The ESG and Sustainability world is abuzz with talk of the European Commission’s ‘Simplification Omnibus’ legislative initiative, or the ‘Omnibus legislation’. But what exactly is it? And what does it mean for your sustainability and compliance requirements? Below, Kendall Reid, Director, ESG provides insights into what business and investors need to know.
What is the Simplification Omnibus?
The European Commission has introduced a comprehensive legislative initiative known as the "Simplification Omnibus" package, aiming to streamline existing environmental, social, and governance (ESG) regulations in order to bolster the European Union's global competitiveness. This initiative encompasses significant amendments to key directives and mechanisms, including a draft directive amending the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), a proposal to amend the Carbon Border Adjustment Mechanism Regulation (CBAM) and the InvestEu Regulation. There is also a draft amendment to the Taxonomy Disclosures and Taxonomy Climate and Environmental Delegated Acts. In short, this is potentially a huge regulatory overhaul.
What is the context?
It does seem to be quite the U-turn, and in many ways, it is. However, the change in direction comes at a time of long-term low growth within the EU, a costly war on the mainland, an aggressive approach to trade from the Trump government and prospective retaliatory measures from trading partners, as well as pressure from increasingly prominent right-wing parties across the Block for states to deregulate and focus on policies that bolster economic growth. The proposed changes come off the back of a report authored by Mario Draghi "The Future of European Competitiveness," which emphasises the need to reduce regulatory burdens on business. Following an informal meeting of Council leadership in November, Ursula von der Leyen, president of the European Commission, announced her intention to overhaul sustainability regulations in order to cut red tape for businesses.
On 29 January, the European Commission published a ‘Competitiveness Compass for the EU’, which is a set of strategic recommendations to be implemented over the next five years that would see the EU ‘regain its competitiveness’ and improve its productivity. Included in this was an announcement of the intent to decrease corporate sustainability burdens by 25 percent.
It is important to recognise that the proposals put forward constitute a comprehensive legislative package, paving the way for a variety of potential outcomes. The European Parliament and the Member States within the Council will now have the opportunity to introduce amendments to these proposals. It is also worth noting the political landscape of both the European Parliament and the governments of Member States has undergone significant transformation since the initial legislation was introduced, and the proposal will need to be formally agreed by both the Council and Member States before it becomes law.
Some of the key changes include:
Corporate Sustainability Reporting Directive (CSRD):
- Scope Reduction: The CSRD's applicability has been narrowed to companies with over 1,000 employees and EUR 450 million in turnover, effectively exempting approximately 80% of companies which previously fell in scope. This adjustment aims to alleviate compliance burdens on small and medium-sized enterprises (SMEs).
- Extended Deadlines: Companies initially scheduled to report in 2026 or 2027 now have until 2028 to comply, providing additional time for adaptation.
- Voluntary Reporting for SMEs: Listed SMEs are no longer mandated to provide sustainability reports, but can choose to disclose such information voluntarily.
- Value Chain: There is no longer a requirement for larger companies to request information from companies within their supply chain that do not fall into scope under CSRD.
- Non-EU Companies: under the current directive, the reporting requirements were to apply to non-EU companies that generated a net turnover of over EUR 150 million in the EU with a qualifying “large” EU subsidiary or an EU branch that generates a net turnover of over EUR 40 million. The proposal increases these amounts to EUR 450 million and EUR 50 million, respectively.
- Data Collection: There are proposed revisions to the current European Sustainability Reporting Standards (ESRS) to reduce the datapoints required to comply with the CSRD, and to change focus on some of these from being more qualitative to quantitative.
Corporate Sustainability Due Diligence Directive (CSDDD):
- Delayed Implementation: The enforcement of the CSDDD has been postponed to mid-2028, granting companies more time to align with the new requirements.
- Focused Due Diligence: Obligations have been refined to concentrate on direct suppliers, reducing the frequency of assessments from annual to every five years. The proposal limits the meaning of value chain to the companies’ own operations, those of their subsidiaries and, where related to their chains of activities, those of their direct business partners. Suppliers with fewer than 500 employees are exempt.
- Modified Liability Provisions: The uniform EU-wide civil liability framework has been removed, delegating the determination of liability to individual member states.
- Net Zero Transition: Transition plans no longer need to be implemented, but a plan must be adopted and include ‘implementing actions’.
- Fines and Penalties: Under the new proposal the penalty of 5% of net worldwide turnover for non-compliance would be removed.
- Supply Chain: It is recommended that, rather than terminate supplier relationships if an adverse impact cannot be remedied, the company should work with their supplier to find a solution to supply-chain issues, and suspend the relationship, while working in tandem to find a solution, as a last resort.
Taxonomy:
- Threshold: Under the new draft proposal, only companies with more than 1,000 employees will be required to report on their business's alignment with taxonomy criteria.
- Simplification of requirements: The Commission is conducting a consultation on proposed amendments to the Taxonomy Disclosures Delegated Act and the Taxonomy Climate and Environmental Delegated Acts. These revisions are intended to streamline reporting requirements by simplifying templates, reducing data points by nearly 70%, and exempting companies from evaluating taxonomy eligibility for non-material economic activities.
Carbon Border Adjustment Mechanism (CBAM):
The bill suggests changing the Carbon Border Adjustment Mechanism (CBAM) to exempt roughly 90% of importers of goods covered by the tax, which it says are only responsible for approximately 1% of imported emissions. No delay to implementation is expected.
Implications for ESG reporting
With the proposed limitation in the CSRD’s scope, many mid-sized and smaller companies are relieved from mandatory sustainability disclosures. The reduction in required data points and the elimination of sector-specific standards will also make reporting more manageable for large corporations.
While this potential change will be eagerly anticipated by many businesses, especially SME’s, many fear it will undermine momentum in bringing meaningful change, and diminish the breadth of ESG data available, especially for investors seeking to understand the impacts of their investments. Small companies who were not in scope in the first place will also be relieved, given they are no longer mandated to provide information to their larger suppliers as part of the legislation. This was a great concern for many smaller companies who supply larger companies with goods or services, as the burden on resources may well have rendered such relationships economically unviable.
It is also important to note that SMEs still retain the option to engage in ESG reporting on a voluntary basis on the proposed package, encouraging transparency without imposing mandatory requirements. For SMEs’ there can be significant benefit to completing some of the exercises originally mandated in the CSRD and CSDDD legislation. For example, completing a double materiality assessment is an invaluable exercise in stakeholder engagement, allowing for conversations with various stakeholders such as the Board, partners, investors and customers. A double materiality assessment is a great way to understand risk exposure and determine ESG priorities for your business, and can provide the basis for forming an ESG strategy to assist in mitigating business risk and creating value. There can also be significant benefit to understanding more about your own value chain, where you might identify efficiencies and cost-saving opportunities, and minimise your exposure to revenue, operational and reputational-related risks. Supply chains are consistently one of the biggest concerns our investor and corporate clients raise. For them, it is more palatable to have comprehensive information about a company’s supply chain and ESG profile, so implementing good due diligence and ESG practices can be a great tool for attracting and retaining investment.
Additional considerations
The legislative adjustments aim to balance reducing administrative burdens while maintaining the EU's commitment to sustainability goals. Whilst there is concern that these changes might undermine progress in corporate accountability and social and environmental stewardship, it is important to remember that the EU is already a regulatory-heavy environment, and it was difficult to gain any meaningful consensus when passing the initial bills. Furthermore, the success of these reforms depends on consistent application across member states. The European Securities and Markets Authority (ESMA) continues to emphasise the need for greater harmonisation to prevent market fragmentation and ensure the effectiveness of the simplified regulations.
The Omnibus proposals have been broadly welcomed by many businesses for slowing or alleviating some of the impending regulatory burden, but they have also caused anger amongst those who have already invested significant time and resource into preparing for the legislation. There is still also significant political disunity within the Block. While some Member States, like Italy and Spain, advocate for less watering down of the legislation, others, like France and Germany, argue that the proposed changes have not gone far enough.
While it is highly likely that there will be changes to the current legislation, the Simplification Omnibus is set to be a highly topical and contentious issue over the coming months as the regulatory outlook remains uncertain. Companies and investors will have little choice but to be vigilant in understanding their own supply chains and environmental and social risks as they wait for the final bill to be passed, in order to determine what their new regulatory obligations will be.
