ESG 2.0: Sustainable reversal in the era of the Omnibus Directive

The European Union has long aimed to position itself as a global leader in sustainability; however, as recent developments show, ambition alone is not enough.

The practical implementation of the EU’s ESG framework is now facing growing tensions between complexity, market usability, and strategic competitiveness. This year’s launch of the Omnibus Simplification Package marked the most substantial revision of the sustainable framework since the Green Deal. The proposal amends three core sustainability regulations: EU Taxonomy, the Corporate Sustainability Reporting Directive (CSRD), and the Corporate Sustainability Due Diligence Directive (CSDDD).

Though simplification is welcome, the proposals raise a key concern: are we streamlining the system – or compromising the consistency and quality of sustainability information?

The Key Reforms at a Glance

The Omnibus Package introduces targeted amendments aimed at easing ESG reporting obligations for companies. Among the proposals are:

• Reducing the CSRD scope by 80%, applying only to firms with more than 1,000 employees and €50 million turnover or €25 million in assets
• Capping value chain reporting, limiting the data that CSRD companies can request from SMEs and non-EU suppliers
• Eliminating sector-specific European Sustainability Reporting Standards (ESRS) and reasonable assurance
• Narrowing the CSDDD to Tier 1 suppliers, removing liability and transition plan requirements
• Restricting Taxonomy reporting to large companies, with new thresholds and allowance for partial alignment disclosures

With most changes under negotiation between EU institutions, one part of Omnibus is already in force – the so-called “Stop-the-Clock” measure, a fast-tracked legislative act that delays the implementation of CSRD and CSDDD for Wave 2 and 3 companies by two years. The rationale was to buy time for political consensus on the broader reforms. This legislative pause signals a broader shift from urgency to caution.

Currently, the European Financial Reporting Advisory Group (EFRAG) is revising the ESRS, with a new draft due by 31 October 2025. The work plan focuses on:

• Clearer materiality thresholds
• Reduced datapoint requirements
• Reliefs for complex or sensitive disclosures
• Better alignment with global standards

EFRAG’s mandate is to achieve simplification without compromising quality, though whether this balance can be achieved remains to be seen.

The Danger of Data Gaps

There is no doubt that some reporting obligations have become overly complex, particularly for SMEs. Streamlining is necessary to ensure proportionality and reduce administrative burden. But the Omnibus reforms risk going too far.

By decoupling corporate reporting obligations from the information financial institutions still require, the reforms may weaken the foundation of Europe’s sustainable finance architecture.

Reporting may become optional, but ESG data requirements remain. Banks, insurers, and investors must still comply with regulations such as the SFDR, which rely on standardised data to manage risks and inform decisions. If fewer companies report, the financial sector will face growing data gaps.

• This creates a clear risk: firms may still be asked to provide sustainability information, but without common standards or formats, making data incomparable across companies and sectors and reducing transparency and reliability.

The European Central Bank (ECB) has echoed these concerns, warning that raising the CSRD threshold to 1,000 employees would significantly reduce key metrics availability, just as financial institutions are expected to integrate such data into governance and risk management.

The ECB flagged four core risks:

• Increased reliance on proxies, weakening ESG risk assessments
• Misalignment between corporate disclosures and the financial sector’s needs
• Distortion of product labelling and capital flows due to unverifiable data
• Threats to financial stability in light of accelerating environmental and social risks

To mitigate these, the ECB recommends maintaining the reporting threshold at 500 employees, emphasising that sustainability disclosures are essential not only for compliance but for financial system resilience.

Institutional investors have expressed similar concerns. Eurosif, the Principles for Responsible Investment (PRI), and the Institutional Investors Group on Climate Change (IIGCC) – representing more than €6.6 trillion in assets – have warned the reforms could create “information voids” and increase “market opacity”.

ESG 2.0: Smarter ESG, Not Weaker

The Omnibus Package has reopened technical and policy discussions on the future of ESG in the EU. While simplification is justified, preserving data quality, comparability, and regulatory coherence is key.

ESG 2.0 should focus on refining, not dismantling, existing frameworks by ensuring alignment across disclosure requirements and reporting standards,  maintaining a core set of standardised disclosures, offering proportionate tools and simplified pathways for SMEs, and leveraging digital reporting solutions to increase efficiency and reduce costs.

Conclusion

Fortunately, the core architecture remains solid. The European Commission has confirmed the continuity of the Green Deal in the new legislative term, reaffirming its role as the strategic backbone of EU climate and industrial policy. Instruments such as the Clean Industrial Deal reinforce the Union’s climate goals for 2030 (-55%) and 2040 (-90%), in line with net-zero by 2050.

Product-level regulations such as SFDR and MiFID II continue to apply. Financial institutions are still expected to manage ESG risks, align with investor preferences, and report transparently.

But the current moment calls for more than continuity. Europe must act decisively – not just simplify, but strategically invest in regulatory clarity, industrial resilience, and data infrastructure.

Now is the time to double down – not scale back.

 

This article first appeared on Environmental Finance