Leaked EU Omnibus Proposal Shrinks Sustainability Compliance Market By 90%

Leaked EU Omnibus Proposal Shrinks Sustainability Compliance Market By 90%

Panic is gripping the boardrooms of sustainability software, consulting and assurance providers as the EU tears up its own recently drafted sustainability regulations. The leaked version of the EU’s Omnibus proposal – which will not be finalized until March – looks set to make major changes to both the CSRD and the CSDDD. From a legal perspective, some of the changes can be made by the European Commission with minimal input from other EU institutions, whilst other amendments will require a full legislative process, which will introduce further uncertainty.

The European Commission’s Omnibus proposal (as it currently stands) intends to delay compliance with the CSDDD by one year, to July 2028. The scope of the directive will be limited to conducting risk-based assessments on the human rights and environmental performance of Tier 1 suppliers. The effectiveness of due diligence measures will only need to be assessed every five years, instead of annually. The Omnibus proposal also includes a dilution of the financial penalties resulting from non-compliance. If these amendments are agreed by the EU institutions, the business case for spending on CSDDD compliance will go up in smoke for the next three years.

How about proposed changes to the CSRD? The biggest change is to the reporting threshold. Originally, there was an expectation that more than 50,000 firms would need to comply with the CSRD. Under the revised directive, only businesses with €450 million of net turnover and more than 1,000 employees will be covered. These higher thresholds will apply to both EU-based firms and non-EU-based firms operating in the EU market. This will likely reduce the population of businesses covered to between 5,000 and 6,000. Bang goes spending on CSRD compliance by the lower mid-market and small business segments.

Taxonomy Regulation reporting, which has been a complex challenge, looks set to become voluntary if the proposal gets political support. At this stage, double materiality reporting covering both impact and financial materiality is not under threat. CSRD reporters will also not be required to gather detailed information from small and mid-sized businesses (SMBs) in their value chain. There has been heavy lobbying to reduce the number of ESRS data point. This is unsurprising given that in their 2024 CSRD reports, some filers cover more than 100 impacts, risks and opportunities (IROs) and drafted 400 pages of commentary. This technical topic will almost certainly be delegated back to the notorious EFRAG experts. Sector-specific standards, which were scheduled to be adopted by mid-2026, now look dead. Limited assurance appears set to continue, but reasonable assurance, originally pencilled in for 2029, is now very unlikely. Expect time spent on CSRD projects by firms covered by the new threshold to shrink by 50%.

If the Omnibus proposal is adopted, it will push back spending on compliance with EU supply chain due diligence indefinitely. Three years is a lifetime for a CFO in a low-growth economy. Likewise, spending on CSRD compliance by the lower mid-market (net turnover of €100 million to €500 million) and SMB segments (turnover <€100 million) will be nil. Accounting firms, ESG data management software vendors and supply chain sustainability software vendors targeting these segments need to revise their commercial strategies. To be clear, we are talking about approximately 45,000 firms not spending on CSRD compliance. It’s a huge negative impact for some business plans.

What is the good news? There is still a solid market for CSRD compliance spending by 5,000 or more large firms. What’s more, many heads of sustainability are delighted. In 2024 the overly complex CSRD regulation sucked up 80% of their resources and resulted in finance and compliance taking over sustainability strategy. Chief sustainability officers can now get back to leading on strategy, innovation and operational improvements. This will flow into more engagements with a positive impact beyond compliance.