For those who follow sustainability issues closely, last week was a juicy one, with the European Commission (EC) presenting on the 26th of February the first Omnibus proposal, a very much anticipated sustainability-related "simplification" package.
This initiative follows the Draghi Report – A Competitiveness Strategy for Europe (September 2024) – which pointed out that Europe's lack of productivity growth posed an "existential challenge." The Omnibus proposal also builds on the EC's recent Competitiveness Compass which promised to make the EU's economy more prosperous and competitive, namely by reducing administrative burdens by 25%, and by 35% for small and medium-sized businesses (SMEs), by the end of this EC's mandate in 2029.
The package of legislative proposals concerns several pieces of legislation which are at the core of the European Green Deal, including:
- The Corporate Sustainability Reporting Directive (CSRD)
- The European Union Taxonomy (EU Taxonomy)
- The Corporate Sustainability Due Diligence Directive (CSDDD)
CSRD
According to the EC's proposal, for EU company reporting, only companies with over 1000 employees (up from 250) will remain in-scope – a change which the Commission estimates will remove 80% of companies from the sustainability reporting requirements, aligning CSRD's scope more closely to that of CSDDD.
For non-EU parent companies reporting from 2028, the threshold is set to increase, applying only to groups that generate a net turnover of €450 million (up from €150 million) within the EU during the last two consecutive years.
As regards listed SMEs, they have been entirely removed from the CSRD framework and will therefore no longer be required to report.
The Commission has also suggested measures to protect SMEs from "disproportionate sustainability information requests" when they form part of the value chains of larger companies subject to CSRD (and CSDDD). Under the proposed new thresholds, in-scope companies will only be permitted to request a limited set of information, aligned with the voluntary reporting standards designed for SMEs.
In fact, for companies with up to 1000 employees that will no longer fall within the scope of the CSRD, the Commission has proposed the introduction of Voluntary Reporting Standards tailored for SMEs (VSME), to be developed by EFRAG. Hence, the VSME exposure draft published by EFRAG in January, will need to be further revised by the Commission prior to adoption (through delegated regulation).
The Commission has also committed to reviewing the European Sustainability Reporting Standards (ESRS) to significantly reduce the number of mandatory data points and prioritize quantitative data points rather than narrative reporting. The revised ESRS are expected to be issued within the first six months after CSRD revision is adopted and in time for companies reporting from 2027 onwards.
Additionally, plans for the adoption of sector-specific standards have simply been abandoned.
The Omnibus proposal maintains the double materiality requirements under the CSRD – a distinctive feature of the European sustainability reporting regime (which was feared to fall considering preliminary versions of the package leaked before 26 February).
While reports will still require limited assurance, the Commission has removed the option to escalate this to reasonable assurance from 2028 onwards.
EU Taxonomy
Currently EU companies subject to CSRD are required to make EU Taxonomy disclosures. However, the EC wishes to limit this requirement to companies that generate €450 million or more in net turnover, either individually or at a group level. For all other in-scope undertakings (i.e., with more than 1000 employees but with a turnover of less than €450 million), Taxonomy reporting becomes voluntary.
Additionally, a one-month consultation has been launched to simplify Taxonomy reporting requirements. Among the additional EU Taxonomy proposals, the Omnibus package suggests:
- Simplifying reporting templates, reducing the number of data points by nearly 70%
- Introducing a financial materiality threshold, exempting in-scope companies from reporting on Taxonomy-eligible activities that account for less than 10% of their businesses
- Modifying key performance indicators for financial institutions, including simplifying the Green Asset Ratio (GAR) for banks (companies outside the scope of CSRD are excluded from the denominator to calculate the GAR, whereas presently all exposures are included in the GAR denominator)
But alongside reporting requirements, Omnibus also proposes substantive modifications to the Taxonomy technical screening criteria, aiming to simplify the assessment of Do No Significant Harm (DNSH) principle and minimum safeguards compliance.
CSDDD
The CSDDD, originally designed to set behavioral obligations and to hold companies accountable for environmental and human rights violations, has been significantly watered down.
Under the Omnibus proposal, while there are no proposed changes to the core scope of CSDDD, the focus of due diligence on human rights and environmental risks will now be on direct business partners, rather than across the entire supply chain – in contrast with the OECD Guidelines and the UN Guiding Principles on Business and Human Rights.
In fact, the proposal significantly narrows the scope of due diligence obligations, limiting them to a company's own operations, those of its subsidiaries, and its direct business partners ("Tier 1"). Additional due diligence requirements for indirect business partners will only apply in two specific cases: if intermediate partners are artificially (fraudulently) established, or if a company has credible information indicating a potential adverse impact at the level of an indirect partner. This implies that operations in high-risk areas will still require heightened scrutiny, and companies must take any complaints they receive seriously.
The EC proposes that when assessing risks within their value chain, companies will be required to gather information from business partners where adverse impacts are most likely to occur. However, for business partners with less than 500 employees, information requests would be limited to what is outlined in the proposed Voluntary Sustainability Reporting Standard under the CSRD (better explained in the previous section), unless additional data is essential for due diligence mapping and cannot be reasonably obtained by other means.
The requirement for the Commission to review the inclusion of downstream activities of financial services businesses is removed under the proposal. This could indicate that the EC has no intention of extending the Directive to cover these relationships, or it may simply be a matter of delaying the decision for a later stage.
The proposal also removes the obligation to terminate business relationships as a last resort. Instead, companies have a duty to suspend the relationship while working collaboratively with the relevant partner to find a solution. This latter clarification aims at addressing concerns about the unintended consequences of CSDDD in high-risk regions, which faced the prospect of significant trade reductions as large EU companies could considered abrupt withdrawal as an easier option (instead of impact remediation).
Additionally, the proposal extends the review cycle for assessing the adequacy and effectiveness of due diligence measures from one year to five years, unless there are reasonable grounds to believe that current due diligence measures are inadequate or ineffective.
While companies will still be required to adopt Climate Transition Plans, the obligation to "put them into effect" was erased, focusing on the requirement for the plan to outline "implementing actions" for transitioning to a sustainable economy. According to the EC, the purpose is to better align with the CSRD transition plan, but how this amendment safeguards consistency with the EU Climate Law remains to be clarified.
The Omnibus proposal significantly modifies the civil liability provisions under the CSDDD, substantially reducing liability risks for companies. Member States will no longer be required to:
- Establish a uniform EU-wide civil liability regime for non-compliance
- Allow NGOs and trade unions to bring representative actions
- Apply domestic law regardless of where the harm occurs
Nevertheless, national laws must still ensure that individuals who suffer harm due to a company's breach of due diligence obligations have the right to full compensation from the liable company. However, companies will need to assess which civil liability rules they are subject to in each Member State – i.e., potentially in 27 different jurisdictions. Moreover, abandoning a uniform EU-wide civil liability regime will potentially require EU courts to apply the laws of the third country where the harm occurs, with all the obvious difficulties this entails.
The ability to impose penalties remains under the EC's proposal, however it removes the requirement for Member States to set a maximum fine of at least 5% of net worldwide turnover. This may incentivize Member States to "race to the bottom" in order to captivate businesses for choosing their jurisdictions. Nevertheless, the Commission is set to issue guidance for supervisory authorities to assist them in determining the appropriate level of penalties, which must nevertheless be effective, proportionate and dissuasive.
To further ensure a level playing field, the proposal introduces maximum harmonization across Member States by prohibiting them from imposing any additional national due diligence requirements beyond those set out in the Directive in key areas such as risk assessment, value chain due diligence, and penalties.
"Stop-the-Clock" on CSRD and CSDDD (but the clock is ticking…)
For those companies that remain in-scope of CSRD but have not yet started their sustainability reporting, the EC has put forward a separate proposal that aims at "stopping the clock" on reporting. If adopted, it will give those companies two more years before having to start reporting, independently of any other substantive changes, recognizing that CSRD reporting must continue in some capacity, albeit with a delay, until further notice.
As to CSDDD, Member States will have an extra 12 months to transpose it, extending the deadline to 26 July 2027. Additionally, the original compliance deadline of 26 July 2027 for the largest entities within scope (5000 employees and €1.5 billion net worldwide turnover, or non-EU-headed groups with over €1.5 billion net turnover in the EU) has been removed. As a result, all EU companies with more than 3000 employees and a net worldwide turnover exceeding EUR 900 million (as well as non-EU entities with more than EUR 900 million in net turnover within the EU) – deemed as large companies –, will now have until 26 July 2028 to comply. For companies within scope but below these thresholds, the deadline for compliance with CSDDD substantive obligations remains unchanged at 26 July 2029.
As regards the CSDDD reporting obligations for large companies, it will still begin in 2029, as originally planned. However, for all other in-scope companies, the start date will be delayed by one year, pushing their first reporting obligations to 2030.
Moreover, the EC will accelerate the publication of its due diligence guidelines, moving the date forward from 26 January 2027 to 26 July 2026. The Commission aims to ensure that the covered entities have two years to understand and prepare for the requirements, rather than just six months.
The EC wishes to fast-track the approval process of this autonomous "stop-the-clock" Directive to quickly provide clarity to businesses currently subject to the CSRD – a matter of shared concern regardless of individual Member States' positions on the key Omnibus reforms.
What about the SFDR?
The Sustainable Finance Disclosure Regulation (SFDR) is not included in the Omnibus package and is expected to undergo autonomously its own simplification process in the last quarter of 2025. However, the significant reduction in the CSRD's scope may hint at the direction of future SFDR reforms. A key question is whether the Commission will alleviate financial market participants by removing (or reducing) the requirement to collect and report on principal adverse impact (PAI) indicators. Since PAI data was originally intended to be sourced from CSRD reporting by investee companies, this reduction in CSRD's scope could complicate data availability, potentially influencing upcoming changes to SFDR.
So now what?...
One of the main challenges for businesses now will be managing this transition period, during which they remain legally bound by obligations that are expected to be amended or even removed in the coming months. This is especially challenging for companies that have been investing resources in preparing their first sustainability report this year. Limbos and uncertainties are always potentially harmful for businesses.
It is worth remembering that one of the core objectives of the sustainability legislation now at stake was to ensure that capital is directed towards sustainable practices, helping to guide investor decision-making and promote responsible corporate behavior.
It would be naive to believe that all Companies that will no longer be required to report will continue to do so. But if we move from compliance back to voluntary reporting and behavior, companies should find their business case for action, bearing in mind the competitive upside (in the short term and in the long run) of assessing, understanding and addressing risks, opportunities, impacts along the value chain and in your own operation.
True competitiveness in the market and economic growth for companies will come from moving beyond the status quo and fully integrating sustainability into the core of business strategy. This requires responsible leadership.
For many companies, education, data collection and lots of preparation for the EU sustainability legislation have already taken place, so they better capitalize this investment. The narrative should move then from "cost" to «value creation» in sustainability reporting – which should be strategic and about profit, growth and innovation.
How the European Parliament and the Council react to the Commission's proposals remains uncertain, as does the extent of trilogue negotiations required. Given the complexity of the European legislative process, the final text could still undergo significant changes. Achieving an agreement often involves lengthy discussions, potentially prolonging the process – that usually takes somewhere between 6 to 18 months.
The EC's proposals will now be subject to discussion and debate by the co-legislators, meaning further changes are not only possible but very likely. In other words, the Pandora Box on some of the main building blocks of the European Green Deal has been reopened. So, if the Omnibus turns out to be a simplification or deregulation package, it is still to be seen.
May the negotiations restart and companies hang-on there and be patient
Ângela Lucas, Advisor at the Center for Responsible Business & Leadership