Travers Smith's Sustainability Insights: EU product regulation    

The future direction of Environmental Product Regulation may not always make the headlines – but, increasingly, it matters.  That's especially true now because, when the EU says that it is "simplifying" environmental product regulations, it is actually transforming them, and that transformation is worth paying attention to.  As well as affecting existing portfolio companies, the policy shift may also be critical when assessing the investment thesis for a new deal.

The European Commission acknowledges that its regulatory architecture needs to change.  The ambitious plan to build a “Simpler, Clearer and Better Enforced EU Rulebook” is long overdue, and an emphatic response to businesses' frustrations and concerns about competitiveness. 

But investors should avoid the temptation to assume that the EU is retreating from product regulation.  In fact, its plan is to rebuild it, so that it is more digital, more interconnected, more enforceable, and in several areas, more consequential than before.  

The net effect will not be less regulation – and it will certainly not be easy to follow: compromises, delays and last-minute changes are inevitable.  It is unlikely to be much simpler.  But it might be more coherent, and it could be good news for European businesses that get it.   (Our detailed briefing is available here.)

A key overarching reform is the Digital Product Passport (DPP), which connects multiple regulatory workstreams – from product safety to chemicals, from energy labelling to circular economy compliance.  The DPP will require disclosure of a wide range of sustainability impacts for the benefit of, among others, customers and regulators.  Businesses that fail to prepare for the DPP may regret it; those that invest in it strategically could turn a cost into a competitive advantage.

Crucially, in some key areas, the European Commission is treating its "simplification" drive as part of its industrial strategy.  For example, the Commission has reframed the forthcoming Circular Economy Act: Environment Commissioner Jessika Roswall has argued that reducing dependence on raw materials is no longer just an environmental goal, but an economic and strategic necessity. 

The Commission expects to publish a draft this year.  The Act will aim to promote recovery and use of secondary raw materials from within the EU, set harmonised end-of-waste criteria, and make recycled materials economically attractive – closing the price gap with virgin materials.  For investors, there are both risks and opportunities.  Businesses that are well-placed to exploit increasing demand for recovery, repair, recycling and responsible sourcing could benefit.  Companies with circular business models – or who supply the products and technologies that will be critical to those circular business models – will also become more attractive.

Carbon pricing is also in the spotlight.  The payment phase of the EU's Carbon Border Adjustment Mechanism (CBAM) – which imposes a tariff based on the carbon embedded in certain imports – began on 1 January 2026, and the first quarterly certificate price was published in April.  Importers must buy certificates in February 2027 to cover 2026 imports.  The Commission is also proposing to extend CBAM's scope to steel- and aluminium-intensive downstream products, which could capture importers currently outside the regime.  And the UK has its own version of the CBAM, expected to start on 1 January 2027.

Modelling for businesses importing carbon-intensive goods (including in "green" businesses, such as renewable energy) suggests that cost exposure could be material, depending on future carbon pricing.  Suppliers in countries without carbon pricing mechanisms, and without credible decarbonisation plans, face being priced out of the European market.  Investors in supply-chain-intensive businesses should be aware of the possible impacts.