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EU Omnibus Package: A Turning Point in Sustainability Regulation or a Temporary Adjustment?

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EU Omnibus package: simplification or strategic retreat?

In February 2025, the European Commission introduced the Omnibus Simplification Package, aiming to reduce administrative burdens and enhance competitiveness within the European Union. This initiative, while presented as a pragmatic response to implementation challenges, has sparked extensive debate on whether it marks a fundamental shift in the EU’s approach to sustainability regulations or simply a temporary regulatory recalibration.

Key Changes Introduced by the Omnibus Package

The Omnibus Package amends several cornerstone regulations of the EU Green Deal framework:

  • Corporate Sustainability Reporting Directive (CSRD): The scope of companies required to report has been drastically reduced. Now, only companies with more than 1,000 employees and either €50 million in turnover or €25 million in assets are covered. This narrows the reporting base by approximately 80%.
  • European Sustainability Reporting Standards (ESRS): The number of mandatory data points has been reduced by nearly 70%, and sector-specific requirements have been eliminated. The goal is to alleviate reporting burdens for companies, particularly SMEs.
  • Corporate Sustainability Due Diligence Directive (CSDDD): Implementation timelines are delayed, and due diligence obligations are restricted primarily to direct suppliers. This represents a significant rollback of initially proposed obligations.

These changes were formally adopted under the premise of reducing “red tape” to improve Europe’s global competitiveness, especially for smaller firms and those operating across multiple jurisdictions.

Implications for Sustainability Objectives

At first glance, the European Commission presents these modifications as a practical streamlining of overly complex regulatory frameworks. However, critics warn that such simplifications could undermine core sustainability objectives and delay systemic change.

One immediate consequence is the reduction in ESG data availability. Thousands of companies that were previously expected to disclose sustainability data are now exempt. This significantly shrinks the ESG information pool accessible to investors, regulators, NGOs, and even customers. For example, under the revised CSRD thresholds, many mid-cap industrial firms, which often operate in carbon-intensive sectors, will no longer be obliged to report on emissions or transition plans. Without such disclosures, it becomes harder to monitor sectoral alignment with the EU’s net-zero goals.

The signal to global markets is also concerning. The EU has long been regarded as a leader in sustainable finance and non-financial disclosure. By relaxing its sustainability obligations, the EU could weaken its normative power. Other jurisdictions may feel emboldened to delay or dilute their own ESG rules, especially if they perceive the EU’s retreat as a sign that strong regulations are economically burdensome.

Furthermore, the inconsistency with long-term policy objectives raises questions. While the EU reiterates its commitment to the 2050 climate neutrality goal, these regulatory retreats may conflict with the investment and behavioral shifts required to get there. Delays in due diligence, for instance, risk perpetuating unsustainable practices in global supply chains.

Lastly, investor trust and capital alignment may suffer. Major institutional investors rely on robust, comparable sustainability data to allocate capital according to ESG and climate risk strategies. A rollback in disclosure requirements risks reintroducing uncertainty into investment models, which could slow the redirection of capital towards sustainable assets. The Institutional Investors Group on Climate Change (IIGCC) has already raised concerns about the potential “systematic bias” such changes could introduce into climate scenario modelling.

Focus: Consequences for the Financial Sector

For banks and financial institutions, the implications of the Omnibus Package are particularly significant. Many banks across Europe, including in Luxembourg, have made net-zero commitments by 2050 and rely on their clients’ ESG data to measure financed emissions, set decarbonization targets, and report under frameworks such as the Partnership for Carbon Accounting Financials (PCAF) or the Task Force on Climate-related Financial Disclosures (TCFD).

By exempting thousands of companies from ESG reporting, the revised CSRD undermines banks’ ability to meet these targets. In practice, this means:

  • Less data to assess risk exposure to sectors vulnerable to transition or physical climate risks.
  • Greater reliance on estimates or proxy data, which increases uncertainty and potentially affects capital allocation decisions.
  • Difficulties in meeting regulatory expectations from central banks and supervisors, particularly those incorporating climate risk into stress-testing frameworks (e.g., the ECB or CSSF).

Green finance flows may also be hindered. Many sustainable finance products rely on underlying ESG data to meet eligibility thresholds or label criteria (e.g., under the EU Taxonomy or SFDR). A shrinking data base may limit both the volume and credibility of sustainable finance instruments.

Moreover, the burden of sustainability analysis may shift from corporates to banks and institutional investors, requiring them to dedicate additional resources to estimate, validate, or supplement missing information—without necessarily improving the quality of sustainability outcomes.

Beyond Regulation: Competitiveness, Asymmetry, and the Search for Balance

A key argument behind the Omnibus Package is that overly complex regulatory frameworks can threaten European competitiveness—particularly in a global context where sustainability rules are not uniformly applied. While the EU has historically led on ESG standards, it also faces rising economic and geopolitical competition from regions with looser or slower-developing frameworks.

This regulatory asymmetry poses a real challenge for European businesses: being early adopters of sustainability reporting brings reputational and risk management benefits, but may also come with compliance costs that are not borne by competitors elsewhere. In energy-intensive industries, for example, this could lead to capital leakage or competitive disadvantage.

However, sustainability does not have to be synonymous with increasing regulation. Alternative levers—such as market-based incentives, voluntary certification schemes, digital innovation in ESG data collection, or better public-private partnerships—could complement regulatory tools. Encouraging transitions through innovation, rather than compliance alone, may foster a more inclusive and pragmatic sustainability agenda. As the EU recalibrates its sustainability strategy, the question is not whether to maintain high standards, but how to implement them in a way that supports global influence, competitiveness, and realistic operationalization.

The Role of We Put You in Touch

In this changing regulatory landscape, We Put You in Touch enables independent consultants and client companies to connect efficiently and share expertise on sustainability and compliance—helping to maintain high-quality advisory standards regardless of evolving legal frameworks.

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