The last few years has seen a noticeable upshift in sustainability-related regulation in the EU, with a focus on increasing accountability and transparency in the private sector. The headline act has been the Corporate Sustainability Reporting Directive (CSRD), replacing the existing Non-Financial Reporting Directive (NFRD) and anticipated to apply to around 50,000 companies (compared to just 11,000 under the NFRD). Closely interlinked with the CSRD is the EU Taxonomy, a classification system that establishes criteria for determining whether an economic activity is environmentally sustainable. Companies must disclose information such as their turnover, capital expenses, and operational expenses in relation to activities that are considered environmentally sustainable according to the EU Taxonomy. Finally, the CSDDD (Corporate Sustainability Due Diligence Directive) requires companies to conduct environmental and social due diligence across their value chain and identify, prevent and mitigate any negative impacts associated with their business activities. 

However, in recent months there has been a steady pushback towards these legislative items. The Draghi Report, published in September 2024 and focused on the future of European competitiveness, suggested that an annual investment equivalent to 5% of the continent’s GDP was needed to keep pace with the US and China, with specific investments needed in innovation, energy and defense.  On the back of this, Germany and France have led the way in calling for delays to the implementation timelines and simplification of the reporting requirements to protect and enhance the competitiveness of companies. Ursula von der Leyen, the President of the European Commission, had already indicated in November last year that the EU was considering a consolidation of the CSRD, EU Taxonomy and CSDDD into one omnibus regulation to reduce the reporting burden. The initial formalized proposal is expected for release on February 26.

Alongside, on January 29 the EU also released its ‘Competitive Compass’, a new strategic framework outlining the continent’s proposed response to the competitiveness challenges highlighted in the Draghi Report. Simplification of regulations is one of the five key objectives, alongside reducing reliance on external parties for critical materials and technologies, advocating for clean trade initiatives, investing in emerging technologies such as AI and biotechnology, and focusing on decarbonization via the Clean Industrial Deal.

So what do these recent adjustments and announcements mean for companies in the EU?

This article is written by Nathan Cable ([email protected]).  Nathan is part of RSM Netherlands Business Consulting Services, specifically focusing on Sustainability and Strategy.

What do we know?

According to the official announcement by the Commission, a new definition for mid-cap companies will soon be introduced. This new category will include businesses that are larger than SMEs but smaller than large enterprises1. As a result, thousands of companies across the EU will benefit from regulatory simplifications similar to those available to SMEs. Mid-cap criteria are reported (but not confirmed) to be between 250 and 1,500 employees, revenue not exceeding 1.5 billion euros or balance sheet assets not exceeding 2 billion euros). The reporting and administrative burden will be reduced by at least 25% for all companies and by at least 35% for the new mid-cap category and SMEs. The commission estimates that these adjustments will cut 37.5 billion euros ($39.0 billion) of costs per year.

What is still uncertain?

Implementation Timeline 

While the French and German governments, along with the EU Parliament’s largest group (EPP), have proposed a two-year postponement for implementation of CSRD, it could be either longer or shorter as no official confirmation has been included in the Commission’s communications so far. 

ESRS, datapunten en dubbele materialiteit

Beyond reporting and administrative obligations, the Commission aims to reduce compliance costs, raising questions about the future of assurance requirements, which represent a significant expense under CSRD. As it stands, limited assurance applies until 2028, after which EU-wide reasonable assurance will take effect on October 1, 2028. One possible cost-cutting measure could be maintaining limited assurance for mid-cap entities indefinitely, but there has been no official confirmation on this yet. 

  • Retaining double materiality, 
  • Limiting it to impact or financial materiality, or 
  • Shifting CSRD compliance toward basic data collection and disclosure without a materiality assessment. 

Assurance Requirements 

Beyond reporting and administrative obligations, the Commission aims to reduce compliance costs, raising questions about the future of assurance requirements, which represent a significant expense under CSRD. As it stands, limited assurance applies until 2028, after which EU-wide reasonable assurance will take effect on October 1, 2028. One possible cost-cutting measure could be maintaining limited assurance for mid-cap entities indefinitely, but there has been no official confirmation on this yet. 

Update: According to reports released on 6 February, the watering down of CSRD and CSDDD requirements may be even more extreme than reported previously, with a rumored full alignment of CSRD and CSDDD qualifying criteria and a pivot towards financial materiality assessment only. There is also a possibility that the omnibus proposal may be delayed into March. Given the dynamic nature of the situation the uncertainty for companies and stakeholders is likely to continue for a while longer.

What has been the response?

There has been significant pushback and opposition to the proposed changes, including:

On the flip side, some financial institutions and companies have voiced opposition to the regulations even before recent developments . A report from Yahoo quotes Adam Jacobs-Dean, global head of markets at AIMA, whose members oversee roughly $4 trillion of combined assets:

““It’s creating an enormous burden on firms that really don’t have the sort of environmental or social footprint that a manufacturing company might … and some of them won’t even have European investors or clients … so who is the reporting for?”

Similarly, the Financial Times reported ExxonMobil Europe president Philippe Ducom said “very little” of the €30bn it had earmarked for investment in technologies, such as hydrogen and carbon capture, would come to Europe as a result of its “frivolous, excessive and expensive regulation”. “A lot of what Europe is doing is trying to do the right thing but doing it the wrong way”.

At a minimum, these proposed changes are causing headaches for companies, the vast majority of which have already invested significant resources into preparing for CSRD compliance and, at this point, find themselves 

Forward Thinking 

In the first announcement of the Omnibus Simplification Initiative, the EU Commission President Ursula von der Leyen has expressed support for “reducing the bureaucratic burden on industries” but emphasized that “the good content of the regulations will remain unchanged.” This suggests that while reporting obligations may be streamlined, core regulatory requirements are likely to stay intact. 

Looking at historical precedents, expectations around regulatory simplifications can be uncertain and complex. For example, during discussions on postponing the EU Deforestation Regulation, the European Parliament proposed a significant reduction in content, but the Council ultimately upheld the regulation in full only with one year implementation delay.  

Regardless of regulatory constraints, companies should continue embracing sustainability and look to realize the opportunities for value creation and growth. Additional benefits and positive elements include:

  • ESG targets, policies, action plans and metrics are the foundation of a robust and mature sustainability strategy regardless of any regulatory oversight, and companies should embrace this framework to help build a more mature sustainability approach
  • Investors are increasingly looking to allocate capital towards companies with proven ESG credentials. A recent survey indicates that “50% of investors say that it is very or extremely important that companies change the way they create, deliver and capture value in response to climate change … Moreover, 71% of investors agree that companies should incorporate ESG/sustainability directly into their corporate strategy … (68%) agree to some extent that companies should make expenditures that address ESG/sustainability issues relevant to their business, even if it reduces short-term profitability”
  • Numerous studies are showing how companies with sustainability credentials and transparency achieve higher rates of talent attraction and retention
  • Many companies who are likely to fall within the new mid-cap range are likely to be suppliers to large-scale organizations with ambitious sustainability ambitions and targets that reach into their value chains. Mid-cap companies which can match these ambitions, provide accurate data and offer opportunities for sustainability partnerships are likely to be favored over those who cannot.  
  • For consumer-facing companies, spending trends show that all generations are increasingly willing to spend more for sustainable products, with particularly large increases amongst younger groups.
  • Previous research indicates that public companies who combined high levels of sustainability, innovation and trust outperformed industry peers with 3.1% higher profits and greater returns to shareholders.

All of the above will contribute towards increased competitiveness, which of course is the overall message behind the new EU Competitiveness Compass. The framework, while only just introduced, offers several potential exciting opportunities for companies, including:

  • A central focus on decarbonization via the Clean Industrial Deal and Affordable Energy Action Plan
  • Increased mobilization of capital for innovation and sustainability-focused projects
  • A focus on talent attraction and retention through the Union of Skills initiative
  • Trade expansion and increased market access for companies with a global footprint

Overall, we expect the upward trajectory for private sector sustainability in the EU to remain in place over the coming years, and that companies who fail to meet compliance requirements or embrace opportunities risk being left behind by more innovative and proactive companies in this space.

RSM is a thought leader in the field of Sustainability consulting. We offer frequent insights through training and sharing of thought leadership based on a detailed knowledge of industry developments and practical applications in working with our customers. If you want to know more, please contact one of our consultants.