Omnibus: Terminus – Europe’s sustainability rulebook scales back

Simplification, or u-turn?

Only months after the dust settled on these negotiations, the European Commission announced a “simplification revolution”. A so-called “Omnibus” package would slash red tape from what the Commission calls the “triangle of the Taxonomy, the CSRD and the CSDDD”. The legal package, composed of two directives, was subsequently released in February 2025. At the same time, the Commission announced the European Sustainability Reporting Standards (“ESRS”), the detailed rulebook underpinning CSRD disclosures, would be simplified extensively as well.

A year of negotiation followed, muddled in controversy ranging from unexpected political alliances to procedural disputes. The very legality of the procedure was questioned, and the European Ombudsman called out the Commission for failing to follow its own rulebook on lawmaking. By then, however, the legislative process was already underway, giving lawmakers room to amend the rules as they saw fit.

Exactly one year after the package of directives was introduced, the changes were set in stone with the publication of Directive (EU) 2026/470 in the EU Official Journal on 26 February 2026. Sustainability reporting now applies only to firms and groups with more than 1,000 staff and over €450m in revenues. Listed SMEs are no longer in scope, and consolidation rules are more favourable. The directive cancelled the adoption of sector-based reporting standards (though a new recital leaves the door open for future sectoral guidance) as well as the envisaged shift from limited assurance to reasonable assurance on CSRD disclosures.

As for the CSDDD, its due diligence obligations will now only apply to very large firms employing over 5,000 people and generating more than €1.5 billion in revenues. Those companies no longer have to draw up plans to align their business models with the 1.5°C climate objective of the Paris Agreement.

A review clause to possibly extend due diligence obligations to financial products and services at a later stage was also removed.

Where does that leave banks?

Although the scopes of the CSRD and CSDDD have been scaled back significantly, the question remains: to what extent do the changes actually simplify compliance from a bank’s perspective?

The CSRD’s revised thresholds and consolidation rules will require fewer banks to include a sustainability statement in their annual reports than in its original form. Still, how much simpler the contents of these statements will be depends on the revised ESRS, still awaited by the market. Having to comply with the CSRD also comes with having to disclose alignment on the EU Taxonomy, that is, how much of a bank’s financing matches the framework’s stringent environmental and climate criteria. This alone, in practice, can add dozens of pages to already hefty annual statements, often with limited added value. Further cuts to the Taxonomy disclosure rules are needed to actually reduce burden.  [See our position on the EU Taxonomy here]

The changes may reduce reporting obligations, but they also weaken one of the CSRD’s core promises: a broad pool of comparable ESG information for financial markets. Now, banks will themselves have lesser access to high-quality, publicly disclosed ESG information from their corporate clients which they need for their own reporting needs, be it under the CSRD or as part of their ESG Pillar 3 disclosures, or to inform their wider risk management frameworks.

Mixed feelings

After roughly six years of intense sustainability rule-making, this reversal may raise the difficult question of what the point of it all was.

Rapidly scaling back flagship sustainability directives, originally intended to support the EU’s green transition sends mixed signals to markets. Some companies that had anticipated the CSRD’s requirements and invested early in compliance may now find themselves outside the directive’s revised scope – hardly a reassuring signal for companies investing early in future regulations.

The reversal also risks weakening one of the central promises of the EU’s sustainable finance agenda: a broad pool of reliable ESG information available to markets. With fewer companies now required to disclose such information, financial institutions will once again need to rely more heavily on bilateral engagement with companies and private data providers, and filling any gap with proxied information – precisely the fragmented ESG data landscape the CSRD was meant to fix.

Much of the simplification sought by policymakers could arguably have been achieved by adjusting underlying rules, rather than reopening the architecture of the high-level legislation. Beyond simplifying the ESRS, clearer guidance on the ambiguous “double materiality” process, required to determine which sustainability disclosures are material, would help significantly. Ultimately, where to draw the line remains at the reporting firm’s discretion, so long as it is properly evidenced. Similarly, simplifying or removing complex Taxonomy-related KPIs would also have simplified compliance considerably. Such an approach may have preserved a greater deal of legal certainty for market actors in the short-term. In other words, the EU may have simplified rules at the wrong level.

In 2022, the Commission set out to bring sustainability reporting at the same level of maturity as financial accounting. That ambition now seems much more distant. Where it once hailed the CSRD as a strategic tool for companies to ensure long-term prosperity, the Commission now frames it as a potential obstacle on growth and competitiveness. As companies and financial institutions continue rolling out costly compliance projects, many are left wondering whether the Commission has fully made up its mind.