The Compass aims to address concerns about productivity and maintain Europe’s leading role in sustainable innovation and climate neutrality.

By Paul A. Davies, Michael D. Green, and James Bee

On 29 January 2025, the European Commission (the Commission) launched the Competitiveness Compass, a strategic initiative that builds on the work undertaken by Mario Draghi. His report, commonly known as the Draghi Report, identified that the EU could no longer rely on many of the essential elements to the EU’s prior economic growth (such as strong external demand from an open global trade system, access to cheap and abundant fossil fuel energy, and a “peace dividend”).

In response, the Competitiveness Compass is built on three pillars (or core areas for action) consistent with the Draghi Report: (1) innovation; (2) decarbonisation; (3) and security. These three pillars are complemented by five enablers: (1) simplifying the regulatory environment; (2) exploiting the benefits of the scale of the Single Market; (3) financing competitiveness through a European Savings and Investments Union; (4) promoting skills and quality jobs; and (5) better coordination of policies at EU and national level.

The Competitiveness Compass is noted as guiding the Commission’s work for the next five years, and this blog will specifically consider certain sustainability aspects of the Competitiveness Compass.

A Roadmap for Decarbonisation and Competitiveness

Central to the Competitiveness Compass is a joint roadmap for decarbonisation, seeking to address the challenge of high and volatile energy prices. Notably, the Competitiveness Compass restates the EU’s commitment to achieving a 90% reduction in emissions by 2040 and a decarbonised economy by 2050.

The upcoming Clean Industrial Deal is said to focus on making the EU an attractive hub for manufacturing, particularly in energy-intensive industries, by promoting clean technologies and circular business models. An Affordable Energy Action Plan is also envisioned, targeting a reduction in energy costs, while the Industrial Decarbonisation Accelerator Act is intended to expedite permitting processes for sectors in transition.

The Competitiveness Compass also underlines the Commission’s view of the potential benefits of (1) tapping into the circular economy, and (2) the business case for clean production. In respect of the former, the Competitiveness Compass identifies that the European remanufacturing market’s circular potential is projected to grow from its current value of €31 billion to €100 billion by 2030, creating 500,000 new jobs. To this end, a Circular Economy Act proposal is intended to catalyse investment in recycling capacity and encourage EU industry to effectively substitute virgin materials and to reduce the landfilling and incineration of used raw materials. Regarding the business case for clean production, the Competitiveness Compass focuses on ensuring that energy-intensive sectors, such as steel, metals, and chemicals, are protected during this phase of transition. For instance, in spring 2025, the Steel and Metals Action Plan is expected to propose concrete measures to address investment needs, access to primary and secondary materials, and use of trade defence instruments, and will set out a proposed definition of a long-term solution to replace current safeguard measures in light of global non-market overcapacity.

Regulatory Simplification and the Omnibus Proposal

The Competitiveness Compass emphasises the need to simplify and reduce regulatory burdens. The Competitiveness Compass sets a target of cutting the administrative burden for firms by at least 25%, and by at least 35% for SMEs. The first anticipated proposal in respect of this simplification agenda is the Omnibus proposal, which is expected to target the streamlining of sustainability reporting, due diligence, and taxonomy. However, the full scope and the specific simplifications envisaged by the Omnibus remain unclear at this point.

In particular, the Omnibus proposal is stated as targeting certain key areas highlighted in the Competitiveness Compass, including tackling the trickle-down effect (ensuring that smaller companies along supply chains are not subjected to excessive reporting requests that were never intended by legislators) and introducing a new definition of small mid-caps (creating a category for companies larger than SMEs but smaller than large enterprises, allowing them to benefit from tailored regulatory simplification).

Furthermore, the Competitiveness Compass refers to measures that simplify the Carbon Border Adjustment Mechanism (CBAM) for smaller market players, making it more accessible and less burdensome. It is also stated as covering the existing rules and new initiatives on chemicals, seeking to bring about real simplification on the ground and ensuring faster decision-making on important hazards through the revision of the REACH Regulation.

Promoting Clean Trade and Investment Partnerships

To reduce dependencies and enhance security, the EU plans to establish Clean Trade and Investment Partnerships. These partnerships are intended to secure the supply of raw materials, clean energy, sustainable transport fuels, and clean technologies from global partners, ensuring a diversified and resilient supply chain.

The Competitiveness Compass underscores the EU’s perceived need to address the increasing threats posed by climate change and extreme weather events. The European Climate Adaptation Plan is a direct response to this call, aiming to integrate climate resilience into urban planning and deploy nature-based solutions. By doing so, the plan seeks to protect supply chains and production sites from disruptions caused by natural calamities such as floods, droughts, wildfires, and storms, thereby supporting the EU’s economic security and stability.

Similarly, the Competitiveness Compass discusses the critical role of resource security in maintaining Europe’s long-term competitiveness. The European Water Resilience Strategy seeks to address this goal by focusing on mitigating water scarcity and promoting sustainable water use. By improving water management practices and infrastructures, the strategy aims to increase water efficiency and ensure a reliable supply for both agricultural and industrial sectors, aligning with the Compass’ emphasis on reducing dependencies and enhancing resource resilience.

Next Steps

By focusing on innovation, decarbonisation, and strategic partnerships, the EU aims to lead the global transition to a climate-neutral economy while reducing the regulatory burden for companies, particularly SMEs.

Latham & Watkins will continue to monitor developments related to the Competitiveness Compass and the Omnibus package and provide updates as necessary.

The authors would like to thank Toon Dictus for his contribution to this blog post.