In the context of the Green Deal, the EU introduced rigid ESG reporting obligations for companies, which are now being rolled back as the EU legislator recognises the disproportionate regulatory burden faced by mid-sized businesses. By introducing the new classification of Small Mid-Caps (SMCs) in the Simplification Omnibus Packages, proposed in the first half of 2025, the European Commission intends to reduce administrative obstacles. Whilst this is generally welcomed, the definition of SMCs, particularly the thresholds, are at the centre of controversial political discussions. The European Parliament will be voting on its position at the end of October.
This article follows our earlier analysis of how ESG policy is evolving across Europe and globally – from Spain’s ambitious carbon reporting regime to the UK’s international alignment strategy. You can read more in our related analysis, ESG Policy Trends 2025: How Spain, the UK and Global Markets Are Redefining Corporate Responsibility
Impact on UK Businesses and Law Firms
For UK businesses, a relaxation of reporting requirements could potentially cause a more complex environment for cross-border business as the FCA is looking at simplifying ESG rules in a different way. Therefore, law firms advising companies or investment firms that are captured by ESG reporting requirements will need to watch for the final outcome of the EU Omnibus Packagel (expected before the end of the year) to put them in a position to advise on the consequences for their clients of diverging reporting standards.
Professional Bodies and trade associations might also consider lobbying the FCA and the UK government on a better alignment of obligations.
Omnibus Package I: A Drastic Shift in EU ESG Reporting
When the European Union adopted the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) in 2022, these measures were hailed by many as a landmark step toward a more equitable and sustainable society. But just three years later, the tide has turned. ESG reporting obligations are now widely considered as administrative burdens, identified as obstacles to growth in the competitiveness reports by Draghi and Letty in 2024.
Who Will Be Affected by EU ESG Reporting Rules
To address this, the European Commission introduced the “Omnibus Package I” in February 2025, aiming at reducing reporting obligations for companies under sustainability rules by up to 80 % to enhance competitiveness. Only companies with:
- More than 1,000 employees and
- A turnover above €50 million or a balance sheet total above €25 million
should remain subject to the rules according to the Commission proposal. This reform is particularly targeted at mid-size companies, boosting competitiveness.
Global Implications for UK-Based Clients
These changes will have immediate implications for UK-based clients with EU-operations or supply chains. As ESG regulation is becoming more fragmented globally, law firms need to be prepared to advise clients with cross-border operations on overlapping and diverging frameworks.
Stop the Clock Directive : Temporary ESG Reporting Relief
The Omnibus Package I includes a “stop the clock” directive, which was adopted in April 2025 in a fast-track procedure, postponing key sustainability reporting requirements for companies currently in the scope of CSRD requirements for two years. As a result, the CSRD’s reporting requirements for companies originally scheduled to begin reporting in the 2025 (second wave) and 2026 (third wave) financial year are now deferred by two years, shifting the reporting start dates to 2027 and 2028, respectively. This legislative adjustment was prioritised to provide legal certainty and avoid a scenario where companies temporarily fall under CSRD obligations—only to be exempted later due to changes in the directive’s scope.
Council Pushes for Higher ESG Reporting Thresholds
One of the three co-legislators, the Council of the EU is seeking to raise the thresholds for reporting obligations even further than the Commission. The Council’s position favours that small mid-caps would include companies with up to 1,000 employees and € 450 million in annual turnover.
Exemptions that currently apply to SMEs with up to 250 employees would be extended to this new category of companies. This includes, for example:
- Anti-dumping complaints under EU trade defence rules
- Prospectus requirements under the EU Prospectus Regulation
- Due diligence obligations under the Batteries Regulation
- Registration duties under the F-Gas Regulation, which would be limited to F-Gas portals.
Regarding the Corporate Sustainability Due Diligence Directive (CSDDD) the scope is narrowed even further. According to the Council decision it should only apply to companies with more than 5,000 employees and €1.5 billion turnover, meaning far fewer European companies will be subject to strict due diligence obligations in the future.
A Shift to a Risk-Based ESG Approach
Furthermore, the Council is in favour of a shift from an entity-based to a risk-based approach, which means that companies must assess likely areas of impact. A mapping of their entire supply chain is not necessary anymore. Due diligence obligations are limited to direct business partners (Tier 1), unless there is verifiable evidence of risks beyond that.
Both the Council and the Commission propose to remove harmonised EU liability rules, leaving it to national laws.
NGOs and Political Debate over European Parliament’s ESG Compromise
These changes triggered strong reactions from NGOs and very controversial discussions between the political parties in the European Parliament. While Socialists and Greens were defending ESG safeguards in the interest of climate and human rights, the lead rapporteur (a Swedish member of the EPP group) allegedly threatened to push for even more drastic changes to the directive, accepting a majority with right-wing to far-right parties. In the end, the main parties agreed on compromise amendments in the leading Legal Affairs Committee, voting to significantly scale back the scope of ESG reporting obligations. Like the Council, the Committee adopted an amendment that the revised Corporate Sustainability Due Diligence Directive (CSDDD) should apply only to large companies with more than 5,000 employees and annual revenues of at least €1.5 billion. In the Commission Proposal, the thresholds are set at 1,000 employees and €450 million in revenue.
There is unanimity between the three co-legislators that companies violating the rules shall no longer be subject to civil liability at the EU level, removing a key enforcement mechanism that had been part of the original proposal and causing great concern amongst NGOs.
Trilogue Negotiations on Final EU ESG Rules
Once the European Parliament Plenary Assembly has voted at the end of October, the negotiating positions are set and the trilogue negotiations between the Commission, Council, and Parliament can commence. The introduction of a category SMC seems certain, but what will the thresholds be? Will the Council and the European Parliament succeed in exempting many companies from the reporting obligations under the CSDDD?
How Legal and Compliance Teams Can Prepare for EU ESG Changes
Legal and compliance professionals should closely monitor ongoing EU ESG regulatory developments, as the final shape of the directive will have significant implications for corporate risk, ESG strategy, and the reputational exposure of their clients.
They should focus on:
- Corporate risk management and ESG reporting exposure
- Alignment of sustainability and ESG strategies with both EU and UK compliance rules
- Reputational and governance risks arising from evolving sustainability obligations
- Early preparation for the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) updates
The EU’s ESG landscape is evolving rapidly. To understand how these developments could affect your compliance strategy or reporting obligations get in touch with our EU Director heike.loercher@hooktangaza.com
Frequently Asked Questions: EU ESG Reporting and the Omnibus Package
- What is the EU Omnibus Package I? – The Omnibus Package I is a European Commission proposal introduced in 2025 to simplify and reduce ESG reporting obligations under the CSRD and CSDDD by up to 80%, especially for mid-sized companies.
- How will the Omnibus Package affect ESG reporting requirements? – It will raise thresholds for which companies must report, meaning fewer mid-sized companies will be covered by EU ESG regulations. The scope and timing of reporting are being reassessed to reduce administrative burden.
- What are SMCs under the new EU ESG framework? – SMCs, or Small Mid-Caps, are a new company classification aimed at easing reporting requirements for businesses that are too large to be SMEs but not large multinationals.
- When will the new EU ESG rules take effect? – The European Parliament is expected to vote in late October 2025, with trilogue negotiations concluding before the end of the year. Implementation could start from 2027 for deferred reporting waves.
- What should UK law firms and compliance teams do? – UK-based advisors should monitor EU developments, as divergence between the EU and UK ESG regimes may increase complexity in cross-border compliance and client advisory work.
