EU Council Reaches Compromise on CSRD and CSDDD: What’s Changing and Why It Matters?

04.07.2025

Contents

The Council of the European Union (the “Council”) has recently reached a political agreement on its positions concerning two flagship pieces of legislation that lie at the heart of the EU’s sustainable transition agenda: the Corporate Sustainability Reporting Directive (“CSRD”) and the Corporate Sustainability Due Diligence Directive (“CSDDD”).

These developments mark a turning point in the European Union’s (the “EU”) regulatory trajectory, reflecting not only a series of targeted legal amendments, but also a broader recalibration of the Union’s expectations towards corporate accountability, transparency, and risk management in the value chain. While both directives were initially designed to raise the bar on sustainability standards and embed ESG considerations into the fabric of corporate decision-making, the Council’s revised stance introduces notable concessions in terms of scope, timing, and implementation burdens.

This blog post explores the key modifications adopted by the Council, the underlying political and economic dynamics driving these shifts, and what they signal about the future of the EU’s sustainable governance framework.

A.   Background Information on the EU’s Sustainability Reforms

On 26 February 2025, the European Commission (“EC”) launched its “Omnibus” package, intended to simplify the current sustainability-related legislation. A central feature of this package is the “Stop-the-Clock” mechanism proposal, which aims to postpone the deadlines by which certain corporate sustainability reporting and due diligence rules must be implemented by EU member states. Alongside this, the package also introduced a “content” proposal focused on easing the regulatory framework by reducing reporting obligations, minimizing administrative workload, and limiting the extension of these requirements to smaller enterprises.

For four months, extensive discussions took place around the Omnibus proposal. Given the rising opposition to sustainability regulations from the business community and the approaching European Commission elections, there has often been debate over how genuine these simplification efforts are, whether they truly aim to deliver meaningful benefits or are primarily political manoeuvres.

B.   Understanding the European Commission’s Stance on the Omnibus Package

It comes as no surprise that the European Commission has taken a definitive position on narrowing the scope of companies subject to both the CSRD and CSDDD directives, as well as on reducing certain reporting and due diligence obligations. These adjustments align closely with the broader simplification agenda introduced by the Omnibus package, which was fundamentally designed to ease compliance burdens and enhance the practicability of the regulations for businesses.

Below, a summary is provided outlining the general consensus that has emerged regarding the key proposed changes to the CSRD and CSDDD frameworks.

1.    Key Changes and Simplifications in the CSRD

1.1. Scope of the Directive

The Current CSRD

EC’s Stance

The CSRD covers (i) large companies, (ii) small and medium-sized undertakings (SMEs) with securities admitted to trading on an EU regulated market, (iii) parent companies of large groups and (iv) under certain circumstances, subsidiaries or branches established in the EU of companies incorporated outside the EU.

 

 

 

Here are the criteria used for the classification.

 

Large

Companies

at least two of the following criteria for two consecutive financial years:

i.      employing an average of at least 250 employees,

ii.     having a net turnover exceeding EUR 50 million,

iii.    having a balance sheet total of EUR 25 million.

Large Groups

at least two of the following criteria:

i.      employing an average of at least 250 employees,

ii.     having a net turnover exceeding EUR 50 million,

iii.    having a balance sheet total of EUR 25 million.

Subsidiary of a non-EU Undertaking

Consolidated turnover of EUR 150 million in the EU + Subsidiary being subject to the CSRD.

 

 

Branch of a non-EU Undertaking

Consolidated turnover of EUR 150 million in the EU + Turnover of the branch being over EUR 40 million.

The EC’s consensus reduces the reporting obligations by significantly limiting the scope of the CSRD. This reduction in scope also applies to credit institutions and insurance undertakings. Moreover, an amendment to the definition of a "large group" has also been proposed.
Additionally, SMEs with securities listed on EU-regulated markets would be excluded from sustainability reporting, thereby easing the reporting burden on smaller enterprises.

Here are the suggested criteria to be used for the classification.

 

Large

Companies

the following criteria for two consecutive financial years:

i.      employing an average of at least 1000 employees,

ii.   having a net turnover exceeding EUR 450 million.

 

 

 

 

Large Groups

the following criteria for two consecutive financial years:

i.     employing an average of at least 1000 employees,

ii.   having a net turnover exceeding EUR 450 million.

 

 

Subsidiary of a non-EU Undertaking

Consolidated turnover of EUR 450 million in the EU + Subsidiary being a large undertaking under the revised tranches.

 

Branch of a non-EU Undertaking

Consolidated turnover of EUR 450 million in the EU + Turnover of the branch being over EUR 50 million.

According to reports published by the EC, the current scope of the CSRD covers approximately 42,500 companies. The simplification proposed by the EC would reduce the number of affected companies by around 80%. If the EC’s stance is adopted following the trilogue discussions, companies that fall outside the CSRD’s scope due to the narrowing of its coverage will only be subject to the Directive temporarily, between 2024 and 2026. Moreover, the current position even allows Member States to exempt these companies from reporting obligations earlier — for financial years starting in 2025.

It should not be overlooked that while the Commission leaves the door open to potential future expansions of the Directives’ scope, it also acknowledges that broader coverage may result in lighter reporting obligations for certain undertakings.

1.2. The Requirement to Provide Sustainability Information

Under the CSRD framework, companies subject to sustainability reporting obligations are required to collect and disclose relevant sustainability information not only about their own operations but also regarding their value chain. This means that suppliers, subcontractors, and other entities within the value chain have an implicit responsibility to provide accurate and timely data to the reporting company. The reporting entity must ensure the reliability and completeness of the information received from its value chain partners to comply with transparency and due diligence requirements.

The EC notes that value chain partners, including SMEs, often receive disproportionate information requests beyond the limits set in Article 29b(4) of the Directive. Therefore, the EC’s position is to limit the burden on smaller value chain undertakings not obligated to report on sustainability. Reporting companies is suggested to be prohibited from requesting information exceeding certain thresholds from value chain undertakings with up to 1,000 employees on average during the financial year. At the same time, these smaller value chain undertakings should have a statutory right to refuse to provide information beyond those thresholds.

The limit defined as the “value chain cap” ensures protection for small and medium-sized value chain companies from unnecessary information requests.

1.3. Changes to the ESRS

As a key component of the CSRD, the first set of European Sustainability Reporting Standards (“ESRS”) was published by the European Financial Reporting Advisory Group (EFRAG) to establish a unified and detailed framework for corporate sustainability disclosures. However, these initial standards have faced criticism for their complexity, length, and the extensive data requirements imposed on companies, raising concerns about the reporting burden and practical implementation challenges.

It is important to note that, the Directive currently empowers the EC to adopt sector-specific reporting standards through delegated acts, with the first set expected by 30 June 2026, an approach criticized for its ambitious attempt on such an early stage.

To address these concerns, the EC suggests adopting a delegated act within six months of the directive’s entry into force to simplify the standards by removing less relevant data points, prioritizing quantitative over narrative information, and clearly distinguishing mandatory from voluntary disclosures, while also clarifying unclear provisions. Furthermore, to prevent an increase in the number of mandatory data points companies must report, the empowerment to adopt sector-specific standards is intended to be removed.

This approach balances the need for robust, comparable sustainability information with the practical realities companies face, particularly smaller entities struggling with resource constraints. However, the success of this revision will depend on maintaining sufficient depth and quality in disclosures to meet the expectations of investors, regulators, and civil society.

2.    Key Changes and Simplifications in the CSDDD

2.1. Scope of the Directive

The Current CSDDD

EC’s Stance

The CSDDD applies to companies established under the law of a Member State that meet at least one of the following criteria: (i) the companies that had an average of more than 1,000 employees and a net worldwide turnover exceeding EUR 450 million in the last financial year; (ii) the companies that does not meet the above thresholds but is the ultimate parent company of a group that did in the last financial year and (iii) the company, or the ultimate parent company of a group, has entered into franchising or licensing agreements within the EU with independent third parties, generating royalties exceeding EUR 22.5 million in the last financial year, and had a net worldwide turnover exceeding EUR 80 million in that year.

Likewise, the CSDDD also applies to companies established outside the EU in the following cases: (i) where the company exceeds the turnover thresholds set for EU-based companies by generating such turnover in the EU; (ii) where the company is the ultimate parent of an undertaking that exceeds those thresholds; or (iii) where the company, or the ultimate parent of a group, has entered into franchising or licensing agreements within the EU with independent third parties, generating royalties exceeding EUR 22.5 million in the last financial year and having a net worldwide turnover exceeding EUR 80 million in that year.

The Report on The Future of European Competitiveness highlighted the due diligence framework as a significant contributor to regulatory burden, emphasizing the necessity to more carefully take into account the size of the companies impacted by the regulation. Therefore, it has been emphasized that the changes should focus on the very largest companies, as they have the greatest capacity to influence their value chains, the most significant impact on human rights and the environment, and the resources necessary to properly implement due diligence.

 

In particular, the EC proposes raising the net worldwide turnover threshold for EU-based companies, and the net EU-generated turnover threshold for non-EU companies, from EUR 450 million to EUR 1.5 billion. Additionally, the employee threshold for EU-based companies is suggested to be increased from 1,000 to 5,000 employees.

 

 

2.2. The Identification of Sustainability Risks

Under the current text of CSDDD, EU member states are granted broad discretion and regulatory authority regarding how the due diligence obligation should be implemented. To ensure that member states do not go beyond the scope of the Directive, and to prevent the emergence of a fragmented regulatory landscape that could lead to legal uncertainty and unnecessary burdens, EC suggest including full harmonisation provisions to the Directive. This will also cover additional provisions governing the core elements of the due diligence process. With that being said, member states should retain the ability to adopt more detailed or stricter due diligence rules in relation to specific objectives or subject areas.

The current framework of the Directive necessitates the companies to conduct risk-based human rights and environmental due diligence throughout their operations. This obligation includes the duty to identify, assess, prevent, mitigate, and bring to an end adverse human rights and environmental impacts that may arise from their own operations, those of their subsidiaries, and, where relevant, from their chain of activities.

As part of this process, companies must carry out a scoping exercise to determine areas of potential risk, taking into account a range of relevant risk factors. Importantly, while the due diligence obligation extends to a company’s chain of activities, the EC has clarified that, for the purposes of CSDDD, the term “business partners” shall refer exclusively to direct business partners. This limitation is intended to ensure legal certainty and proportionality by preventing overly burdensome obligations related to indirect or remote actors in the value chain. This approach reflects a risk-based and pragmatic regulatory philosophy. Companies are expected to focus their efforts where risks are most salient and where they have the greatest capacity to influence outcomes, particularly through contractual relationships or direct leverage over business partners.

Although there seems to be an emerging understanding that indirect business partners should also fall within the scope where reasonably available information exists, it is worth noting that the current criteria and definitions in the text remain relatively vague and subjective in contrary with the CSDDD. This creates a degree of legal uncertainty and may limit the effectiveness and consistency of the due diligence framework across sectors and jurisdictions.

2.3. Adoption and Disclosure of a Transition Plan

Under the CSDDD, companies are required to adopt and publicly disclose a climate transition plan aligned with the objectives of the Paris Agreement, outlining how their business model and strategy will be made compatible with the transition to a sustainable economy. To ensure consistency between the two Directives, the requirement to "put into effect" the transition plan for climate change mitigation is proposed to be replaced with a clarification that the obligation to adopt such a plan includes setting out both planned and implemented actions. It should also be noted that the explicit reference to limiting global warming to 1.5°C is proposed to be removed from the Directive.

Furthermore, a clear legal distinction is made to indicate that the underlying obligation should be reframed from a “best efforts” standard to a “reasonable efforts” standard, thereby clarifying the expected level of diligence required from companies.

Consensus has been reached that Article 22(1) of the CSDDD, which regulates the elements to be included in the content of the transition plan, should be made optional in order to allow companies greater flexibility.

Finally, given the complexity of formulating transition plans for climate change mitigation, there should be a transitional period during which adoption of such a plan is optional rather than obligatory for companies. That transitional period should be limited to two years from 26 July 2029.

2.4. Exclusion of the Liability Regime

The CSDDD establishes a civil liability framework under which companies may be held accountable if they fail to prevent or address negative human rights or environmental impacts stemming from their own operations, those of their subsidiaries, or their business partners. However, in order to better reflect the principle of subsidiarity, the harmonized, EU-wide liability mechanism currently set out in Article 29(1) of the Directive is proposed to be removed by the EC. Nevertheless, member states would still be obliged, under both international and EU law, to guarantee that affected individuals have effective access to justice and are provided with an adequate remedy.

While the removal of a uniform EU liability regime may be seen as a step back in terms of legal certainty and consistency, it reflects a political compromise aimed at respecting national legal traditions.  It should be noted that the introduction of a civil liability regime under the CSDDD was already a subject of extensive debate prior to the Directive’s adoption, and many viewed the inclusion of an international liability provision as a significant advancement. However, this development may not be considered satisfactory by proponents of that view.

C.   The Next Steps Regarding the Omnibus

Following the EC’s position, the next phase involves interinstitutional discussions between the EC and the European Parliament, known as trilogue negotiations. These negotiations seek to bridge differing perspectives and work towards a final compromise on the directive texts. Given the complexity and political sensitivities surrounding sustainability legislation, the stance taken by the Council may evolve during these talks. Once consensus is reached, the agreed version will be formally adopted, allowing Member States to proceed with implementation according to the agreed timelines.

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