Sustainable Finance: What is the ESG Omnibus Directive?

ESG Omnibus: What is this directive proposed by the European Commission in February 2025?

As part of a legislative package published on 26 February 2025, the European Commission proposed a substantial simplification in the area of sustainability (Omnibus I) and EU investment programmes (Omnibus II). This legislative package aims to simplify the rules on sustainability (CSRD), due diligence (CS3D) and the Taxonomy. These proposals are mainly aimed at easing the burden on SMEs.

On 26 February 2025, the European Commission published a series of proposals to simplify, among other things, the European Union’s rules on reporting and due diligence when it comes to sustainability. This is the Commission’s ESG Omnibus Directive.

The Commission has therefore initiated this major review to streamline and simplify sustainability reporting and certain European social and environmental regulations including postponing the implementation of the CSRD by two years with a significant reduction in the number of companies concerned.

Reportedly, 80% of the companies previously targeted by the CSRD would be excluded with an applicability threshold of 250 to 1,000 employees and with the following financial criteria: turnover greater than €50 million or a balance sheet total greater than €25 million.

In addition, the Commission wishes to revise the European Sustainability Reporting Standards (ESRS) to make them less complex and facilitate compliance.

This proposal has led to intense controversy in political and economic circles.

Only three regulatory texts – the CSRD, the CS3D and the Taxonomy Regulation – are concerned by this proposal. The SFDR, or “Sustainable Finance Disclosure Regulation”, is not impacted by this ESG Omnibus Directive.

The Commission had asked the other two co-legislators to address the issue as a matter of priority. On 3 April 2025, the European Parliament adopted the postponement of the CSRD by two years and the CS3D by one year. Negotiations on amendments to the directives are pending.

The European Commission hopes that this ESG Omnibus Directive will be published in early 2026.

Reminder of the main regulations on sustainable finance: SFDR, Taxonomy, CSRD and CS3D

All about the SFDR: Sustainable Finance Disclosure Regulation

The European Commission’s Green Deal began in November 2019 with this initial SFDR: Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector, which aims to promote sustainability in the finance sector in Europe.

The SFDR was followed and amended in June 2020 by the Taxonomy Regulation: Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment.

The SFDR has been applicable since March 2021, classifying funds under Articles 6, 8 or 9 of the regulation, and has been the subject of numerous discussions and several projects and amendments to its Regulatory Technical Standards (RTS). The SFDR is expected to be reviewed in 2025.

A consultation on the SFDR was open from 14 September to 22 December 2023, highlighting two potential approaches for the proposed changes under SFDR 2.0:

• The first option would build a categorisation/labelling framework alongside the existing product, while also making a distinction between Articles 8 and 9 of the SFDR.

• The second option would introduce an alternative system based on investment strategy classifications (e.g. a commitment to a positive contribution to specific sustainability objectives or by focusing on a transition) – strategies that would not necessarily align with existing SFDR concepts.

All about the Taxonomy Regulation

Regulation (EU) 2020/852 of 18 June 2020, called the Taxonomy Regulation, complements the SFDR and establishes a legal framework to facilitate sustainable investment and enable investors to identify investments that genuinely meet the six environmental goals to protect the planet. Both objectives (1. Climate change mitigation and 2. Climate change adaptation) applied from January 2022 and the other four from January 2023:

3. Sustainable use and protection of water and marine resources

4. Transition to a circular economy

5. Pollution prevention and control

6. Protection and restoration of biodiversity and ecosystems

All about the CSRD: Corporate Sustainability Reporting Directive

Directive (EU) 2022/2464, the CSRD or “Corporate Sustainability Reporting Directive”, replaced the European NFRD or “Non-Financial Reporting Directive”, which governed non-financial performance declarations by European companies.

The CSRD has incorporated ESG aspects and has been gradually applied since 1 January 2024, when it officially replaced the NFRD. For various reasons, a majority of EU countries have not transposed this directive, the deadline for which was 6 July 2024.

All about the CS3D: the European directive on due diligence

The CS3D, or “Corporate Sustainability Due Diligence Directive”, complements the sustainable finance regulations and establishes a legal framework to promote sustainable and responsible corporate behaviour. It will be applicable from 2027.

It lays down rules concerning the obligations of companies with regard to actual and potential negative impacts on human rights and the environment, with regard to their own activities, the activities of their subsidiaries and the activities across their value chain carried out by entities with which the company has an established business relationship. It also lays down rules on liability in the event of a breach of these obligations.

The directive also aims to establish a horizontal framework to support the contribution of companies operating in the single market to achieving the EU’s transition to a green and climate-neutral economy, in line with the European Green Deal and the UN’s Sustainable Development Goals.

Other regulations have been amended to introduce sustainability criteria, namely:

• The Benchmark Regulation: two new categories of low-carbon indices were introduced in 2019 – Climate Transition Benchmarks (CTBs) and Paris-Aligned Benchmarks (PABs).

• MiFID II: since 2022, intermediaries offering investment advice or a portfolio management service have been required to collect their clients’ sustainability preferences before offering them a financial investment.

• The AIFMD and the UCITS Directive: the delegated acts require all UCITS management companies and AIF managers, whether or not they have an ESG-related investment strategy, to incorporate sustainability risks into the management of a fund.

In May 2023, ESMA published its "Guidelines" on the names of funds marketed in the EU containing ESG or sustainability terms. They apply immediately to new funds, while existing funds still have until 21 May 2025 to comply. It is important that fund managers conduct their investigations to ensure compliance and limit regulatory risks.

Jean-Pierre Gomez, Senior Advisor (Public Affairs), Societe Generale Securities Services Luxembourg