Sustainability Blog #24

The first quarter of 2025 brought significant shifts to the ESG landscape of the EU, with key regulatory updates and major political changes shaping the future of sustainable finance. Policymakers primarily focused on simplifying ESG reporting and refining the EU Taxonomy through the new Omnibus proposal. Additionally, 2025 will be a crucial year for preparing for new regulatory obligations in 2026, such as the EUDR and the EU Pay Transparency Directive.

Legislation

The European Commission published the Omnibus package on 26 February, introducing key amendments to four major EU ESG legislative acts: CSRD, CSDDD, the EU Taxonomy, and CBAM. These changes aim to simplify reporting requirements, adjust compliance timelines, and refine obligations for businesses operating in the EU.

The Corporate Sustainability Reporting Directive (CSRD) will still be implemented in waves, but the second and third waves have been postponed by two years, meaning large companies will now start reporting in 2028 instead of 2026. The European Council has already announced its support for the stop-the-clock proposal regulating this delay, and now the decision rests with the European Parliament. The criteria for defining large undertakings are also changing, now requiring at least 1,000 employees and either EUR 50 million in net turnover or EUR 25 million in total assets. Additionally, listed SMEs will no longer be required to report, and sector-specific reporting standards will not be developed. Instead, the European Sustainability Reporting Standards (ESRS) will be simplified, with a reduced focus on data-heavy metrics.

The Corporate Sustainability Due Diligence Directive (CSDDD), which narrowly passed in 2024, remains a contentious issue. In response to growing opposition, the European People’s Party (EPP) has proposed a two-year delay in implementation, which is likely to be approved. The directive’s scope has been significantly adjusted, narrowing the definition of “stakeholders” to include only workers, their representatives, and directly affected individuals or communities. Member States will not be allowed to introduce stricter rules on human rights and environmental abuses, and due diligence requirements will apply only to direct suppliers. Companies will also need to consider SME support measures but will no longer be obligated to terminate business relationships if a partner breaches CSDDD obligations.

The Omnibus package also introduces an important change to the Carbon Border Adjustment Mechanism (CBAM). While the list of covered product categories remains the same, the previous €150 de minimis threshold will be replaced by a new mass-based threshold. This adjustment aims to maintain CBAM’s effectiveness, ensuring that 99% of embedded emissions in imported goods remain subject to the regulation.

The EU Taxonomy framework is also undergoing major changes. Reporting requirements will be limited to the largest companies, though other large firms covered by future CSRD rules can report voluntarily. A new option will allow businesses to disclose activities that are only partially aligned with the Taxonomy, promoting a gradual environmental transition. Additionally, a financial materiality threshold will be introduced, and reporting templates will be reduced by around 70%. The “Do No Significant Harm” (DNSH) criteria, particularly those related to pollution prevention and chemical use, will also be simplified.

News

On 21 March, the European Commission announced a delay in its proposal for the European Union’s 2040 climate target, pushing it beyond the first quarter of 2025. This postponement affects the establishment of a new emissions reduction goal, intended to bridge the gap between the 2030 targets and the EU's objective of net-zero emissions by 2050. Political opposition from some member states and lawmakers, particularly regarding a proposed 90% emissions cut by 2040, has contributed to the delay. Additionally, the EU missed the February deadline to submit its 2035 climate plan to the United Nations, which was supposed to be based on the 2040 target. Despite these setbacks, the EU remains committed to climate action, although industries and certain governments continue to express concerns about the economic impact of environmental regulations.