On 24 February 2026, the European Union (“EU”) adopted Directive (EU) 2026/470 (the “Directive”), amending, inter alia, Directive 2006/43/EC, Directive 2013/34/EU, Directive (EU) 2022/2464 and Directive (EU) 2024/1760, with a view to strengthening corporate sustainability reporting and due diligence requirements. It introduces mandatory human rights and environmental due diligence obligations for large companies operating in or with the EU.
With the entry into force of the Directive, companies should now assess whether their existing sustainability reporting or due diligence readiness plans remain necessary under the revised thresholds.
Impact for investment funds
Although the Directive does not directly apply to fund vehicles as such, its personal scope is of relevance to the asset management industry. The definition of “company” expressly includes regulated financial companies, including alternative investment fund managers ("AIFMs"), managers of EuVECA, EuSEF and ELTIF, as well as UCITS management companies.
Amendments to the Corporate Sustainability Reporting Directive (CSRD)
Introduction of a new scope
The obligation to prepare and publish sustainability reporting is limited to companies with more than 1,000 employees and a net turnover exceeding EUR 450 million during the financial year.
In addition, the European Commission has been granted the power to periodically revise the applicable net turnover thresholds in order to reflect the effects of inflation, thereby ensuring that the scope of the reporting obligation remains proportionate over time.
The Directive further clarifies the obligation to report on key intangible resources, specifying that such requirement applies exclusively to companies exceeding the above-mentioned thresholds.
The extraterritorial application of the reporting obligation has been significantly limited by the Directive. Reporting obligations for third-country corporate groups now arise only where two cumulative thresholds are met:
the non-EU parent generates more than EUR 450 million in net turnover within the European Union, and
the relevant EU presence (subsidiary or branch) exceeds EUR 200 million in net turnover.
In that case, the non-EU parent company prepares the sustainability report at group level. The EU subsidiary/branch does not write its own sustainability report anymore. The main obligation of the subsidiary branch is to make the parent company’s report publicly available in the EU (e.g. on a website or official filing platform).
It does not mean the non-EU entity is “out of scope” entirely. It still exists within the regulatory framework and may still be involved indirectly in providing data to the parent if needed (format reporting burden is on the group level).
Furthermore, listed small and medium-sized enterprises (“SME”) have been removed from the mandatory scope of the CSRD. Correspondingly, the empowerment previously conferred on the European Commission to adopt SME-specific and sector-specific European Sustainability Reporting Standards (“ESRS”) has been deleted.
What are the major changes?
Introduction of a new “Protected Undertaking” Concept
The Directive introduces the concept of “protected undertakings” to cover smaller entities within the value chain that employ fewer than 1,000 employees on average. These entities fall under a voluntary sustainability reporting framework and are not required to provide information beyond what is set out in those voluntary standards.
Reporting companies may rely on self-declarations to determine whether a value-chain partner qualifies as a protected undertaking. Where a requested piece of information goes beyond what is permitted under the voluntary standards, reporting companies must inform the protected undertaking of this fact and clearly communicate their right to decline the request. Assurance providers issuing opinions on sustainability reports are similarly required to respect these limitations when performing their assessments.
Overall, this framework is designed to reduce the reporting burden across value chains while still ensuring a baseline level of accessible sustainability information.
In parallel, a three-year transitional regime continues to apply for value-chain data gaps. During this period, reporting companies are required to explain any missing information and to describe the steps they intend to take to obtain direct data or, where that is not feasible, to develop reasonable estimates over time.
Simpler reporting for group going through restructuring
The Directive introduces less burdensome reporting for groups undergoing mergers, acquisitions, or disposals during a reporting period.
These groups are now permitted to postpone inclusion of sustainability data for entities acquired or merged during the financial year until the subsequent reporting cycle. Similarly, entities exiting the group during the year may be excluded from that year’s consolidated sustainability disclosures.
However, this flexibility does not remove the obligation to provide continuing transparency requirements. To that extent, the parent undertaking must disclose any material events associated with such transactions that could have a significant impact on the group’s overall sustainability profile.
Introduction of exemptions for financial holding companies
The Directive sets out a new exemption for certain EU and non-EU financial holding companies, removing the requirement to prepare consolidated sustainability reporting under specific conditions.
Indeed, a parent undertaking qualifying as a financial holding entity and not participating in operational, financial, or strategic decision-making over its subsidiaries will benefit from reporting exemptions.
Safeguards for commercially sensitive information
The Directive allows companies to leave out certain sustainability disclosures where publishing them would seriously harm their commercial interests, expose trade secrets, reveal classified information, or where confidentiality is necessary to protect privacy or security interests. This possibility is subject to specific conditions and must be reviewed at every reporting period.
Revision of European Sustainability Reporting Standards (ESRS)
The Directive states that the Commission shall issue non-binding sector guidance to support practical implementation.
Within six months after the rules start applying, the European Commission is required to update the ESRS standards through a formal delegated act.
The purpose of this update is to make the reporting framework less complex and more focused. In practice, this means:
removing data requirements that add little value or are repetitive,
putting more emphasis on clear, numerical (quantifiable) information,
clearly distinguishing what companies must report from what is optional,
reinforcing the materiality principle so companies only report what is truly relevant and avoid over-reporting, and
improving alignment with international sustainability reporting frameworks to make systems more compatible across jurisdictions.
Timeline
Companies falling below the new thresholds may be exempted by Member States from CSRD reporting for financial years running from 1 January 2024 to 31 December 2026. From financial years beginning on or after 1 January 2027, mandatory sustainability reporting will apply exclusively to companies that meet the revised thresholds.
In Luxembourg, the latest amendments to draft law 8370, adopted on 6 May 2025, have already anticipated this transitional exemption in the national transposition framework.
For more information you can also read our previous publications on the topic.
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