Recalibration or U-turn? The omnibus directive and the new course of EU sustainable finance

On 26 February 2025, the European Commission (EC) presented its proposal for an Omnibus Directive, a legislative package reshaping two pillars of the EU’s sustainable finance framework: the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D).

This came in a moment of geopolitical tension and concerns about the competitiveness of Europe. The Commission’s stated aim was to reduce administrative burdens (especially for SMEs) while maintaining environmental and social ambitions. However, the proposal has stirred up significant political controversy and triggered a public outcry, especially lately following an European Parliament (EP) vote on the Omnibus package on 13 November. The EP vote only passed in plenary because the EPP ultimately voted together with the far-right groups, rather than with the standing centrist alliance.

Narrower scope

One of the most consequential changes is a reduction in the scope of the CSRD. According to the proposal, the new rules will only apply to around 10,000 companies (instead of the previous 50,000) with over 1,000 FTEs and either €50 million turnover or €25 million in assets. The co-legislators aim to go even further by supporting a €450 million turnover threshold, with the EP also suggesting a higher FTE threshold. With these parameters, fewer than 5,000 companies (or less than 4,000 according to the EP’s latest position) would remain in the scope of the CSRD. This represents a significant reduction in coverage of over 90% and falls below the previous scope of the Non-Financial Reporting Directive (NFRD).

While this has not been proposed by the EC, the co-legislators agree to also narrow the scope of the CS3D by setting a threshold of 5000 FTEs and 1.5bn net turnover, leading to only 1300 companies being addressed.

Reduced substantive obligations

The Omnibus proposal also streamlines CSRD reporting, which has found support from the co-legislators. It is envisaged that mandatory sector-specific European Sustainability Reporting Standards (ESRS) be dropped (and possibly be replaced with voluntary guidelines), mandatory datapoints be reduced and larger firms prevented from requesting sustainability data from smaller business partners beyond the voluntary SME standard.

Under the Omnibus proposal, the CS3D is also being re-shaped into a more business-friendly regime. Three new measures stand out:

• The EC and the Council agree on a narrower mandatory focus on direct business partners while the EP supports a full risk-based approach to identify direct and indirect impacts;
• Although with different nuances, according to the EC and the Council, transition plans must be adopted but no longer “put into effect,” while the EP supports cutting the obligation altogether;
• No common EU civil liability regime is envisaged.

A Recalibration or a U-turn?

The EC and the co-legislators frame the Omnibus as a pragmatic simplification. However, narrowing the coverage of the CSRD and the CS3D, diluting value chain scrutiny and softening accountability risk eroding the functioning and credibility of the EU sustainable finance framework.

The ECB has warned that weaker corporate sustainability requirements could impair the capacity of the financial system to address climate-related risks. An ecosystem in which ESG information is accessible, systematic and comparable is a key ingredient to support the green transition, and ultimately financial stability.

Admittedly, the package may only affect larger companies at the margin, as they can navigate market pressure, voluntary standards and fragmented enforcement. But it may widen informational uncertainty and risks, with possible implications for investment decisions and the cost of capital.

The upcoming trialogue will need to strike a careful balance to ensure the Omnibus constitutes a sensible recalibration and not a U-turn in the EU sustainable finance strategy.