Understanding the EU's Omnibus Proposal: Key Changes to CSRD, CS3D, and Taxonomy

The Corporate Sustainability Directive (“CSRD”) has been on the forefront of most businesses’ minds since its transposition into Irish law in 2024. CSRD ultimately amended the Accounting Directive (Directive 2013/34/EU) to replace the non-financial reporting framework, initially established by the Non-Financial Reporting Directive (Directive 2014/95/EU) (“NFRD”). Although NFRD was initially hailed as a leading piece of legislation on corporate transparency, it soon became apparent that it was inadequate. To address the shortcomings of NFRD, the new enhanced CSRD regime introduced several key features: an expanded scope covering approximately 50,000 companies across the EU, a third-party assurance requirement (starting with limited assurance and progressing to reasonable assurance), mandatory inclusion of relevant disclosures in the management/directors’ report, and the creation of new European sustainability reporting standards.

In addition to CSRD, on 25 July 2024, the Corporate Sustainability Due Diligence Directive (“CS3D”) was transposed into Irish Law. CS3D is a key initiative of the European Commission and aims to harmonise the regulatory framework that mandates certain companies to implement comprehensive due diligence processes. CS3D mandates that in-scope companies integrate due diligence into their policies and risk management systems. They must identify and assess actual or potential adverse impacts within their operations and across their chain of activities. Essentially, under CS3D, companies are required to prevent and mitigate potential adverse impacts and address any actual adverse impacts, providing remediation where necessary.

Since transposing into Irish Law, there has been some uncertainty around the disclosure requirements and scope of both CSRD and CS3D. To address this, on 26 February 2025, the EU Commission published a package of proposals (the “Omnibus Proposals”) aimed at simplifying the rules underpinned by CSRD, CS3D, and the Sustainable Activity Taxonomy (“EU Taxonomy”). The Omnibus Proposals are part of the EU Commission’s goal to reduce overall administrative burdens for EU companies by 25%, and by 35% for SMEs. Additionally, the proposed changes significantly reduce the number of companies falling within the scope of CSRD, removing from the scope companies with fewer than 1,000 employees and simplifying the requirement to carry out due diligence under CS3D.

The Commission aims to prevent companies from being subject to CSRD requirements under current law, only to be exempted if the proposed changes are implemented. To address this, the Commission has suggested delaying the application of CSRD by two years for companies that are scheduled to report for the first time for their 2025 or 2026 financial years. This proposal is separate from the one amending the substantive requirements under CSRD and CS3D.

We set out below, a list of some of the proposed changes outlined in the Omnibus Proposals.

Proposed Changes to CSRD

The current reporting deadlines for CSRD are as follows:

Deferral

To address the pending changes in scope, it is proposed that the CSRD reporting requirements be postponed by two years through an amending Directive ("Omnibus Directive I"). This deferral will apply to:

• Large companies and parent companies of large groups that were initially scheduled to report for the first time in 2026 for the 2025 financial year; and

• SMEs with transferable securities listed on a regulated market.

Similar amendments are proposed for issuers under the Transparency Directive (Directive 2004/109/EC). The Commission's explanatory memorandum explains that the postponement aims to prevent certain undertakings from having to report for the 2025 (second wave) or 2026 (third wave) financial years, only to be later exempted from this requirement. This would help avoid unnecessary and avoidable costs for those undertakings. To implement this, Member States must transpose the Directive by 31 December 2025, if it comes into force. Companies required to report for the 2024 financial year as part of the first wave will not be affected by this change, although they may later fall out of CSRD's scope due to the proposed changes.

Proposed Changes to the Scope of CSRD

A further amending directive (“Omnibus Directive II”) proposes changes to the scope of CSRD, whereby only large companies or parent companies of large groups having more than 1,000 employees will be required to prepare sustainability reports under Article 19a and 29a of the Accounting Directive. This means that if Omnibus Directive II is implemented, certain companies that need to produce CSRD-compliant sustainability reports in 2025 for the 2024 financial year might not be required to continue doing so in subsequent years.

Proposed Changes to the Threshold of CSRD

Currently, unlisted EU companies are in scope of CSRD if they fall into the “large undertakings” category by exceeding at least two of the following criteria:

• More than 250 employees;

• Net turnover exceeding €50 million; and

• Balance sheet assets exceeding €25 million.

The Omnibus Proposals suggests changing the scoping threshold for listed and unlisted companies to companies whose undertakings are more than 1,000 employees and exceed either the existing €50 million net turnover or €25 million balance sheet thresholds. The revised test will exclude from the scope of CSRD the vast majority of holding companies, special purpose vehicles (“SPVs”) that hold real assets, and securitisation vehicles, as these entities typically will not meet the employee threshold. However, if these vehicles have subsidiaries and assess their scope on a consolidated basis, they might still fall within the scope. Given that SPVs usually do not have employees, they could potentially be completely exempt from CSRD reporting. Furthermore, listed SMEs will also be excluded.

Changes to Taxonomy Reporting

The reduced scope of CSRD will affect the companies required to make disclosures under Article 8 of the EU Taxonomy Regulation (Regulation (EU) 2020/852). Additionally, Omnibus Directive II stipulates that in-scope companies or parent companies with a net turnover not exceeding €450 million on their balance sheet dates (either individually or on a consolidated basis) can disclose information under Article 8 of the EU Taxonomy Regulation more flexibly. The Explanatory Memorandum accompanying Omnibus Directive II describes this as an 'opt-in regime' for companies asserting that their activities are aligned or partially aligned with the EU Taxonomy. Moreover, the Commission has issued draft amendments to certain Taxonomy delegated acts to simplify and reduce the disclosure requirements for in-scope companies.

Proposed Changes to the Existing Reporting Standards

The European Sustainability Reporting Standards (“ESRS”) are utilised for CSRD reporting. Following a thorough review of the ESRS, the Commission acknowledged their excessive detail and, intends to adopt a Delegated Act within six months to streamline them. This will reduce mandatory datapoints by eliminating less significant ones and prioritising metrics over narrative text. The Omnibus Proposal will also provide clear guidelines on materiality assessments to avoid unnecessary reporting and resource expenditure. The Commission aims to ensure the revised standards remain compatible with global standards such as the ISSB. The ESRS climate standard is expected to stay aligned with the ISSB climate standard. Furthermore, the Commission proposes removing sector-specific reporting standards, which currently impose additional reporting requirements on certain sectors under CSRD.

The Omnibus Proposals will not change the double materiality principle underpinned by the ESRS, so companies must still report on how sustainability risks affect their business financially and their impact on people and the environment.

The Removal of Sector Specific Reporting Standards

To alleviate the reporting burden on in-scope companies, sector-specific reporting standards will no longer be developed. Initially set for adoption by June 2024, and later postponed to June 2026, these provisions have been removed by the Omnibus Directive II.

Exemption for the Financial Sector

Under CS3D, the services sector, including the financial sector, has minimal obligations for due diligence in its downstream activities. The Commission proposes to eliminate the review clause in CS3D that mandates consideration of specific due diligence rules for the financial sector, effectively making the exemption for financial services permanent.

Take Aways

In conclusion, CSRD and CS3D have significantly impacted businesses since their transposition into Irish law. CSRD has expanded the scope of sustainability reporting, introduced third-party assurance, and established new European sustainability reporting standards. Meanwhile, the CS3D mandates comprehensive due diligence processes for in-scope companies.

To address uncertainties and reduce administrative burdens, the EU Commission has proposed the Omnibus Proposals. These aim to simplify the rules under CSRD, CS3D, and the EU Taxonomy, reduce the number of companies within CSRD's scope, and streamline due diligence requirements. The proposals also suggest delaying CSRD reporting requirements by two years for certain companies and revising the scope and thresholds for reporting. The Commission estimates that the number of companies in scope will be reduced by about 80%, and that the combined cost savings from the proposed changes amount to €4.4 billion per year.

The Commission's efforts to align the revised standards with global frameworks, eliminate sector-specific reporting standards, and make exemptions for the financial sector reflect a commitment to creating a more efficient and coherent regulatory environment. These changes are expected to alleviate the reporting burden on companies while maintaining the integrity and effectiveness of sustainability reporting and due diligence processes.

It is important to note that the Omnibus Proposals are still in their initial stages and require approval from the European Council and European Parliament before they can be enacted. Consequently, they remain subject to further, potentially significant, amendments before being enacted and transposed into domestic Irish law.

For further information on the above, please reach out to Yolanda Kelly, Director of Client Services.