ESG Regulations Round-Up #5

“Simplification promised, simplification delivered” – EU sustainability regulations just got a major overhaul with the Omnibus Simplification Package proposal, which promises significant relief for small and medium-sized businesses by slashing compliance burdens and timelines. We’re breaking down the details and what the European Commission’s new proposal means for businesses, along with UK and US updates.

The Omnibus Simplification Package: A Win for SMEs?

The European Commission unveiled its Omnibus Simplification Package I, a regulatory reform to reduce reporting burdens and improve consistency across EU sustainability regulations. This move follows growing business concerns that complex – and often overlapping – compliance requirements are stifling competitiveness, particularly for small and medium-sized enterprises.

What’s inside the Commission Proposal?

• Large Cuts to Compliance Scope – Notably, the mandatory corporate sustainability reporting threshold is being raised to 1,000 employees. The CSRD now only applies to 10,000 companies (down from 50,000) while EU Taxonomy and CBAM will only apply to large players, removing more than 80% of companies initially in-scope.
• Delays and “Stop the Clock” – compliance deadlines under the CSDDD extended to 2028, allowing businesses more time to adapt, and postponing the entry into application of the reporting requirements for companies that have not yet started implementing the CSRD (waves 2 and 3).
• Fewer Due Diligence Checks – Companies will be required to conduct due diligence only on their direct suppliers with 500+ employees, rather than the entire supply chain. The obligation to assess their supply chains will change from an annual requirement to once every five years.
• ESRS to Be Reopened – The Commission will adopt a delegated act to revise and simplify the existing sustainability reporting standards (ESRS). The sector-specific standards requirement will be deleted.
• Support for Energy-Intensive Industries – The Omnibus package has been complemented by the Clean Industrial Deal, which allocates €100 billion to help industries like steel, cement, and chemicals transition to cleaner technologies.

Suggested read: Omnibus Package: A Reality Check for the EU Sustainability Reporting and Due Diligence Regulations.

What’s Next?

The Omnibus package consists of two proposals. Both proposals must go through the co-decision process and are subject to change by the European Parliament and Council before becoming law.

The timeline for adoption remains uncertain. The “stop the clock” proposal will be fast-tracked through a simplified procedure and may be adopted within three to six months before summer. The other proposal, which makes substantial changes to the regulations, will likely take longer. It is anticipated to be adopted by the end of the year or in the first half of 2026.

Until the proposals are approved and transposed, existing legislation continues to be in force. Meanwhile, the Commission is working on the next package of simplification proposals.

BAFA Guidance on Risk-Based Approach

In other news, the Federal Office for Economic Affairs and Export Control in Germany (BAFA), the enforcement agency for the LkSG (German Supply Chain Act) published a comprehensive FAQ for companies on how to carry out risk analyses to identify, assess and prioritize human rights and environmental risks within their operations and supply chains. The paper:

• Provides companies with practical information on the risk-based approach to risk analysis and cooperation in the supply chain
• Explains how companies can effectively implement their due diligence obligations
• Shows the legal limits of supplier involvement and monitoring

The BAFA guidance comes at the right time to provide businesses with the clarity they need to implement meaningful sustainability risk management, as the German government continues its harmonization efforts to integrate the LkSG with the new EU due diligence directive.

UK Sustainability Reporting Standards Consultation

In March, the UK government will launch a 12-week consultation on its proposed sustainability reporting standards (SRS) – following the International Sustainability Standards Board’s (ISSB) lead.

From April 2022, UK-registered large companies and financial institutions have been required to do climate reporting alongside their usual financial reports, as mandated by the standard set by the Task Force on Climate-Related Financial Disclosures (TCFD). Since the organization has been disbanded, the ISSB is continuing its work.

The ISSB issued its inaugural standards, known as the UK Sustainability Reporting Standards, in June 2023, and the UK government was tasked with endorsing the rules so they can be implemented nationwide. 

There are two bodies at work here: the government and the Financial Conduct Authority (FCA), which regulates the financial services sector and operates independently of the government. Both bodies need to carry out consultations before the new legislation goes into parliamentary approval. The FCA intends to begin its consultation in the summer.

SEC Climate Change Rule Paused

Since its proposal in March 2022, the US Securities and Exchange Commission (SEC) climate disclosure rule has had a tumultuous history and the latest twist might be the end of the road. After the initial rule was weakened two years and 24,000 comment letters later to deal with objections to public companies disclosing Scope 3 emissions, it was immediately challenged in the courts. Recently, the SEC said it will no longer defend the one year-old rule, indicating it will be withdrawn.

“The Rule is deeply flawed and could inflict significant harm on the capital markets and our economy,” acting SEC Chair Mark Uyeda said in a statement, referencing President Trump’s regulatory freeze.

The SEC rule, finalized in March 2024, required companies to report climate emissions and risks in cases when that information might affect an investment decision. The requirements would have kicked in starting the fiscal year 2026.