Evolving legislation in Europe: a new interplay between Sustainability, Trade and Competitiveness?

In early 2025, the European Commission repositioned itself on key themes: sustainability, competitiveness, and trade. Geopolitical tensions and strong competition on global markets have proved a strong driver for the EU to target it's efforts in a united focus with the overarching goal of enhancing competitiveness of it’s businesses, including through simplification and reducing regulatory burdens.

After a decade of leading the "Brussels effect"—establishing the EU as a global regulatory powerhouse through sustainability-focused legislation like the European Green Deal—the Commission is now taking a more pragmatic stance. This shift acknowledges the dynamic and competitive global trading environment, requiring strategic adaptations. This is not an easy challenge to live up to - but recent initiatives provide the building blocks towards a more coherent and balanced approach.

Recent elections across member states and increasing pressure from businesses to reduce regulatory compliance burdens have prompted the Commission to propose deregulatory measures. The Competitiveness Compass, presented on 25th January 2025, provided the plan to turn the recommendations from the Draghi report, including recommendations on productivity and innovation and reduced dependencies, into action. 

Moreover, targeted sustainability simplifications were presented under the Omnibus proposal (presented 26 February 2025), introducing adjustments to key sustainability legislations such as the Corporate Sustainability Due Diligence Directive (CSDDD) and the Corporate Sustainability Reporting Directive (CSRD). In addition, the European Commission has proposed new policies aimed at strengthening industrial competitiveness—such as the Clean Industrial Deal—which allign sustainability objectives with the objectives of economic resilience and strategic autonomy.

Sustainability changes proposed in the The Omnibus Proposal: let's look at the Sustainability Due Diligence (CSDDD) changes Proposed

The Omnibus proposal presented by the Euroepan Commission introduces significant modifications to sustainability reporting and environmental, social, and governance (ESG) risk management. In the first package, four key rules from the European Grean Deal will be subject to adjustments proposed, including the corporate sustainability reporting directive (CSRD), the corporate sustainability due diligence directive (CSDDD). In addition, the EU taxonomy on sustainable investments and the carbon border tax (CBAM) will equally be tackled.

These proposed adjustments seek to alleviate compliance burdens while maintaining critical sustainability objectives:

• Postponing implementation and scope of CSRD and CSDDD: A reduced scope is proposed for the CSRD, from 50.000 companies to 5000 companies. Whereas the availability of data and information on sustainability footprint of companies has proved valuable to investors, buyers and consumers, the proposed reduced scope narrows this advantage. Unclear timelines have now thrown European businesses into uncertainty, reducing predictability of the over-all business environment.

• Limiting due diligence obligations to Tier 1 suppliers: This marks a shift from the OECD’s risk-based approach, which extends due diligence across the full value chain. Under the proposed changes, businesses would only be directly responsible for their Tier 1 suppliers, unless they have "reasonable knowledge" of ESG violations further down the chain.

• Refining the definition of stakeholders: The proposal narrows the definition of stakeholders to include only workers, their representatives, and directly affected communities. Companies engaged in broader sustainability efforts may still choose to consult a wider range of stakeholders.

• Capping due diligence information requests to SMEs: While intended to reduce burdens on smaller suppliers, this may prove unrealistic. Due diligence practices inherently involve supplier engagement, including codes of conduct and sustainability questionnaires.

Traceability as a key component of Sustainable Supply Chains and Resilience?

Traceability is becoming an essential requirement for both business resilience and regulatory compliance. The EU is integrating stringent traceability conditions across multiple sustainability regulations, reinforcing transparency throughout global supply chains:

• EU Deforestation Regulation: Companies must now track commodities down to the exact plot of land to verify that no deforestation has taken place. This regulation significantly impacts industries relying on agricultural raw materials such as soy, palm oil, and cocoa.

• EU Battery Regulation: Battery producers are required to implement a chain-of-custody system, ensuring visibility over upstream actors in the supply chain. This is particularly relevant for industries dependent on critical raw materials (CRM) such as lithium, cobalt, and nickel.

• EU Forced Labour Regulation: Due diligence obligations extend to all companies, including SMEs, reinforcing the need for robust ESG risk management frameworks and supplier accountability.

Traceability has been strongly integrated as a key step in the EU's legislative frameworks on sustainable supply chains. Besides the fact that insights into supply chain provenance of raw materials, goods and services is key to identifying ESG risk and maturity of supply chain actors, it will equally contribute to monitoring supply chain dependencies and shocks, and hence ensuring resilience.

The political journey ahead; towards a balanced outcome for sustainability changes proposed under EU Omnibus

The coming months will prove to what extent the CSDDD and CSRD will continue to drive sustainability in global supply chains through reporting and due diligence requirements in the global value chains. What will equally remain to be seen is to what extent the ‘wave of legislative change’ initiated by the European Commission actually in a more ‘coherent’ package of sustainability requirements proposing improved alignment with Battery regulation, Forced Labour, Deforestation, CBAM?

In the short term, the question for many companies and Governments will be: what will the implications of these changes be in terms of compliance efforts, and over-all sustainability risk management?

Prioritizing Competitiveness: the Clean Industrial Deal and new era of international trade partnerships

Clearly, against the global and geopolitical background of a world in turmoil, the overall tendency in Europe anno 2025 is; prioritize competitiveness at home, leverage sustainability where it can support business resilience in a dynamic global trading environment.

This ambition is clearly reflected in the Competitiveness Compass, presented in January 2025 as a holistic approach to bring back ‘economic dynamism in Europe’ under leadership of a ‘growth and investment oriented European Commission’. Moreover, to stimulate survival of the European industry, the European Commission prepared the Clean Industrial Deal, presented on 25th February 2025, which puts forward competitiveness and resilience as main policy goals. As mentioned in the presentation of the Competitiveness Compass; ‘The EU's ability to diversify and reduce dependencies will hinge on effective partnerships.’

In this context, the EU’s trade policy is equally undergoing a recalibration. Previously seen as defensive and protectionist, the Commission is now emphasizing international partnerships to secure access to raw materials and reduce dependencies in global supply chains.

As emphasized in the EU Clean Industrial Deal, Europe seeks to reduce dependencies on China and the U.S.; and aims to strengthen ties with "friendly" third countries (e.g., Balkans, Central Asia, SE Asia, Latin America, Africa) to secure supply chains amid digital and energy transitions.

But dependencies are highly commodity- and sector specific, sometimes characterized by a production concentration in a single country (such as cobalt from DRC), sometimes showing an important exporter or processing role located in a specific geography. This means; there is not a one size fits all to 'reducing dependencies'; as analysis of Europe's trade patterns by CEPR has shown. These insights confirm that competitiveness and resilience require tailor-made and coherent approaches to dependency 'risk mitigation'; combining trade policy instruments, capacity building and EU domestic regulatory reform and support.

In that sense, the EU Critical Raw Materials Act (CRM Act) can certainly be considered as a flagship initiative on 'reducing dependencies' and securing stable supply chains for essential materials needed in green and digital transitions. It's implementation will however require a strong public-private collaboration to realize the ambitions in key raw materials supply chains.

Recent developments signal the shift towards a re-embracing of international trade cooperation, whilst taking a more coherence over-all approach:

• Clean Trade & Investment Partnerships (CTIP): The first CTIP was announced at the EU-South Africa Summit on 13 March 2025, demonstrating a commitment to integrating trade, investment, and sustainability goals. This partnership aligns with broader EU efforts under the Global Gateway Initiative, which seeks to enhance economic cooperation with emerging economies.

• Renewed trade negotiations: Talks with Malaysia have resumed after a 12-year impasse, and agreements with Mercosur and Mexico are nearing finalization.

• China-EU relations: The EU is exploring "mutual interest" solutions while maintaining a cautious "de-risking" strategy.

With a new generation of trade agreements lined up, the European Commission intends to pursue a ‘whole of government approach’, bringing together GlobalGateway investments, trade and investment partnerships and rules, as well as regulatory cooperation on key challenges such as sustainability.

The key challenge for the EU will be balancing its competitiveness and sustainability agenda with the interests of its trading partners. Can it develop trade agreements that promote both economic growth and sustainable development?

What next for the EU's sustainability and competitiveness policy frameworks?

On a broader scale, the puzzle to solve for the EU is: by re-positioning it’s sustainability and competitiveness oriented policy framework, can the EU reclaim a leading role in global trade while ensuring sustainable supply chains? And; how can the new approach on competitiveness and sustainability deliver on supply chain resilience and reduced dependencies for strategic autonomy at home?

With regards to the Omnibus proposal and sustainable supply chain legislations, the next months will prove determining in finding a balanced approach, showing to what extent the European Council and European Parliament will ‘correct’ the suggested changes. Already, the Greens and Socialist (S&D) parties in the European Parliament have strongly opposed first Omnibus package which is a set-back of the European Green Deal as compass for boosting competitiveness whilst meeting human rights and climate commitments. On the right side, the EPP political parties are pushing for a success and in favor of proposed Omnibus changes.

With regards to Europe’s re-orientation towards re-establishing it’s trade cooperation and global partnerships, clarity needs to be provided whereby the EU Trade Policy unites the various policy goals; competitiveness, trade and sustainability. A renewed emphasis needs to be placed on supporting sustainable development and ‘just transition’ in developing countries where Europe is an active player (including through sourcing raw materials).

Why Hyacint Consult? Here to support your challenge.

At Hyacint Consult, we continue to monitor developments, as a basis for supporting key actors to navigate in this evolving policy landscape which requires businesses and policymakers to adopt adaptive strategies. At Hyacint Consult, we specialize in guiding organizations through the complexities of trade, ESG risk management, and EU regulatory reforms.

We offer:

• Insightful data and analysis on trade, competitiveness and sustainability, how these interlink, and their business and societal implications

• Tailored strategies for to anticipate global developments, integrate policy changes and position in global markets and supply chains, prepare for compliance and beyond;

• Implementation guidance to help businesses build resilient and competitive supply chains that meet sustainability standards on environment, human rights and governance (ESG).

With our expertise and strong track-record in global trade and sustainability, we can support your organisation to stay ahead of regulatory changes, optimize competitive advantages, and strengthen its position in the global trade whilst upholding responsible business conduct standards in global value chains.

Questions or ideas? Do not hesitate to reach out how we can support your organization in navigating this changing landscape. Contact Hyacint Consult today to explore solutions tailored to your business needs: info@hyacint.org.