EU’s Omnibus Proposal: Key changes to the CSRD, CS3D and Taxonomy

Key Takeaways

• The European Commission's omnibus proposal significantly modifies the CSRD and CS3D, including the harmonization and simplification of due diligence requirements
• The number of undertakings subject to mandatory sustainability reporting requirements will be reduced by approximately 80%
• The EU Taxonomy will be mandatory only for companies covered by the CS3D
• In the context of the CS3D, there will be less needed to consider entities beyond the company's direct business partners
• Companies will have more time to prepare, as the CSRD and CS3D will come into effect later
  
  

Following widespread concerns about the administrative burden imposed on companies, the European Commission has adopted a first draft sustainability “Simplification Omnibus Package” on February 26, 2025.

The main aim of the Simplification Omnibus Package is to ensure a clear, simple and harmonised regulatory framework for businesses and to realise a significant simplification in the fields of sustainability finance reporting, due diligence and taxonomy, in particular for SMEs and small mid-caps.

The Simplification Omnibus Package reflects the commitment to reduce reporting burdens and enhance competitiveness in the EU, through amendment of a.o. the following legislation:

1. Directive (EU) 2022/2464 (“Corporate Sustainability Reporting Directive” / “CSRD”);
2. Directive (EU) 2024/1760 (“Corporate Sustainability Due Diligence Directive” / “CS3D”) ; and
3. Regulation (EU) 2020/852 (“EU Taxonomy Regulation”).
    

Main changes to the CSRD and ESRS

To reduce the sustainability reporting burden on businesses, and to promote closer alignment with the scope of the CS3D, the scope of application of the CSRD (and therefore the obligation to prepare and publish a sustainability statement at individual level) shall be reduced to companies with:

For EU companies:

• an average of more than 1,000 employees; and
• at least one of the following thresholds:
  • an annual net turnover exceeding 50,000,000 EUR; or
  • a balance sheet above 25,000,0000 EUR.
     

For non-EU companies:

• an annual net turnover exceeding 450,000,000 EUR in the EU; and:
• at least one of the following thresholds:
  • a large EU subsidiary (meeting the EU company criteria above); or
  • a branch in the EU with an annual net turnover exceeding 50,000,000 EUR.
     

Such reduction in scope will also apply to credit institutions and insurance undertakings.

According to the press release of the European Commission this is a very significant change, leading to the exclusion of approximately 80% of the companies that were initially in scope from the scope of application of CSRD.

Other notable changes regarding the CSRD concern a reduction of the reporting burden for companies in the value chain that are not subject to the CSRD themselves (limiting their reporting to the information specified in the ESRS standards for voluntary use), an abolishment of the Commission’s power to adopt sector-specific standards and a phased implementation of limited assurance standards.

Furthermore, the European Commission intends to adopt a delegated act to revise the first set of European Sustainability Reporting Standards (ESRS), as soon as possible and at the latest 6 months after the entry into force of the Simplification Omnibus Package. The revision will substantially reduce the number of mandatory ESRS datapoints and clarify the provisions that are deemed unclear. 

Finally, the European Commission also proposes to postpone by 2 years the entry into application of the reporting requirements for the second and third wave. The second wave concerns all companies that need to report in 2026 for financial year 2025 and the third wave concerns those that need to report for financial year 2026 (the EU listed SMEs). The Commission also proposes that the EU Listed SMEs in the end do not fall in scope of CSRD any longer. 
 

Main changes to the EU Taxonomy Regulation

Under the current legislation companies in scope of CSRD automatically are also in scope of EU Taxonomy. That principle will change according to the proposal. In order to reduce the administrative burden, the full scope of the EU Taxonomy Regulation will be limited to the largest companies, i.e. those that fall in scope of CS3D. Companies falling under the scope of the CSRD, but not reaching the CS3D thresholds, can benefit from a flexible opt-in regime. The proposal makes a distinction between undertakings that claim that their activities are aligned or partially aligned with the EU Taxonomy and those that do not make such a claim.

Where large undertakings with more than 1000 employees on average (i.e. undertakings that have more than 1000 employees

and either a turnover above EUR 50 million or a balance sheet above EUR 25 million) and a net turnover not exceeding EUR 450 million claim that their activities are aligned or partially aligned with the EU Taxonomy they shall disclose their turnover and CapEx KPIs and may choose to disclose their OpEx KPI.

This “opt-in” approach will eliminate entirely the cost of compliance with the Taxonomy reporting rules for such large undertakings which do not claim that their activities are associated with economic activities that qualify as environmentally sustainable under the Taxonomy Regulation.

In addition, the proposal provides more flexibility by allowing these undertakings to report on activities that meet certain Taxonomy technical screening criteria without meeting all of them.
 

Main changes to the CS3D

To reduce the sustainability due diligence burden on businesses, and mainly on the SMEs, the CS3D shall be amended on 10 main points, namely:

1. Extending the scope of maximum harmonisation*;
2. Targeting due diligence, as a general rule, to direct business partners**;
3. Removing the duty to terminate the business relationship as a measure of last resort;
4. Limiting the notion of (relevant) “stakeholder” and further restricting the stage of the due diligence process that require stakeholder engagement;
5. Extending the intervals in which companies need to regularly monitor the adequacy and effectiveness of due diligence measures (from 1 to 5 years);
6. Clarifying the principles regarding pecuniary penalties (and thereby removing the requirement to base pecuniary penalties on (a minimum of 5%) of the net worldwide turnover);
7. Removing aspects of the civil liability clause and the rules regarding representative actions (and thereby removing the specific EU-wide liability regime);
8. Changing the provisions on the implementation of the climate transition plans;
9. Deleting the review clause regarding financial services (and thereby the obligation of the Commission to submit a report on the development of additional due diligence requirements tailored to the financial sector by 2026); and
10. Give companies more time to prepare by (i) deferring the first application deadline for the CS3D from July 2027 to July 2028 and (ii) advancing the deadline for the Commission to adopt general due diligence guidelines to July 2026.

In this newsflash, we will further highlight two of the most remarkable changes:

* Maximum harmonisation:

The current CS3D prohibits Member States from introducing into their national laws requirements that expand specified obligations relating to identifying and assessing actual and potential adverse impacts and ending actual adverse impacts.

To ensure that EU member states do not go beyond the CS3D and create a fragmented regulatory landscape resulting in legal uncertainty and unnecessary burden, the full harmonisation provisions of the CS3D shall be extended to additional provisions regulating the core aspects of the due diligence process. In particular, this includes the identification duty, the duties to address adverse impacts that have been or should have been identified, and the duty to provide for a complaints and notification mechanism.

At the same time, EU member states shall be allowed to introduce more stringent or more specific provisions on other aspects, including to address emerging risks linked to new products or services.
 

** Due Diligence limited to direct suppliers

As regards the chain of activities, as a general rule, due diligence measures will be limited to a company’s own activities, the activities of its subsidiaries and the activities of its direct business partners (and thus not all business partners, including the indirect business partners, as foreseen in the current CS3D).

Evaluations of indirect business partners will be conducted only under specific circumstances, particularly when credible information indicates that adverse impacts may have occurred or could potentially occur within the operations of an indirect business partner.

In this context, Member States are also tasked with ensuring that, during the mapping process, the impact on SMEs is limited as much as possible (e.g. by limiting the amount of information requested from direct business partners with less than 500 employees).

What’s next?

Once the official draft of the Simplification Omnibus Package is published, it will need to be approved by the European Parliament and the Council. The timing of this approval is currently unknown; however, the European Commission has requested that the Council and the European Parliament "fast track" the Omnibus once it is published. The Commission has submitted two separate proposal directives. The first proposal focuses solely on postponing certain disclosure requirements under the CSRD and the transposition deadline under the CS3D. By separating these issues, the Commission aims to reach an agreement on the postponement as quickly as possible, thereby gaining time to address the negotiations regarding the more fundamental changes they propose.

The practical impact should not be underestimated. Member States that have already transposed the CSRD and CS3D will need to amend their implementations within 12 months after the text comes into force. In this context, it is important to note that Belgium has already transposed the original CSRD into its national law, meaning that this legislation is currently in effect. Conversely, the CS3D has not yet been transposed into Belgian law.

The key question is how to approach the implementation process, particularly for the CSRD, as many companies already in scope have taken action and are currently in the midst of their implementation efforts. It is advisable for companies affected by the reduced scope in the Simplification Omnibus Package to take a step back and await the outcomes of ongoing discussions. While it appears that a postponement will be readily adopted, it remains uncertain whether the proposed changes to the thresholds will be accepted by all stakeholders. Therefore, it cannot be ruled out that some companies, which may no longer be in scope based on the current proposal, could ultimately remain in scope. EY Law will closely monitor the legislative process in the coming weeks and months and will provide updates accordingly.
 

Action points:

1. Review the Omnibus Proposal and assess how it will impact your company's reporting and due diligence processes.
2. Prepare to implement necessary adjustments to compliance strategies, focusing on direct business relationships.
3. If you have any questions regarding this topic, please do not hesitate to reach out to us.
4. Follow us to stay informed about the latest updates on the Omnibus Proposal.