ESG Knowledge Update | July 2026
Published on 22nd July 2026
Welcome to Osborne Clarke's ESG Knowledge Update from our multi-disciplinary ESG team
At a glance:
The European Commission and the UK government have each taken steps to tighten rules on deforestation across supply chains
First compliance deadlines under the EU Packaging and Packaging Waste Regulations apply from August
New delegated regulations seek to simplify the Corporate Sustainability Reporting Directive
Sustainability and climate reporting
EU legislators agree provisional framework for small mid-cap companies
European Parliament and Council negotiators have reached a provisional agreement introducing a new category of small mid-cap (SMC) enterprise as part of the Commission's fourth Omnibus simplification package. The new category is intended to avoid cliff-edge situations where a company's regulatory obligations increase sharply upon growing beyond the small and medium-sized enterprise threshold.
Small mid-cap companies are defined as those with fewer than 1,000 employees and either up to €200 million in turnover or up to €172 million in total assets. SMC company exemptions would be extended across a range of legislative frameworks, including the General Data Protection Regulation record-keeping obligations where processing is not likely to be high-risk, the Prospectus Regulation, the Batteries Regulation, the F-gases Regulation, Markets in Financial Instruments Directive and the Resilience of Critical Entities Directive.
Within five years of entry into force, the Commission will produce a report on the SMC threshold and its impact on administrative burden, with the possibility to review it. The provisional agreement must be formally adopted by Parliament and Council before entering into force.
Companies that currently sit just above the SME threshold will be looking to assess whether they would qualify as an SMC and consider what exemptions may become available to them.
Commission adopts delegated regulations to simplify the CSRD
Following its consultation on Corporate Sustainability Reporting Directive (CSRD) reporting standards, the European Commission has adopted two delegated regulations simplifying the sustainability reporting framework. Both are subject to a two-month scrutiny period by the European Parliament and the Council.
The first revises and simplifies the European Sustainability Reporting Standards (ESRS). It introduces a simplified materiality assessment and additional targeted flexibilities. The revised ESRS will apply for financial years starting on 1 January 2027, with an early adoption option for companies whose CSRD obligations begin in 2026.
The second establishes voluntary standards for companies with fewer than 1,000 employees on average. These sit outside the mandatory CSRD regime but are drawn into sustainability reporting through the value-chain cap, under which large in-scope companies may request sustainability data from supply chain partners. The voluntary standards provide a structured, proportionate basis for responding to those requests. They will apply to in-scope entities undertaking value chain reporting from financial years starting in 2027 and to out-of-scope companies wishing to report voluntarily from the date of entry into force.
Circular economy
EU packaging regulation's first compliance deadlines approach in August
The first wave of requirements under the EU Packaging and Packaging Waste Regulation (PPWR) take effect from 12 August, applying to any business that places or distributes packaging on the EU market, regardless of material.
From that date, manufacturers must carry out conformity assessments and draw up a declaration of conformity for each type of packaging placed on the EU market, food contact packaging containing PFAS (per- and polyfluoroalkyl substances) above specified thresholds will be banned, and producers placing packaging on the market in a member state where they are not established must appoint an authorised representative in that member state.
Further requirements follow over the coming years and into the next decade, including reusable container systems for the hospitality sector, harmonised labelling, recyclability standards and single-use plastic bans. With implementing acts still to come, businesses will be looking to start planning early rather than wait for regulatory clarity as PPWR obligations and deadlines evolve well beyond 2026.
EU ban on destruction of unsold clothing and footwear takes effect
The ban on large companies destroying unsold apparel, clothing accessories and footwear under article 25 of the Ecodesign for Sustainable Products Regulation (ESPR) took effect on 19 July, with medium-sized enterprises required to comply from 19 July 2030. Businesses in scope will want to review their inventory management and any existing destruction arrangements to ensure compliance.
The ban is subject to a limited set of confirmed exceptions, including where products are dangerous, unfit for purpose, in breach of intellectual property rights, or where a genuine effort to donate them has proved unsuccessful. Any business relying on an exception are required to retain supporting documentation for five years.
While the destruction ban currently applies only to clothing and footwear, the Ecodesign for Sustainable Products Regulation (ESPR) disclosure obligations are broader: they cover all unsold consumer goods placed on the EU market. Collection of the relevant data, since the first disclosure covers goods discarded during the first full financial year after the ESPR entered into force on 18 July 2024.
Supply chain transparency
Government confirms plans for mandatory deforestation due diligence across GB supply chains
The UK government has confirmed that it will introduce mandatory deforestation due diligence requirements for businesses in Great Britain, using powers under Schedule 17 of the Environment Act 2021 alongside legislation to strengthen the existing UK Timber Regulation. A consultation is due later this year, covering businesses that trade in commodities sourced from rainforests, including soy, palm oil, cocoa and rubber.
The government has proposed that the GB regime will cover the same core commodities and underlying information requirements as the EU Deforestation Regulation (EUDR), which will apply in Northern Ireland from 30 December this year.
The aligned approach is intended to reduce administrative duplication across the UK and help businesses exporting to the EU meet consistent traceability standards. The government has also indicated a longer-term ambition to transition to a fully deforestation-free standard, beyond the initial focus on illegally deforested land.
This announcement represents a significant step forward after a prolonged period of inaction on GB deforestation rules. The extent of alignment between the GB regime and the EUDR remains to be determined through the forthcoming consultation.
Commission updates EU Deforestation Regulation product scope and digital tools
The European Commission has adopted two measures to support implementation of the EU Deforestation Regulation ahead of its application from 30 December for large and medium-sized operators.
A delegated regulation updates the list of covered products, removing cattle hides, skins and leather, re-treaded tyres, soybeans for sowing, articles of vulcanised rubber, conveyor and transmission belts, and aircraft and motor vehicle seats. It adds soluble coffee, certain palm oil derivatives and frozen cattle tongues from 30 December 2027.
The changes relate to products derived from the seven EUDR commodities and do not alter the commodity list itself. The relegated regulation also clarifies that samples used for analysis, examination and testing fall outside the regulation's scope and introduces exemptions for waste, used and second-hand products, packing material, and products used in the manufacture of medicinal products.
An implementing regulation sets out the functioning of the information system for submitting due diligence statements and simplified declarations, including a simplified declaration form for micro and small primary operators, updated specifications for automated application interfaces, and a contingency plan for unplanned unavailability. The Commission has also updated its main guidance on the EUDR to reflect all changes.
Commission consults on Corporate Sustainability Due Diligence Directive implementation guidelines
The European Commission has launched a public consultation, open until 24 July, on the development of guidelines to support implementation of the Corporate Sustainability Due Diligence Directive (CSDDD).
The amended CSDDD, following the Omnibus I simplification package, will apply from 26 July 2029 to large EU companies with more than 5,000 employees and net annual turnover exceeding €1.5 billion, with the same turnover threshold for non-EU companies.
The guidelines will provide practical guidance to companies on fulfilling their due diligence obligations, to member state authorities on implementation and enforcement, and to stakeholders on pursuing their rights. They will also be relevant to companies and other stakeholders in non-EU countries linked to the supply chains of in-scope companies.
The first tranche of guidelines is due by 26 July 2027 and the second by 26 July 2028.
In-scope companies, and smaller businesses in their value chains, may wish to consider responding to the consultation before 24 July to ensure their views are considered in the guidance.
UK Immigration and Asylum Bill introduced to strengthen modern slavery reporting framework
The government's Immigration and Asylum Bill, presented to Parliament on 30 June, proposes changes to the reporting regime under section 54 of the Modern Slavery Act 2015, which requires commercial organisations with annual turnover of £36 million or more to publish an annual slavery and human trafficking statement.
The bill's principal proposals cover mandatory prescribed content for modern slavery statements, with greater emphasis on accountability and requiring organisations to explain why certain steps have not been taken.
They include an accuracy statement from the relevant signatory, with parent undertakings permitted to sign on behalf of subsidiaries; the extension of reporting obligations to public bodies where their budget meets a threshold to be set in secondary legislation; a requirement to submit statements to the secretary of state by specified electronic means; and a financial penalty regime for non-compliance of up to the greater of £1 million or 1% of total turnover.
The bill does not include mandatory human rights due diligence obligations, an omission already criticised by the Independent Anti-Slavery Commissioner. The bill passed its second reading on 13 July by 264 votes to 90 and will now proceed to committee stage.
European Commission publishes guidelines on Forced Labour Products Regulation
The European Commission has published guidelines on the application of the Forced Labour Products Regulation (FLPR), alongside the launch of its new Forced Labour Single Portal, providing businesses and other stakeholders with practical guidance ahead of the regulation's enforcement date of 14 December 2027. The guidelines are addressed to competent authorities, customs authorities, businesses and consumer associations, and are not legally binding.
The FLPR prohibits the placing of products made with forced labour on the EU market and their export from the EU. It covers all products regardless of origin, type or sector, whether made in whole or in part with forced labour at any stage of the supply chain, and applies to all economic operators, including non-EU businesses.
The guidelines cover the scope of the regulation, including the definition and risk indicators of forced labour; and the investigation and enforcement process, including how investigations are prioritised and how penalties are calculated. Non-binding due diligence guidance for businesses is also covered, which follow the Organisation for Economic Co-operation and Development (OECD) six-step framework, covering risk identification and assessment, prevention and mitigation, monitoring, external communication and remediation.
The December 2027 enforcement date gives companies a window to map forced labour risks across their supply chains and test their due diligence frameworks against the OECD model referenced in the guidelines.
UK private members' bill proposes mandatory human rights and environmental due diligence
A private members' bill introduced in the House of Lords on 17 June is seeking to impose a statutory duty on commercial organisations and public authorities to prevent human rights and environmental harms across their own operations, subsidiaries and value chains.
The Commercial Organisations and Public Authorities Duty (Human Rights and Environment) Bill would require companies with a worldwide annual turnover of £36 million or more would be required to conduct due diligence and publicly report on it annually.
The bill includes civil liability for failure to prevent harms anywhere in the value chain, financial penalties of up to 10% of global turnover, exclusion from public procurement for up to five years, and a criminal offence for directors of repeat offenders.
Modelled on the structure of the Bribery Act 2010, it also creates a "failure to prevent" corporate criminal offence where a person associated with a commercial organisation commits an act to obtain or retain business, and that act constitutes a specified offence including slavery, servitude, forced or compulsory labour or human trafficking under the Modern Slavery Act 2015.
The bill is at first reading stage and its prospects of becoming law in this session are uncertain. It signals growing political pressure for a UK mandatory due diligence regime. Businesses will want to closely monitoring its progress alongside the EU Corporate Sustainability Due Diligence Directive and the amendments to the UK's modern slavery reporting framework.
Green claims
ASA issues rulings on environmental claims across fashion, consumer goods and cruise sectors
The Advertising Standards Authority (ASA) has published a series of rulings on environmental claims made by advertisers across the fashion, consumer goods and cruise sectors, identifying recurring issues with the substantiation and presentation of green claims.
In the fashion sector, the ASA found that absolute claims such as "sustainable" were likely to be interpreted by consumers as referring to a product's full life cycle, including its overall environmental impact. Where advertisers intended the claim to refer only to a specific environmental benefit, the ASA found that the basis of the claim needed to be made clear and supported by corresponding evidence.
In relation to disposal claims, the ASA found that "biodegradable" claims were inadequately substantiated where advertisers had failed to account for real-world disposal conditions. Compliant claims require evidence that reflects how consumers are actually likely to dispose of the product, together with sufficient information on how biodegradation occurs, the timeframe involved, and any by-products or limitations.
In the cruise sector, the ASA raised concerns with both absolute and comparative claims, including descriptions of a particular fuel as "the world's cleanest marine fuel." The ASA acknowledged that companies operating in high-impact sectors may legitimately advertise steps taken to reduce their environmental footprint, but found that precision in wording is essential to avoid overclaiming.
Sustainable finance
Council of the EU agrees negotiating position on SFDR 2.0
The Council of the EU has agreed its negotiating position on an updated Sustainable Finance Disclosure Regulation (SFDR) advancing proposed amendments to the EU's sustainability disclosure framework for financial products. Agreed on 24 June, the reform would amend the existing SFDR and the Packaged Retail and Insurance-based Investment Products Regulation, and repeal the SFDR regulatory technical standards.
The SFDR 2.0 reforms introduce three new product categories – sustainable, transition and ESG basics – to replace existing concepts that have contributed to greenwashing and investor confusion.
Under the Council's position, financial products in the sustainable and transition categories are required to use at least three mandatory indicators from a European Commission list when disclosing principal adverse impacts. Investments in fossil fuel companies that allocate at least 20% of capital expenditure to EU taxonomy-aligned activities and have a clear, time-bound strategy to reduce greenhouse gas emissions may qualify for the transition category, subject to a fourth mandatory adverse impact indicator.
General-purpose issuances by Union-established bodies may be included in the transition category where certain conditions are met. The amendment's categorisation provisions will not apply to alternative investment funds offered exclusively to professional investors.
The Council's agreement paves the way for trilogue negotiations with the European Parliament, which published its own draft legislative resolution in May.
International guidance published on green, climate transition and sustainability-linked bonds
At its annual general meeting on 22 June, the Executive Committee of the Green, Social, Sustainability and Sustainability-Linked Bond Principles and Climate Transition Bond Guidelines, supported by the International Capital Market Association, published three documents offering global ESG investor guidance.
The Climate Transition Bond Guidelines frequently asked questions document provides clarification on differentiating transition and green projects, "best efforts" alignment, and the application of the guidelines by different issuer types, including those in hard-to-abate sectors, financial institutions and sovereigns.
A phase 1 comparison of the Green Bond Principles and the European Green Bond Standard Regulation outlines the commonalities and differences between the two frameworks and encourages issuers to demonstrate alignment with both to ensure global investor recognition.
A third ESG-related paper explores the structural drivers underpinning investor demand for green, social, sustainability and sustainability-linked, or GSS+, bonds. Updated technical guidance was also released, including revised guidelines for external reviews and updated harmonised impact-reporting frameworks for green projects and social bonds.
Zero limit set on international carbon units for UK's fifth carbon budget
International carbon units from overseas reductions or avoidances of greenhouse gases cannot count towards meeting the UK's fifth carbon budget (2028 to 2032), following the making of the Climate Change Act 2008 (Credit Limit) Order 2026 (SI 2026/694), which came into force on 26 June.
The order exempts from this limit any carbon units arising from the trading of allowances between the EU Emissions Trading System and the UK Emissions Trading Scheme, if the two are linked during the fifth carbon budget period. This is to avoid restricting any future link between the two schemes.
