EU and UK reset sustainability rules 

A Softer Turn in Sustainability Regulation as Europe and the UK Recalibrate

The second half of 2025 marked a noticeable shift in the direction of sustainability regulation across Europe and the UK. Policymakers moved to temper earlier ambitions by easing compliance burdens, narrowing legal exposure and extending implementation timelines. At the same time, courts signalled that environmental liability risks for multinational parent companies remain very real. Together, these developments are reshaping expectations for corporate reporting, due diligence and trade regulation as businesses look ahead to 2026 and beyond.

EU Reporting Rules Narrowed and Deferred

In Brussels, legislators reached agreement on a wide-ranging reform package revising the Corporate Sustainability Reporting Directive. The compromise significantly raises the thresholds for companies caught by the next waves of mandatory reporting, including higher employee and turnover tests. Transitional exemptions were also introduced for certain listed companies and financial holding parents.

The clear policy aim is to reduce the number of newly in-scope entities and to stagger the rollout of reporting obligations. For UK-based groups with EU operations, the changes mean fewer subsidiaries may be drawn into the regime in the short term, easing immediate compliance pressures.

Lighter Sustainability Reporting Standards

Alongside the directive changes, revised drafts of the European Sustainability Reporting Standards were released in a more streamlined form. Several procedural requirements have been relaxed, and greater clarity has been provided on how companies should conduct double materiality assessments.

Importantly for businesses with complex supply chains, the revised standards allow firms to rely on “reasonable and supportable information” that can be obtained without undue cost or effort. This provides practical relief on value-chain data gathering and is likely to be welcomed by UK multinationals navigating EU reporting expectations.

Due Diligence Obligations Scaled Back

Lawmakers also agreed substantial amendments to the Corporate Sustainability Due Diligence Directive. The provisional text raises thresholds for liability and reporting, narrows the scope of mandatory impact assessments and removes any EU-wide civil liability regime. Maximum financial penalties have been reduced, and the timetable for national implementation has been pushed back by a further year.

The combined effect is a meaningful reduction in both the number of companies covered and the scale of potential legal exposure. For UK-headquartered groups operating in the EU, this represents a notable softening of what was previously seen as one of the most far-reaching pieces of sustainability legislation.

EU Deforestation Rules Delayed

Implementation of the EU Deforestation Regulation was formally postponed following negotiations between EU institutions. Most operators will now benefit from a one-year delay, with micro and small enterprises receiving an additional six-month extension.

The revised framework introduces simplified due diligence steps, excludes certain printed products such as books and commits the European Commission to review administrative burdens by April 2026. The intention is to address concerns around readiness and IT capacity while maintaining the regulation’s environmental objectives. UK exporters into the EU will have additional time to prepare their systems and documentation.

Sustainable Finance Reform on a Longer Horizon

Beyond reporting and supply-chain rules, the European Commission has indicated plans to overhaul sustainable finance disclosures. Proposals include new product categories, tighter controls on fund naming and marketing, and standardised transparency requirements for products that fall outside any new taxonomy.

Crucially, these reforms are not expected to take effect quickly. Lawmakers are considering a staged rollout between 2027 and 2028, providing firms - including UK asset managers marketing into the EU - with a longer runway to adapt.

UK Developments: Litigation Risk and Carbon Borders

In the UK, two developments stand out for international businesses. First, an English High Court ruling in long-running litigation over the Fundão dam collapse confirmed that parent companies may, in principle, be held liable for environmental harm caused by overseas joint venture operators. The decision underscores the continuing litigation risk for UK-based multinationals and may encourage further cross-border environmental claims.

Second, the UK government confirmed in its 2025 Budget that a domestic Carbon Border Adjustment Mechanism will be introduced from January 2027. The regime will apply to selected carbon-intensive imports and is designed to align with the UK Emissions Trading System. Certain emissions will be excluded at launch, and HMRC has committed to publishing detailed guidance ahead of implementation. For UK importers, the measure represents a significant new layer of climate-related trade compliance.

Looking Ahead

Taken together, the developments of late 2025 point to a more pragmatic regulatory phase in both the EU and the UK. While headline ambitions on sustainability and climate policy remain intact, the focus has shifted towards manageability, proportionality and reduced legal risk. For UK-based businesses with European exposure, the challenge in 2026 will be less about rapid expansion of obligations and more about navigating a recalibrated, but still complex, compliance landscape.

Sourced by Noah Wire.

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