Omnibus must reaffirm the mainstreaming of sustainability in corporate governance in the EU – not weaken ambition

The EU Omnibus Simplification Package as currently proposed risks weakening corporate accountability, increasing uncertainty and penalising the early adopters in the sustainability transition. As the legislative process towards approval is opened up, the opportunity must be seized instead to refocus on a framework to support companies to navigate risks effectively, write Lea Reitmeier and Agnieszka Smoleńska.

After several years of rapid development of EU policy under the Green Deal, we are witnessing political pushback amid concerns about European economic performance and competitiveness in an increasingly unstable geopolitical context. Certainly, the EU sustainability reporting framework is not the easiest to navigate for companies, and reform has been called for as a result.

On 26 February the European Commission put forward a set of revisions under the name ‘Omnibus’ to several major pieces of the EU sustainable finance puzzle: the new sustainability due diligence rules (CSDDD), corporate sustainability reporting (CSRD) and the green taxonomy. The revisions, though supposedly intended to ‘simplify’ the regime, do so largely by delaying and limiting the scope of requirements. To become law, the proposals need to be approved by the EU Council and European Parliament, with the negotiations likely to last the better part of 2025, and need to be implemented by Member States. But in this response to demands for deregulation, policymakers are missing the trees for the forest.

This legislative process should be treated as an opportunity to recentre delivery on the regulatory goals: rechannelling capital flows towards sustainability transition and encouraging better risk management and long-termism in corporate governance. Pursuing these goals is a complex challenge requiring a comprehensive approach to policy design and reform. Regulating for sustainability transition requires policymakers to balance different considerations: global political shifts, escalating physical risks, rising debt costs and political backlash. At the same time, policymakers must recognise the complex interplay and distribution of responsibility across regulatory authorities, central banks and other agencies, over a long time horizon. As we argue in a new CETEx report on policy effectiveness for the transition, public authorities need to focus on the outcomes that the rules pursue and match policy design to these outcomes through a policy process that is inclusive and coordinated.

The Omnibus proposals: fragmentation instead of simplification

The Omnibus Simplification Package falls short of a reform that can achieve policy effectiveness at this stage.. The proposals go to the heart of the complex EU sustainable finance and corporate governance regime but without considering the implications for the system as a whole and undermining the mainstreaming approach that is intended to achieve long-term transition across the economy.

The proposals also risk creating more confusion while penalising the first movers and companies that have started to adjust their business models and investment strategies. Many firms have already started to prepare for reporting requirements, and public and civil society organisations have been building an ecosystem to support companies in doing so. Large companies began reporting under the CSRD this year, and EU Taxonomy alignment reporting has been happening since 2023. This January the first companies issued bonds under the EU Green Bond Standard, an EU regulation designed to prevent greenwashing and set high standards in capital markets, which is underpinned by EU Taxonomy data. So the regulatory frameworks are already starting to deliver; better quality and more reliable data is helping to identify risks and inform supervisors, investors and the public. The reduction in reporting obligations proposed under Omnibus jeopardises the effectiveness of these highly interconnected policies.

At this crucial juncture, the proposals also risk fragmentation in several ways. First and foremost, raising the thresholds for reporting being necessary and removing guiding principles will lead to fragmentation between different reporting standards and overreliance on estimations and proxies. While the Omnibus package proposes to exclude smaller companies from direct requirements, they remain integral to supply chains and will still face reporting demands from larger firms needing this data for compliance, internal decision-making and risk management. Lack of high-quality data – another likely result of the proposals – could penalise SMEs in terms of their access to capital, as financial institutions increasingly incorporate material sustainability factors into risk analysis. The changes will also likely have spillover effects and unintended consequences, for example on the Sustainable Finance Disclosure Regulation (SFDR), the EU Green Bond Standard, and EU microprudential rules pertaining to environmental, social and governance (ESG) risk management.

Instead of fostering coherence, therefore, the Omnibus proposals appear to undermine the potential for policy to create a common understanding of what data is necessary to assess sustainability risks and impacts. Poorer understanding of sustainability risks across the economy will have repercussions for banks and financial actors’ ability to adequately price in climate change and environmental degradation impacts, including from a double materiality perspective.

Over-simplification and under-reporting present risks to financial stability

Without accurate, economy-wide data, banks and other financial sector institutions cannot effectively assess risks, capitalise on opportunities or properly mitigate risks related to the transition. Limiting the availability of quality and public data will force banks to continue to rely heavily on external ESG data providers, often treating ratings as black boxes rather than understanding the underlying metrics. Meanwhile, in line with existing EU prudential rules, financial supervisors such as the European Central Bank will continue to monitor banks’ understanding of climate- and nature-related financial risks. The European Banking Authority’s new guidelines on managing ESG risks show how CSRD reporting can support high-quality ESG risk management. If approved, therefore, the Omnibus proposals could undermine the overall progress already made in improving the state ESG risk regulation in the financial sector.

A smarter approach: streamlining without sacrificing ambition

It is not too late: the legislative process opened up by the Omnibus proposals is an opportunity for refinement. This should focus on:

• Enhanced coordination across institutions to align objectives and actions
• Consistent interpretation of regulatory requirements to reduce uncertainty
• Closing regulatory gaps and uncertainties to facilitate better implementation
• Aligning processes to maintain coherence across the broader policy landscape
• Supporting SMEs in their sustainability transformation
• Accelerating supervisory data-sharing and analysis to reduce compliance burden and increase policy effectiveness

The policies introduced under the Green Deal were designed to enhance economic and environmental resilience. Rolling them back in response to political pressure will erode investor confidence, disrupt business strategies and weaken institutional trust. Ultimately, ‘simplification’ may harm European competitiveness, the very goal that the European Commission professes to pursue. The Omnibus process should be refocused on policy effectiveness, rather than misconstrued efficiency, to avoid additional uncertainty weakening the system overall – and leaving people, nature and also businesses themselves more vulnerable.

Next steps within the CETEx project on effective policymaking are to identify relevant policies and assess them based on the building block framework we outline in our report ‘Coordinating the net zero transition: a practical framework for policymakers’. Please contact us with suggested case studies: email gri.cetex@lse.ac.uk