Regulatory Evolution in ESG Disclosure
Introduction
Since 2019, environmental, social, and governance (ESG) regulation has reshaped the operating landscape for companies across the European Union. Ambitious frameworks such as the Corporate Sustainability Reporting Directive (CSRD)1, the Corporate Sustainability Due Diligence Directive (CSDDD)2, the SFDR3 and the EU Taxonomy Regulation4 have not only raised the bar for transparency but also established a foundation for what many saw as a new standard of corporate accountability. These policies pushed firms, either large and small, to invest heavily in data infrastructure, governance frameworks, and ESG talent to comply with what became some of the most advanced sustainability requirements in the world5.
In 2025, the European Commission and the European Banking Authority (EBA) are proposing a simplification of this regime. Through the Omnibus legislative package6, the Commission suggests rolling back obligations under CSRD and CSDDD, raising applicability thresholds and scaling back due diligence requirements. Parallel efforts by the EBA7, including new proposals under Capital Requirements Regulation (CRR3), Pillar 3 disclosure amendments (the banking package), aim to ease ESG reporting for small and non-listed banks, citing proportionality and cost-efficiency. This consultation runs until 22 August 2025.
These developments have triggered intense debate. Is this recalibration a pragmatic response to the growing regulatory burden on businesses, or does it signal a retreat from the EU’s flagship Green Deal ambitions? For firms that have invested significantly in aligning with these mandates, the implications extend well beyond compliance timelines. These developments raise important questions about the long-term stability and predictability of the EU’s ESG regulatory landscape, particularly as businesses seek to integrate sustainability more deeply into their core strategy.
I. The Road to Reform
On 26 February 2025, the European Commission unveiled a sweeping regulatory package designed to streamline sustainability obligations across the corporate landscape. Central to this shift are the Omnibus I and II proposals, which aim to recalibrate the scope and scale of corporate sustainability reporting and due diligence.
Among the most consequential changes is the proposed increase in reporting thresholds. Under the revised CSRD criteria, only companies with more than 1,000 employees, and either a balance sheet total above €25m or a turnover exceeding €50 million8 would fall under mandatory reporting obligations, a shift that could exempt approximately 80% of currently affected firms9. At the same time, a “Stop-the-Clock” directive10 offers a temporary two-year deferral of reporting obligations for companies still preparing to comply, including listed small and medium-sized enterprises.
“Today we delivered on our promise regarding the simplification of EU laws. The fast adoption of this directive is an important first step towards cutting red tape, providing legal certainty to our companies and making the EU more competitive.” – Adam Szłapka, Minister for the European Union of Poland
On the financial side, the EBA has initiated its own simplification effort. Proposed amendments to ESG disclosure obligations under Pillar 3 of the CRR3 aim to reduce the compliance burden for small and non-listed institutions. These include streamlined templates, “enhanced and proportionate disclosure requirements related to ESG-related risks, equity exposures and aggregate exposure to shadow banking entities. It also implements the new codes for the statistical classification of economic activities in the EU (NACE)11”.
Policymakers have framed these changes as part of a broader strategy of proportionality, aimed at easing the regulatory load on smaller players and reducing administrative costs. This emphasis reflects growing concerns over so-called “green fatigue,” especially among SMEs and mid-cap institutions12. With economic uncertainty lingering across the Eurozone and the 2024 European Parliament elections amplifying calls for competitiveness and deregulatory relief, the simplification agenda has gained traction as a timely and politically pragmatic response.
II. Simplification or Strategic Backslide?
The European Commission’s 2025 “Simplification Omnibus” package proposes significant changes to the EU’s sustainability reporting landscape, especially considering the new threshold suggested for the CSRD (see section I).
Likewise, the CSDDD would see its scope refined, with due diligence obligations focusing on direct business partners. While this adjustment may enhance clarity and operational feasibility for companies, it also raises questions about how indirect value chain impacts will be addressed within evolving ESG risk frameworks.
Source: European Confederation of Institutes of Internal Auditing13
These developments have raised fundamental questions about the predictability and credibility of the EU’s regulatory environment. Many companies have made significant operational investments to comply with the CSRD and CSDDD frameworks, including building ESG data systems, hiring specialist teams, and restructuring supply chain protocols. A sudden regulatory pivot risks triggering a sense of regulatory whiplash and undermining long-term planning.
Adding to the scrutiny, the European Ombudsman has launched a formal inquiry into the Commission’s process for drafting these reforms14.
“The decision to open an inquiry follows a complaint by eight civil society organisations who argue that the Commission breached its better regulation guidelines by failing to justify why it did not carry out a public consultation or impact assessment on the draft legislation,” – Ombudswoman Teresa Anjinho
Meanwhile, the proposed introduction of a Voluntary Sustainability Reporting Standard for SMEs (VSME) aims to provide a streamlined option for businesses falling below the new CSRD threshold15. Although this may alleviate administrative burdens, there are concerns that voluntary approaches could lead to fragmented ESG disclosures, thereby undermining overall market comparability.
Conclusion
The European Union is entering a new phase in its sustainable finance journey; the proposed regulatory simplifications signify a pivotal moment. This period may be seen as a recalibration or a strategic course correction, with the current consultation indicating a clear shift in tone from rapid transformation to more deliberate consolidation.
For businesses, particularly those already advanced in ESG integration, this transition presents both potential and ambiguity. Streamlined reporting frameworks could ease immediate compliance demands; however, they also introduce concerns around continuity, comparability, and the coherence of long-term strategy. The suggested move towards voluntary standards for SMEs and a more limited scope of due diligence obligations may enhance flexibility but could equally dilute the depth and consistency of sustainability insights across the market. In this changing context, ESG infrastructure retains its strategic value. Robust data systems, transparent reporting procedures, and effective governance mechanisms remain essential. Companies may find an advantage in stabilising and refining them to maintain adaptability within an evolving regulatory landscape.
With public consultation ongoing and scrutiny intensifying, it becomes increasingly important for market participants to remain actively involved. This involves balancing responsiveness to regulatory shifts with a consistent dedication to transparency, accountability, and the pursuit of sustainable value creation.
To stay informed and explore how these regulatory shifts might shape your ESG strategy, visit the LHoFT website for the latest insights, resources, and expert analysis.
Footnotes:
Image: Midjourney
1. Corporate sustainability reporting
2. Corporate sustainability due diligence
3. Regulation (eu) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on Sustainability‐Related Disclosures in the Financial Services Sector.
4. EU taxonomy for sustainable activities
5. Société Générale (30/03/2023)“EU Action Plan on Sustainable Finance”
6. Omnibus package
7. EBA (22 May 2025)“EBA launches consultation on amended disclosure requirements for ESG risks, equity exposures and aggregate exposure to shadow banking entities”
8. Fintech Global (May 12, 2025) “New 1,000-employee threshold could exempt many firms from CSRD reporting”
9. Simmons & Simmons (13 March 2025)“The EU Omnibus I and II packages”
10. Council of the EU- Press release (14 April 2025)“Simplification: Council gives final green light on the ‘Stop-the-clock’ mechanism to boost EU competitiveness and provide legal certainty to businesses”
11. See EBA link (Footnote #7)
12. “Mid-cap (or mid-capitalization) is the term that is used to designate companies with a market cap (capitalization)—or market value—between $2 and $10 billion”
13. ECIIA (March 2025)“Corporate Sustainability Due Diligence Directive – Changes proposed by Omnibus”
14. Benoit Van Overstraeten and Kate Abnett (May 23, 2025)“EU watchdog launches inquiry into Commission’s easing of green rules”
15. Frida Stolpe (6 March 2025)“VSME and the ‘Sustainability Omnibus’: Adapting to the new ESG landscape”