The moment that companies get long-awaited clarity on their sustainability reporting obligations within the European Union seems close. European institutions reached a provisional agreement on the final shape of the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), vastly reducing the number of requirements and of in-scope companies. The directives are part of the EU Omnibus, the package that the European Union Commission proposed to simplify corporate sustainability reporting. The European urge to uncomplicate things has also triggered modifications to the European Sustainability Reporting Standards (ESRS), which underpin CSRD, and the European Deforestation Regulation (EUDR), as well as an overhaul of the Sustainable Finance Disclosure Regulation (SFDR). This article gives an overview of the planned and agreed changes, outstanding issues, and timelines for all five.

CSRD and CSDDD: The (almost) final round

Ten months after the EU Omnibus was introduced, its final shape is within grasp. The European Union Council, which represents the heads of state of all EU member states, and the European Parliament staked out their negotiating positions in June and November, respectively. A trilogue, involving the Commission, Council, and Parliament, to reach a provisional agreement began on November 18th and concluded surprisingly quickly in the second week of December. The most important takeaways:

  • The number of companies covered by the CSRD and the CSDDD will shrink compared to the EU Omnibus proposal. The Council and Parliament got their way on a drastically higher CSDDD threshold, raising the bar from 1000 to 5000 employees and global net turnover from €450 million to €1.5 billion, reducing the number of companies in scope by 70 percent.
  • Regarding the new CSRD threshold, the Council position prevailed: the directive will only apply to companies with 1000 or more employees and €450 million or more net turnover, reducing the number of in-scope companies by approximately 85 percent, up from 80 percent in the Commission proposal. The Parliament aimed to raise the employee threshold to 1750, which would have increased the number by another five percentage points.
  • The change in CSRD scope also changes the number of companies that need to apply the EU Taxonomy Regulation, which classifies what corporate activities count as sustainable. The number of companies in scope for both roughly overlaps.
  • All parties agreed that small and medium-sized suppliers should be shielded from in-depth data requests by companies in-scope of CSRD. Exact details are not yet available, but the outcome appears to be a blend of Council and Parliament positions. Suppliers with 1,000 or fewer employees can refuse to provide information beyond the voluntary SME standards, an outcome roughly aligned with the Parliament's position, although it did not get the 1750 employees threshold it wanted.
  • As expected, the removal of EU-wide harmonization of civil liability, included in the CSDDD, and lower fines for non-compliance have passed. The maximum fine is now 3 percent of global net turnover.
  • The Parliament scored a few unequivocal victories, shaping the final version of the CSDDD. The provisional agreement scraps the mandatory transition plan altogether, as the Parliament pushed for. The compromise version preserves the risk-based approach to identifying and addressing adverse impacts in the value chain, which should begin with a “scoping” exercise. Companies may contact business partners with under 5000 employees only when public information is not available and when necessary to address salient issues.

Although close, it is not entirely a done deal yet. The provisional agreement will now go to a full vote in both the Parliament (scheduled for December 16th) and the Council. Once approved, the journey will be complete.

ESRS: cleaning house

The European Sustainability Reporting Standards (ESRS) provide detailed guidance on how companies must fulfill their CSRD reporting obligations. In early December, the European Financial Reporting Advisory Group (EFRAG) released its final version of the proposed revisions, following an initial draft in July. This final version includes:

  • A reduction of mandatory data points by 61 percent (when material), removal of all voluntary disclosures, and emphasis on the materiality of information principle.
  • A simplified Double Materiality Assessment that allows for a top-down approach to determine if an issue is material or not. IRO scoring should still be considered for borderline issues.
  • A substantial consolidation of standards. Standards are shorter, and there is more flexibility in how companies can present policies, actions, and targets.
  • Enhanced alignment with International Financial Reporting Standards (IFRS) S1 (e.g., on materiality and financial quantification) and IFRS S2 (e.g., on transition planning)
  • The preference for direct data collection in value chain mapping has been removed. 

No further significant changes to the ESRS are expected. However, the outcome of the trilogue will reduce the number of companies that need to apply the standards. Once the Commission has approved the new ESRS (expected in mid-2026), Council and Parliament have a brief period to reject it, but they cannot amend it. Without objections, the ESRS automatically becomes law.

EUDR: looking out for small players

The EU Deforestation Regulation (EUDR) is a landmark EU regulation that aims to ban the import and export of deforestation-linked commodities (such as wood, cocoa, palm oil, and coffee) and products containing them, unless companies can prove that the goods are deforestation-free. The EUDR is currently expected to come into force on December 30th, 2025.

Facing pushback against the high and costly burden of proof, especially for small companies, the EU Commission recently proposed to soften and simplify EUDR requirements. In November, the EU Council and the Parliament set their negotiating positions on the Commission's proposal.

The trilogue meetings began on December 4th. The parliament plans to vote on a provisional agreement on December 16th, followed by a Council vote. Below are the main proposed changes and outstanding questions.

  • The amendment creates micro/small enterprises (small, primary producers that place a product on the EU market) that only have to submit a simplified one-time declaration. Council and Parliament want this class to be based on activity instead of company size, so that small-scale activities of larger firms also qualify for a lighter due diligence regime.
  • The Commission proposes granting a six-month grace period. Council and Parliament want to postpone the EUDR for a whole year, meaning it would go into force for medium/large enterprises on December 30th, 2026, followed by micro/small operators a year later.
  • The amendment introduces downstream operators with limited due diligence responsibility. The first operator to import a product must submit a complete Due Diligence Statement (DDS). Operators that follow only need to ensure they have a valid DDS reference number. Council and Parliament want to scrap that residual requirement as well.
  • At the request of both Council and Parliament, the European Commission plans to perform a simplification review of the Regulation by 30 April 2026, assessing the EUDR’s impact and the administrative burden—particularly for micro/small operators—and outlining potential measures. So, additional amendments remain a possibility.

The Council and Parliament want moderate changes to the amendment. And since they largely agree, they will very likely get their way.

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SFDR 2.0: Starting from scratch

SFDR was meant to offer investors transparency by requiring financial institutions to disclose how the products they market incorporate sustainability from a risk consideration all the way to being a part of the investment strategy. However, asset managers and investors criticized SFDR’s complex requirements and its not always apparent alignment with associated pieces of financial market legislation. Then came the Omnibus, which impacts the breadth and depth of sustainability data available to financial institutions catering to public and private markets. This in turn led to the European Commission going back to the drawing board and, in late November, publishing its SFDR 2.0 proposal, containing substantial changes.

This is the first of many procedural steps during which the SFDR 2.0 could go through several changes. We do not expect SFDR 2.0 to enter into force by mid-2027, with application starting by the end of 2028. Below is a list of the main proposed changes.

  • SFDR 2.0 switches from a disclosure-focused regime to a regime focused on compliance with product-specific criteria.
  • The proposal introduces mandatory exclusion of harmful industries and activities across the portfolio, with the number of exclusions rising with the sustainable ambition level (ESG Basics, lowest; Sustainable, highest).
  • At least 70 percent of investments must also align with the stated product category objective below. If not, investments can’t make claims associated with the intended product category.  
    • ESG Basics: financial products that integrate ESG but do not fit into the other categories
    • Transition: products supporting a credible pathway toward sustainability
    • Sustainable: financial products pursuing a defined sustainability objective
  • SFDR 2.0 substantially reduces the number of product-specific disclosures and removes the Principal Adverse Impact (PAI) disclosure at the entity level. It also scraps financial advisors and portfolio managers from its scope and solely focuses on creators of financial products, such as banks and asset managers, and
  • Closed-end funds that predate SFDR 2.0 have the option to opt out.

Together, these changes have profound implications for the sustainable investment market. In the coming months, investor interest in the new product categories will become clearer. Given the expected scale of eligible investments in each category, market participants will need to start developing robust investment strategies that meet the new criteria.

Conclusion

For the CSRD and CSDDD, a lengthy finalization process is nearing its end, and companies should accelerate their preparations for them. Several other sustainability regulations are still in different stages of change. However, the direction is clear: the European Union is steadfast in its commitment to simplifying the rules and reducing the administrative burden on companies, while still increasing transparency and accountability.