The European Commission has released its much-awaited package of proposed simplification measures on supply chain regulation, including two draft amending directives on sustainability reporting. Will this increase efficiencies and help achieve the competitiveness required for the EU in these drastically changing times while at the same time promoting the sustainability goals the EU has set itself?
The fate of sustainability reporting in the EU
There has been much speculation over the past few months as to the fate of the Corporate Sustainability Reporting Directive 2022/2464 (CSRD) and the Corporate Sustainability Due Diligence Directive 2024/1790 (CSDDD) in the face of criticisms focusing on burgeoning bureaucracy, burdensome reporting and overlapping supply chain due diligence requirements on companies operating in the European market. Here, we explore the main provisions of the proposed Simplification Package, its potential impact on EU corporate sustainability reporting requirements and how it could influence competitiveness in the context of European Union Environmental, Social and Governance (ESG) policies and rapidly changing geopolitics.
Managing sustainability in supply chains
Over the past few years, the European Commission has progressively put forward sustainability laws as part of the EU Green Deal, supplementing them with guidance documents and implementing legislation. Two key elements of the EU Green Deal are the CSRD and the CSDDD.
Under the CSRD, in-scope entities must disclose detailed environmental and social sustainability information through changes to the Accounting Directive, adding protocols for mandatory reporting on non-financial information on a ‘double materiality’ basis. The information on ESG impacts gathered by companies through the CSDDD, assessing sustainability-related risks across their entire value chain, would be used to feed into that disclosure and reporting.
In some cases, there has been criticism of the haste in passing new legislation without having the necessary supporting administrative infrastructure in place. In others, overlapping data management and reporting requirements have been regarded as burdensome for both EU and non-EU companies, compounded by the lack of sufficient guidance and the demands of emerging political and economic forces.
With the competing pressures of sustainability, competitiveness and geopolitics weighing heavily on markets, the European Commission has been tasked with addressing the impact of environmental and social regulations and standards,1 starting with simplifying and reducing the administrative burden of the reporting and due diligence obligations of the CSRD and CSDDD.2 The outcome is a package of proposals, including an amending directive for the CSRD and CSDDD, targeting environmental and social due diligence, transparency and impact reporting. The Simplification Package is aimed at “fostering economic prosperity, resilience, and security”, while also maintaining the objectives of the European Green Deal and the Sustainable Finance Action Plan.3
How will the Simplification Package change supply chain diligence and reporting?
The Simplification Package proposes three significant changes to the CSRD: timing, scope and standards. These changes aim to align with other requirements, such as the CSDDD, and create efficiencies designed to enhance EU competitiveness.
- Reporting for companies required to report in 2026 and 2027 (based on the CSRD thresholds for different categories of undertaking) has been postponed until 2028 and 2029, respectively.
- The scope of CSRD reporting is reduced to better align with CSDDD, to avoid the need for multiple assessments and inconsistent data. The revised thresholds will now be as follows: (i) undertakings with more than 1,000 employees (i.e., large undertakings) will be covered, excluding listed small and medium enterprises (SMEs) and other companies that do not meet that threshold; (ii) the net turnover thresholds will increase so that (a) the threshold for a branch in the EU will now be €50 million (to align with the turnover threshold for large undertakings), and (b) the threshold for a non-EU company/third-country undertaking will now be €450 million (an increase from €150 million).
- The reporting requirements have also been simplified by removing reference to sector-specific standards to be developed under the European Sustainability Reporting Standards (ESRS).4 The first set of ESRS (adopted in July 2023 and sector-agnostic) will remain the applicable standards for CSRD for all in-scope undertakings regardless of the sector. The Commission has signalled its intention to adopt a delegated act within six months of the entry into force of the Simplification Package, to streamline the ESRS. The aim would be to simplify the reporting framework, reducing the number of mandatory ESRS datapoints, and clarify how to apply the ‘materiality principle’, along with “any other modifications that may be considered necessary considering the experience of the first application of ESRS”.
Aligning with the CSRD, the first compliance timeline for CSDDD has also been deferred to 2028, in order to provide in-scope companies with sufficient time to “take into account guidance and best practices” for implementing due diligence measures. To facilitate this, the Commission commits to adopting the first set of general guidance by 26 July 2026.
Proposed changes to the CSDDD in the Simplification Package extend the range of obligations over which member states will be prevented from ‘gold plating’ their national laws in order to “ensure a level playing field and avoid fragmentation of national rules”. The main changes are:
- Limiting the due diligence obligations in the value chain to the company's own operations, those of its subsidiaries and those of its direct business partners (unless any actual or likely adverse impacts are identified or circumvention of the rules is suspected at the level of indirect business partners).
- Removing the duty to terminate a business relationship for non-compliance. Instead, in-scope companies would be encouraged to suspend the business relationship while continuing to work with the supplier to resolve the non-compliant situation.
- Reducing the frequency of monitoring intervals for in-scope companies to assess the adequacy and effectiveness of their due diligence measures from annually to at least every five years.
- Limiting the definition of ‘stakeholders’ to those whose rights or interests are or could be “directly” and adversely affected by “the products, services and operations of the company, its subsidiaries and its business partners”, thereby reducing the scope of stakeholders to be consulted.
- Removing the concept of an EU-wide civil liability regime and the rules on representative actions. Access to justice and compensation for adverse impacts are expected to be addressed in member states’ national law.
- Redefining the scope of fines and removing the requirement for fines to be commensurate with the company’s net worldwide turnover. However, the Commission will be required to develop guidelines for financial penalties and other sanctions in collaboration with member states to ensure consistency. No timeline is provided for this.
- Clarification and simplification of the requirement for transition plans for climate change mitigation, making the obligation for companies to “adopt a transition plan” rather than implement it.
What comes next?
The Simplification Package will now go through a period of ‘co-legislator review’ by the Council of Ministers and the European Parliament. Assuming agreement is reached and the final texts are approved, the amending directives will be officially released, after which member states will be required to implement the updated CSRD and CSDDD into their national laws.
Although there remains some uncertainty about the final revisions, one thing is clear: the outcome is still a work in progress. As external factors are shifting the dialogue on ESG issues at a rapid pace, there may still be adjustments to come. All of this is presented with the backdrop of continued dialogue with member states, some of which have already started or completed the implementation process for supply chain due diligence and reporting.
The proposed changes leave open the possibility of revisiting laws, guidelines and policies, adding uncertainty for market participants who are already on the compliance journey, as well as for those assessing corporate ESG and supply chain metrics. Businesses, policy makers and regulators within and outside of the EU now have the added burden of waiting to see the end result. At this point, market participants should monitor the proposed changes to the CSRD and CSDDD as they continue to develop, as any further changes or additional detail will have implications for ESG compliance processes.
If you have any questions on the Simplification Package, supply chain disclosure and reporting, or the application of ESG policies to your business, please get in touch with your usual Reed Smith contact or any of our team members below.
Client Alert 2025-069
- In September 2024, Mario Draghi released a report The Future of European Competitiveness as part of the European Commission’s focus on how to ensure sustainable prosperity and competitiveness in Europe, and for development of its new Clean Industrial Deal. The Draghi Report identified three target areas for growth: (i) refocusing Europe’s collective efforts on closing the innovation gap with the United States and China, especially in advanced technologies; (ii) a joint plan for decarbonisation and competitiveness; and (iii) increasing security and reducing dependencies on certain raw materials suppliers. Member states supported the policy objectives and committed to the Draghi Report recommendations in the November 2024 Budapest Declaration on the new European Competitiveness Deal.
According to Commission press release, January 29, 2025: An EU Compass to regain competitiveness and secure sustainable prosperity, this is part of the strategy referred to as the ‘Competitiveness Compass’, to identify policy changes needed “to adapt to new realities”, develop ways to increase the speed and quality of decision-making, and simplify and align frameworks and rules.
- The package of initial changes in the Simplification Package also includes amendments under the Carbon Border Adjustment Mechanism (CBAM), including postponing compliance timelines. The Commission has signalled an intention to issue other simplification packages to support the commitment to reduce red tape and create other efficiencies to enhance competitiveness.
- The ESRS is a set of common standards for companies to assess their sustainability performance in order to better report and manage ESG information, including on matters related to climate change, biodiversity and human rights. This was intended to cover information that would be relevant for identifying sustainability criteria appropriate for investors.
