Simplification and competitiveness: the European Union shifts direction by easing reporting requirements and narrowing Its scope

On 24 February 2026, the European Parliament and the Council of the European Union adopted Directive (EU) 2026/470, a legislative act that substantially amends the regulatory framework governing corporate sustainability reporting and corporate due diligence obligations. In particular, the directive introduces amendments to Directives 2006/43/EC, 2013/34/EU (NFRD), (EU) 2022/2464 (CSRD) and (EU) 2024/1760 (CS3D).

This reform is part of the Commission’s vision for a “simpler and faster” Europe, aimed at streamlining regulatory requirements and reducing the bureaucratic burden placed on companies, while preserving the strategic objectives of the European Green Deal and the Sustainable Finance Action Plan.

The most significant change concerns the size criteria used to determine which companies fall within the scope of mandatory sustainability reporting. According to the report The Future of European Competitiveness, the existing regulatory framework had generated disproportionate compliance burdens. In response to this issue, the new directive limits the obligation to prepare and publish sustainability reports exclusively to companies, including insurance undertakings and credit institutions, that exceed both of the following thresholds:

• net turnover of more than EUR 450 million and
• an average workforce of more than 1,000 employees.

This decision is intended to concentrate reporting obligations on larger companies, which are considered the most significant in terms of environmental, social and governance (ESG) impacts and are better equipped to absorb the costs associated with sustainability reporting. All companies below these thresholds, as well as listed small and medium-sized enterprises that were previously within the scope of the CSRD, are now excluded from mandatory reporting, while remaining free to report on a voluntary basis. The aim is to encourage voluntary transparency without turning it into an indirect burden or a de facto obligation imposed by the market or by value chain pressures.

The value chain itself represents one of the central pillars of the reform. The European legislator has acknowledged the difficulties reported by smaller companies, which are often subject to disproportionate ESG data requests from larger market players. To address this issue, the directive introduces the concept of “protected undertakings”, defined as companies with no more than 1,000 employees that operate within the value chain of a reporting company. To prevent excessive data requests, protected undertakings now have a legal right to refuse to provide information that goes beyond what will be set out in the voluntary sustainability reporting standards to be adopted by the Commission by July 2026. The directive also clarifies that any more onerous contractual clauses imposing additional reporting requirements are not binding.

In this way, the responsibility for sustainability reporting remains with large companies and is no longer automatically passed on to smaller suppliers and business partners. Reporting companies may rely on self-declarations from their counterparties to determine their size, and, where reliable data from the value chain are not available, estimates may be used during a transitional period.

The reform also affects the audit and assurance framework. The obligation to introduce reasonable assurance requirements has been abolished to avoid further increases in compliance costs for companies. At the same time, the deadline for the adoption of limited assurance standards has been postponed to 1 July 2027, allowing additional time for their development.

Furthermore, within six months of the directive’s entry into force, the Commission is required to review the first set of European Sustainability Reporting Standards (ESRS). This review is intended to remove less relevant disclosure requirements, prioritise quantitative data and draw a clearer distinction between mandatory and voluntary information. Provisions empowering the Commission to adopt sector-specific reporting standards have also been repealed.

Alongside sustainability reporting, the directive substantially amends the rules on corporate sustainability due diligence set out in Directive (EU) 2024/1760. Here too, the scope of application has been significantly narrowed. The due diligence obligations will apply only to companies with more than 5.000 employees and a net worldwide turnover exceeding EUR 1.5 billion.

The due diligence process has been made more flexible and risk based. Companies will first be required to carry out a preliminary scoping exercise based solely on information that is reasonably available, followed by more in-depth assessments only in higher-risk areas. Companies will not be held automatically liable where, despite having adopted appropriate measures, certain impacts are not identified.

The general deadline for the application of these rules to all relevant companies has been postponed to 26 July 2029.

Finally, the Commission has committed to supporting implementation through the creation of a dedicated online portal providing templates and practical guidance on sustainability reporting. By March 2028, the Commission will also publish a report on technological solutions designed to enable secure, seamless and automated exchange of sustainability data between companies.

Member States will be required to transpose most of the new sustainability reporting provisions by 19 March 2027, while the due diligence rules must be transposed by 26 July 2028.

Overall, Directive (EU) 2026/470 marks a clear shift in European sustainability policy. Following a period of rapid expansion of ESG obligations, the European Union has now opted for a more streamlined and targeted approach, limiting mandatory reporting to the largest companies and introducing explicit safeguards for smaller businesses. The overarching objective remains the provision of high-quality ESG information, but through a framework that is more proportionate, sustainable and aligned with the competitiveness of the European economy.