for much of the existing legislation, such as the start of the CBAM financial adjustment and anchors the timeline for the legislative process to play out and for lobbying efforts. Many civil society organizations, number of left-leaning legislators and EU governments and businesses that have invested heavily in compliance or prefer imports subjected to carbon taxes will lobby against these changes. Others, including conservative political groupings and governments and certain businesses from around the world will be lobbying in favor of the proposed changes, or even push beyond the proposed changes.

This is just the beginning of a complex process with numerous stakeholders from across sectors. Engaging in this process will be key to ensure key interests are safeguarded, and to end up with a more manageable ESG framework rather than the complexities currently in place.