The EU Simplifies CBAM and Sustainability Reporting Rules – Impact on Chinese Companies

The European Commission has introduced reforms to simplify CBAM and sustainability reporting rules, easing compliance for businesses, including Chinese companies operating in or exporting to the EU. This article explores the key changes, postponed deadlines, and their impact on companies navigating EU import and sustainability regulations.

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The European Commission has adopted a new package of proposals to simplify the European Union (EU) rules on sustainability reporting and due diligence, as well as the bloc’s carbon pricing system for imports. The “Omnibus package”, as it is named, seeks to create a more favorable business environment for both EU companies and non-EU companies operating within the bloc while still adhering to the bloc’s climate and environmental pledges.

The package proposes a range of changes aimed at reducing compliance burden for small and medium-sized enterprises (SMEs) while postponing implementation deadlines for larger companies. Proposed measures include raising the threshold for companies to carry out corporate sustainability reporting, delaying deadlines for corporate due diligence requirements, and exempting smaller importers from paying the adjusted carbon tax under the EU’s Carbon Border Adjustment Mechanism (CBAM).

In this article, we provide an overview of the EU’s rules on sustainability reporting, sustainability due diligence, and carbon border tax, and discuss the implications of the new simplified rules on Chinese companies.

Changes to the Corporate Sustainability Reporting Directive

The Corporate Sustainability Reporting Directive (CSRD), which came into effect in January 2023, requires companies above a certain size to report on risks and opportunities arising from social and environmental issues and on the impact of their activities on people and the environment. The aim of the directive is to help stakeholders, such as investors and consumers, to evaluate how sustainable a company is. Reporting must be prepared in accordance with the European Sustainability Reporting Standards (ESRS).

The CSRD replaces the EU’s previous Non-Financial Reporting Directive (NFRD), introduced in 2014, which required large companies and conglomerates to disclose non-financial and diversity information. These reporting requirements only applied to large Public Interest Entities (PIEs), such as large banks and insurance companies, with more than 500 employees, and did not require comprehensive reporting on environmental and social aspects.

However, the CSRD expands the scope of mandatory reporting to include large companies, SMEs with transferable securities admitted to trading on an EU regulated market (excluding micro enterprises), and parent companies of large groups that are from an EU country.

Micro enterprises are defined as undertakings which on their balance sheet dates do not exceed the limits of at least two of the three following criteria:

1. A balance sheet total of €450,000
2. A net turnover of €900,000
3. An average of 10 employees during the financial year

As such, following the introduction of the Omnibus package, non-EU companies will be subject to the CSRD requirements if they meet one of the two the following criteria:

1. Have transferable securities admitted to trading on an EU regulated market (requirement unchanged); or
2. Have generated a net turnover of over €450 million (previously €150 million) in the EU in each of the previous two consecutive financial years, and either:
   1. Has a subsidiary in the EU that is either a large entity as defined by the EU’s Accounting Directive (previously also applied to subsidiaries that were SMEs with securities admitted to trading on an EU regulated market); or
   2. Has a branch with net turnover generated in the EU above €50 million (previously €40 million).

In the event that the non-EU entity is required to provide sustainability reporting due to having a subsidiary or branch under the criteria listed above, the subsidiary or branch will be responsible for publishing the sustainability information at the group level.

Following the Omnibus package, large companies (including subsidiaries of a non-EU company) must meet two of the following three requirements before they are subject to the CSRD:

• Have more than 1,000 EU-based employees (previously 250 employees);
• Have a turnover of over €50 million (previously €20 million); and/or
• Have a balance sheet of over €25 million.

Below are the four waves of CSRD implementation, including the proposed postponement in the Omnibus package:

• Wave 1: Large public interest entities with more than 500 employees must report for the first time in 2025 for the financial year 2024.
• Wave 2: Other large entities must report in 2026 for the financial year 2025 – postponed by two years to 2028.
• Wave 3: SMEs with securities listed in EU-regulated markets must report in 2027 for the financial year 2026 – postponed by two years to 2029.
• Wave 4: Non-EU undertakings that meet the CSRD reporting thresholds must report in 2029 for the financial year 2028.

Changes to the Corporate Sustainability Due Diligence Directive

The Corporate Sustainability Due Diligence Directive (CSDDD), which came into effect in July 2024, expands corporate responsibility by requiring companies to identify and mitigate environmental and human rights risks across their supply chains. This includes addressing negative social and environmental impacts linked to their operations, ensuring due diligence in subsidiaries and business partners, and implementing climate transition plans aligned with the EU’s carbon neutrality targets for 2050. The CSDDD applies to companies with 1,000 employees and a turnover of €450 million.

Under the proposed changes in the Omnibus package, the transposition deadline has been postponed by one year to July 2027, and the first phase of application for the largest companies has been delayed to July 2028. Additionally, the European Commission will issue guidelines by July 2026, giving companies a clearer roadmap for compliance and reducing their dependence on legal consultancy.

As such, the CSDDD will be implemented for different companies as follows:

• Phase 1 (July 2028 – previously July 2027): The largest EU companies – those with more than 5,000 employees and an annual net worldwide turnover exceeding €1.5 billion – as well as non-EU companies generating more than €1.5 billion in the EU.
• Phase 2 (July 2028 – currently unchanged): Companies with over 3,000 employees and a net turnover exceeding €900 million, including non-EU firms meeting this threshold in the EU.
• Phase 3 (July 2029 – currently unchanged): All other companies falling within the directive’s general scope would be required to comply. By this stage, the CSDDD will apply to approximately 6,000 large EU companies and 900 non-EU companies.
• Phase 4 (post-2029 – currently unchanged): Any remaining undertakings that meet the CSDDD criteria would be required to comply, ensuring full implementation across all relevant entities.

Other aspects of the due diligence process have also been streamlined to minimize complexity and costs. For instance, companies are now only required to conduct assessments every five years instead of every year as was originally required. Moreover, stakeholder engagement obligations have been eased, and the requirement to terminate business relationships as a last resort has been removed.

Additionally, the CSDDD aligns more closely with the CSRD by adopting the same requirements for climate transition plans while also introducing further harmonization of core due diligence obligations to ensure consistency across EU member states. Finally, the provision requiring a review of the potential inclusion of financial services in the scope of the directive has been removed, eliminating the need for future assessments of their applicability under the CSDDD.

Changes to the Carbon Border Adjustment Mechanism

The CBAM is a key policy under the EU’s “Fit for 55 in 2030” package, which aims to cut greenhouse gas (GHG) emissions by 55 percent by 2030. Approved by the European Parliament on April 18, 2023, CBAM is designed to prevent carbon leakage by ensuring that imported goods face the same carbon costs as those produced within the EU. Instead of relying on free carbon allowances, which can distort market incentives, CBAM requires importers to pay the difference between their home country’s carbon price and the EU’s Emissions Trading System (ETS) price. This levels the playing field for domestic and foreign producers while encouraging global carbon pricing.

The CBAM is being phased in gradually. A transitional phase (between 2023 and 2025) requires importers of carbon-intensive goods like steel, aluminum, and cement to report emissions but does not impose financial costs. Full implementation begins in 2026, when importers must purchase CBAM certificates based on the average ETS carbon price. The scheme will run alongside the gradual phase-out of free carbon allowances under the EU ETS until 2035, by which point CBAM will cover over half of emissions in ETS-regulated sectors. While CBAM aims to drive emissions reductions, it will likely increase costs for importers and impact global trade dynamics.

According to the proposed amendment, experience and data collected during the transitional period showed that a few large companies were responsible for the vast majority of emissions produced by the CBAM-liable goods. As such, the amended rules seek to reduce the financial and compliance burden on smaller importers who are less responsible for emissions.

The proposed amendment, therefore, sets a de minimis threshold of 50 tonnes mass, applying cumulatively to all CBAM goods in the iron and steel, aluminum, fertilizer, and cement sectors imported by importers during a calendar year. This means companies importing CBAM-liable goods in amounts below this threshold in a given year will be exempt from paying the CBAM duties.

According to the Commission, this change will keep around 99 percent of emissions within the scope of CBAM while removing requirements for 90 percent of companies. The mass-based system will also help to reduce the administrative burden on smaller companies as “they will not have to obtain or provide any data additional to those provided in the customs declaration”.

In addition to the de minimis threshold, the Commission also proposes greater flexibility in managing CBAM obligations. To ease administrative burdens, authorized CBAM declarants will be able to delegate the submission of CBAM declarations to a third party. While the authorized CBAM declarant remains responsible for compliance, the third party must meet specific technical requirements, such as holding an Economic Operators Registration and Identification (EORI) number and being established in an EU member state.

Additionally, the deadline for submitting CBAM declarations and surrendering certificates will be extended beyond May 31 of the following year, giving importers more time to collect verified emissions data and purchase CBAM certificates.

The amendments also seek to streamline the calculation of embedded emissions for aluminum and steel goods. Since emissions from these materials are largely determined by their input materials (precursors) rather than by emissions generated during finishing processes, the latter will be excluded from emissions calculations. Furthermore, if input materials have already been subject to the EU ETS or a carbon pricing system fully linked with the EU ETS, their emissions will not be double-counted when determining the embedded emissions of finished goods.

How will the changes affect Chinese companies?

The proposed changes under the Omnibus package will reduce the regulatory burden on smaller Chinese companies operating in or exporting to the EU.

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The amendments to the CSRD will lower the number of Chinese companies required to comply with EU sustainability reporting requirements. By raising the net turnover threshold for non-EU companies from €150 million to €450 million and increasing the employee threshold for subsidiaries from 250 to 1,000 employees, many Chinese companies that previously would have been required to report will now fall outside the scope of the directive. This change will relieve some Chinese companies of administrative and financial compliance burdens. However, larger Chinese businesses with a significant EU presence remain subject to sustainability disclosure obligations.

For these companies, the postponement of reporting deadlines will allow for additional preparation time. Some Chinese firms fall under wave two and wave three of the phased CSRD implementation, meaning they would have originally been required to report in 2026 and 2027. Under the revised timeline, these companies now have until 2028 and 2029, respectively, giving them more time to adapt their reporting frameworks and align with the ESRS.

Similarly, the postponement of the CSDDD deadlines will provide additional time for very large Chinese companies subject to the directive. The European Commission has stated that this delay is intended to give affected companies more time to prepare for their obligations, particularly in light of the Commission’s planned guidelines, which will be introduced in 2026 to provide further clarity on implementation.

The introduction of a de minimis threshold under the CBAM will further reduce exposure to Chinese companies, particularly small and medium-sized importers. Under the current CBAM requirements, Chinese companies already face limited exposure, as China’s exports of CBAM-liable products account for a very small proportion of its total exports to the EU. In addition, Chinese exports of certain CBAM-liable goods, such as steel and aluminum, have already been suppressed due to the EU’s other safeguarding measures that are aimed at protecting its domestic industries.

Despite the reduced burdens and exposure risk, Chinese companies still need to prepare for the broader implications of CBAM, as the EU’s carbon pricing system is expected to expand. This means that Chinese exporters, particularly those in energy-intensive industries, should consider adjusting their supply chains and production methods to align with the EU’s carbon reduction ambitions. Transitioning to lower-carbon production processes and sourcing materials from suppliers with lower emissions could help Chinese companies mitigate future compliance costs and maintain competitiveness in the EU market.

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