A package of measures from the European Commission (EC) – an omnibus proposal – covering several EU directives reveals amendments to the Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD), alongside the Carbon Border Adjustment Mechanism (CBAM) and EU Taxonomy. 

While some sectors will welcome the news, others will not – particularly those businesses that have invested significantly in sustainability, including market services providers and consultancies. 

“While in most respects the fundamentals remain intact, the proposed changes to the CSRD represent a significant scaling-back of the ambition for sustainability reporting in the EU,” says Dr Nigel Sleigh-Johnson, ICAEW’s Director, Audit and Corporate Reporting. “We will continue to assess the complex implications of these proposals while we await further information.”

ICAEW Policy Director John Boulton adds: “The new European Commission that took office in December 2024 is focusing on boosting European competitiveness. While it remains committed to the European Green Deal, it has seen elements of the package as burdensome, particularly for entities at the smaller end of the scale.”

While the developments could alter the trajectory on corporate and financial reporting, in the meantime climate and nature-related risks continue to multiply, says Richard Spencer, ICAEW’s Director, Sustainability. “Irrespective of reporting requirements, taking steps now to identify, assess and manage these risks is just good business sense as it’s the only way to ensure strategies and investments are future-proofed and resilient against future shocks. ICAEW continues to encourage companies and finance institutions to take steps now to align with the Taskforce on Nature-related Financial Disclosures’ voluntary disclosure framework, to ensure they are prepared.”

CSRD

Changes to the CSRD include the scope of reporting requirements and the level of related assurance, as well as aspects relating to out-of-scope undertakings (the value chain cap). A drastic reduction in scope is proposed, which will see the definition of large companies being amended to companies that have more than 1,000 employees (from 250 employees) and either a turnover above €50m or a balance sheet total above €25m. This change would, according to the EC, take 80% of companies out of scope for CSRD and would also apply to credit institutions and insurance undertakings. Companies that still find themselves in scope under the revised thresholds will be expected to publish an individual sustainability statement. 

In addition to the change in scope, the effective date of mandatory reporting has been delayed for some. No changes have been made in respect of ‘wave 1’ reporters – public interest entities with more than 500 employees, For ‘wave 2’ reporters – those who were expected to report in 2026 on 2025 information – mandatory reporting has been postponed by two years, until 2028 (on 2027 information). A similar postponement of two years is proposed for ‘wave 3’ reporters, which will have the effect of dropping the need for a separate reporting standard for listed SMEs. 

There is no change to the ‘double materiality perspective’ of European Sustainability Reporting Standards (ESRS) – the standards that companies must report in accordance with under the Directive. Companies that remain in scope will therefore have to report about how sustainability risks and opportunities affect their business (financial materiality) as well as on their own impact on environmental, social and governance matters (impact materiality). 

However, the EC has committed to revising ESRS with the aim of substantially reducing the number of data points, clarifying certain provisions and improving consistency with other pieces of legislation. The requirement for the EC to adopt sector-specific standards is also to be withdrawn.

For non-EU companies with operations in the EU, while the net turnover thresholds that determine whether they are in scope of CSRD are set to increase, the expected separate reporting standards are not mentioned.

“We’re pleased that the EC intends to reconsider the scope of the mandatory reporting regime for both EU and non-EU companies and to allow most in-scope companies more time to prepare for sustainability reporting under the CSRD,” says Sleigh-Johnson. “This is a challenging endeavour and it is important to ensure that the demands on companies are proportionate and secure high-quality, trusted sustainability reporting.”

Out-of-scope companies and value chain cap

Under the proposals, companies outside of the scope of the amended CSRD will be able to report on a voluntary basis using the Voluntary Small and Medium-sized Entity (VSME) standard developed by the European Financial Reporting Advisory Group (EFRAG). 

Beyond what is included in the VSME standard, entities in scope of the CSRD will not be allowed to request information from out-of-scope companies in their value chain. The VSME standard will therefore act as a ‘shield’, limiting the information that out-of-scope companies will be required to provide to in-scope companies.

Assurers are also expected to be aware of this change and to respect it when taking on assurance engagements for larger entities in scope. 

“It’s very positive, in particular, that the EC now wants to streamline European reporting standards by reducing the number of data points and clarifying their provisions, and to limit the practical impact of the new regime on SMEs within the value chain of in-scope companies,” says Sleigh-Johnson. “We are also pleased to note an intention to further enhance interoperability of EU and international standards, something that ICAEW has long been calling for.”

Limited assurance guidelines and potential dropping of reasonable assurance requirements

The EC will issue ‘targeted assurance guidelines’ classifying necessary procedures for any sustainability assurance work, due before the EC adopts limited assurance standards. A requirement to adopt a reasonable assurance standard will potentially be dropped. 

“While the improved clarity is good, it is disappointing to note the much-reduced prospects for any transition from a ‘limited’ to a ‘reasonable’ assurance regime as this transition could add significantly to the confidence of users in the reliability of reported sustainability information,” says Sleigh-Johnson.

EU Taxonomy reporting obligations

EU Taxonomy reporting obligations will be limited to the largest companies, aligning with the scope of CSDDD. Other large companies within the future scope of CSRD can report voluntarily. 

Companies have the option of reporting on partially aligned activities with the EU Taxonomy. This, the EC says, is to encourage a gradual transition of activities over time, alongside the scaling up of transition finance. 

It introduces a financial materiality threshold for Taxonomy reporting, and simplifies the ‘do no significant harm’ criteria, which relates pollution prevention and control. 

Regarding the Green Asset Ratio KPI for banks, financial institutions will be able to exclude exposures relating to undertakings outside of the CSRD’s scope. 

CSDDD

The EC has proposed several critical changes to the CSDDD. Value chain due diligence will be limited to direct suppliers unless the company has “plausible information” about any issues with indirect partners. 

Companies also cannot request information from suppliers with fewer than 500 employees, outside of what’s included in voluntary sustainability reporting standards. Monitoring would be reduced in frequency from annually to once every five years. 

The proposals remove the obligation to put into effect a credible transition plan, and the definition of ‘stakeholder’ has been narrowed to those ‘directly’ affected by a company’s actions. This removes consumers, entities, national human rights and environmental institutions and civil society organisations. There is also no obligation to terminate a business relationship if a partner doesn’t pass due diligence checks. 

The EC proposed the removal of the EU-wide civil liability regime and would not be required to consider separate due diligence rules for the financial services sector. Member states would be restricted from introducing more stringent rules to tackle human rights and environmental abuse. The application of due diligence requirements for the largest companies will be postponed by one year, to 26 July 2028. Due diligence guidance is expected to be published on 26 July 2026.

CBAM

The proposals exempt small importers from CBAM obligations, through the introduction of a CBAM cumulative annual threshold of 50 tonnes per importer. The EC says that this will eliminate 90% of importers from the scope of CBAM obligations while still covering more than 99% emissions in scope. 

The rules for entities that remain in scope will be simplified, including the authorisation of CBAM declarants and the calculation of embedded emissions and reporting requirements. 

The EC will conduct a full review of the CBAM to assess the potential for it to be extended in the future to other Emissions Trading System sectors, downstream goods and indirect emissions. The EC will also examine how to help exporters of CBAM products at risk of carbon leakage. This will be followed by a legislative proposal in early 2026.

The omnibus proposals will be submitted to the European Parliament and Council for consideration and adoption. The EC has requested that it be treated as a priority. A draft act will then be adopted after public consultation.

“The proposed changes to CBAM appear to be a positive step,” says Ed Saltmarsh, Technical Manager, VAT and Customs at ICAEW. “They will provide much-needed relief to small importers from complex compliance requirements, while maintaining the environmental impact of the CBAM by ensuring it continues to cover more than 99% of in-scope emissions.”

The omnibus marks an early and widely anticipated act by the incoming European Commission to shore up European competitiveness and marks the closing of a chapter of business from the previous commission, says Boulton. “We now expect to see a concerted effort to examine means of delivering business growth in Europe, in the context of security pressures and trade challenges from the new Republican administration in the US.” 

The Commission has committed to deepening the European single market and work is commencing on a new savings and investment union as part of this. “Although the UK has been distanced from EU law developments for the past five years, with a growing security alliance and a commitment to talks on the Trade and Cooperation Agreement, we expect a warming relationship between the two,” says Boulton.

The UK is expected to consult shortly on its own plans for sustainability reporting through adoption of the international sustainability reporting standards IFRS S1 and IFRS S2.