The European Union stands at the forefront of global efforts to promote environmental, social, and governance (ESG) accountability. As the world becomes increasingly ESG-aware, the EU has developed a comprehensive regulatory framework designed to ensure transparency and accountability across all sectors.
These regulations represent the EU's commitment to sustainable development and responsible business practices. However, the regulatory landscape is evolving, with the February 2025 EU Omnibus Proposal introducing potential modifications aimed at reducing the regulatory burden on businesses. However, these proposals come at the risk of substantially undercutting the impact of the regulations.
This article recaps the current ESG regulatory framework in the EU, explores the changes proposed by the Omnibus, analyzes the potential impacts of these modifications, and discusses how financial institutions can navigate this evolving landscape while maintaining compliance.
The EU is advancing sustainability through a framework of regulations that enhance corporate accountability and reporting on ESG impacts. These measures aim to promote genuine sustainable practices and address international trade and emissions challenges. Though comprehensive, these regulations are also, at times, confusing in the way they overlap and impact each other.
To get started, let’s examine the EU Taxonomy, SFDR, and CSRD—a triad of interconnected regulations designed to streamline and strengthen sustainable investing practices.
The EU Taxonomy provides a classification system for environmentally sustainable economic activities, offering clear criteria to determine whether an economic activity can be considered "green."
The Taxonomy helps channel investment toward genuinely sustainable projects and businesses by creating a common language for sustainable activities.
The EU Taxonomy has been operational since January 2022 with phased implementation. As of March 2025, companies subject to CSRD must disclose their taxonomy alignment percentages.
The SFDR focuses specifically on the financial sector, requiring financial market participants to disclose how they integrate ESG risks into their investment decisions and the sustainability impact of their financial products.
The SFDR plays a crucial role in bringing transparency to the rapidly growing sustainable investment market.
Fully implemented since March 2021, with enhanced Level 2 requirements since January 2023. All EU financial market participants must classify products under Articles 6, 8, or 9. Current market data shows that 28% of EU funds are compliant with Article 8 and 5% with Article 9, with a significant trend of reclassification from Article 9 to 8 due to stricter interpretations.
The CSRD stands as a cornerstone of the EU's ESG regulatory framework, requiring companies to report comprehensively on their environmental, social, and governance impacts. This directive mandates alignment with the EU Taxonomy, ensuring standardized reporting of sustainability metrics.
The CSRD represents a significant step forward in standardizing sustainability reporting across the EU, providing investors, consumers, and regulators with comparable information on corporate sustainability performance.
The CSRD, adopted in November 2022, replaces the Non-Financial Reporting Directive (NFRD). The transition to CSRD reporting was originally slated to begin in 2025 and would expand the number of companies subject to reporting requirements to 49,000 (vs 11,700 under NFRD). However, as we’ll see later, the Omnibus may push back the timing of CSRD.
Outside of the EU Taxonomy, SFDR, and CSRD, the Omnibus Proposal highlights two other key ESG regulations: CSDDD and CBAM. These regulations relate to corporate accountability for supply chains and to limiting carbon leakage.
The CSDDD focuses on corporate accountability throughout global supply chains, requiring companies to identify, prevent, and mitigate human rights and environmental risks associated with their operations.
This directive acknowledges that a company's sustainability impact extends beyond its direct operations, encompassing its entire value chain.
CSDDD was adopted in April 2024. Its phased implementation is slated to start in June 2026 and be completed by June 2028. The timing and scope of CSDDD is subject to change following the Omnibus Proposal.
The CBAM is an innovative approach to preventing carbon leakage. It levies a carbon tax on imports to ensure that the EU's ambitious climate policies do not simply shift carbon-intensive production outside its borders.
This mechanism aims to create a level playing field for EU producers subject to carbon pricing while encouraging global partners to implement similar carbon pricing mechanisms.
The transitional phase for CBAM began in October 2023, with full implementation scheduled for January 2026. It currently covers cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. The certificate requirements will phase in gradually from 30% in 2026 to 100% by 2034. It’s expected to apply to 1.8 million EU importers and generate €5-14 billion in annual revenue when fully implemented.
The EU Omnibus Proposal represents a significant recalibration of the EU's regulatory approach, seeking to balance sustainability ambitions with business competitiveness concerns.
The primary objectives of the Omnibus focus on alleviating regulatory burdens faced by businesses, simplifying compliance requirements, and streamlining reporting obligations. These efforts aim to enhance business competitiveness while addressing regulatory complexity concerns. By minimizing these challenges, the goal is to create a more favorable environment for businesses to thrive. However, this push for simplification could come at the expense of transparency and accountability, especially in sectors where regulation plays a protective role.
Below, we’ll take a closer look at each regulation and the changes proposed by the Omnibus Proposal.
The Omnibus Proposal suggests a Level 2 modification to the application of the EU Taxonomy, reducing the number of companies required to report taxonomy alignment.
Key Changes:
Possible Implications:
These modifications would potentially undermine the Taxonomy's role in creating a common language for sustainable activities.
The Omnibus Proposal significantly narrows the scope of the CSRD, reducing the number of companies required to report on ESG impacts.
Key Changes:
Possible Implications:
These modifications would substantially reduce the regulatory burden on smaller companies but raise concerns about the availability of comprehensive sustainability data.
The Omnibus includes significant modifications to CSDDD, with a narrowed scope and reduced monitoring requirements.
Key Changes:
Possible Implications:
These changes would significantly reduce companies' compliance burdens but come at the risk of removing the essence of the directive, which is eliminating child labor, forced labor, etc.
While not directly modified, changes to other regulations, particularly the EU Taxonomy, indirectly affect the SFDR.
Indirect Impacts:
These indirect effects could undermine the SFDR's effectiveness in bringing transparency to sustainable investment products.
The Omnibus Proposal simplifies CBAM compliance, particularly for smaller importers.
Key Changes:
Possible Implications:
These modifications would maintain the CBAM's effectiveness while reducing the administrative burden on smaller importers.
Proponents of the Omnibus Proposal emphasize its benefits for business competitiveness and regulatory efficiency. They highlight the reduced administrative burden, especially for small and medium-sized enterprises (SMEs), which often struggle with complex regulations. Additionally, the changes aim to simplify compliance requirements, making it easier for businesses to adhere to regulations. By aligning with global standards, the proposal helps maintain the EU's economic competitiveness while promoting a more efficient allocation of resources across industries. Together, these factors create a more streamlined and supportive environment for businesses to thrive.
As BusinessEurope Director General Markus J. Beyrer stated:
"Doing better with fewer and clearer norms is what European companies of all sizes are asking for. By reducing unnecessary reporting and regulatory burdens, the first Omnibus will allow companies to contribute more effectively to the EU's sustainability objectives while also preserving the EU economy's competitiveness."
European Commission President Ursula von der Leyen also expressed support for the proposal, stating:
"EU companies will benefit from streamlined rules. This will make life easier for our businesses while ensuring we stay firmly on course toward our decarbonization goals."
Critics raise significant concerns about the potential undermining of the EU's sustainability ambitions. They argue that the Omnibus Proposal may lead to unintended consequences, including reduced transparency in corporate sustainability performance, weakened supply chain accountability, and regulatory uncertainty during transition periods. Additionally, it could undermine sustainability objectives and increase the risk of greenwashing.
As Mariana Ferreira from WWF European Policy Office commented:
"The Commission's sudden urge to destroy laws that are crucial for the achievement of the EU Green Deal is a perilous approach that is forcing Europe into a time of regulatory uncertainty. Under the guise of 'simplification,' the Commission put forward a proposal that will hinder economic and business success."
Similarly, a joint statement from over 360 civil society organizations and trade unions expressed:
"The Omnibus proposal erodes EU's corporate accountability commitments and slashes human rights and environmental protections."
While the European Parliament debates the Omnibus Proposal, the fact remains that even if the regulations are delayed or loosened, the need for risk management remains unchanged. Investors require transparency, and companies must manage supplier risk effectively.
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