Does the Compass provide clear direction for sustainability regulation?

The Omnibus Simplification Package: what we currently know.

Executive summary

On 5 and 6 February, the European Commission hosted consultations with business groups over the upcoming ‘Omnibus Simplification package', which aims to simplify the reporting burden placed on companies by key EU corporate sustainability regulations. The Commission’s proposal is currently due to be published on 26 February 2025, although recent reports suggest it might be pushed back to March.

There has been much speculation, intense lobbying, and leaked information around the contents of the Omnibus Simplification package. Debates are ongoing (see below) and nothing is settled. But there is some indication of what may be on the horizon.

On 29 January 2025, the European Commission launched its Competitiveness Compass for the EU (Competitiveness Compass, or Compass) and on 30 January a draft of the Commission’s strategy towards regulatory implementation and simplification was leaked (leaked draft Simplification Strategy). In the article below, we explore these documents in the context of wider press coverage to consider the future of regulatory simplification and European corporate sustainability.  

How did we get here? A brief history of EU regulatory simplification… 

The EU’s commitment to reduce reporting burdens on companies by 25% in order to enhance competitiveness is not new.

In March 2023, in a communication to the Parliament called “Long-term competitiveness of the EU: looking beyond 2030” the Commission committed to streamline and simplify reporting requirements, for each of the green, digital and economic thematic areas” with the aim to “reduce such burdens by 25%, without undermining the related policy objectives” (page 18).

Nearly two years later, with the launch of the Competitiveness Compass and the incoming Omnibus Simplification package, such efforts are underway.   But as politicians negotiate the details of the Omnibus, widespread concerns remain about whether such efforts will lead to deregulation or renegotiation of existing laws.

The 2020 European Green Deal – which set the EU a long term target of reaching net zero emissions by 2050 with an interim target of reducing 55% of emissions (compared to 1990 levels) by 2030 – has resulted in a wave of new laws that have embedded sustainability into corporate culture and investment practices in the EU over the last five years.

Notable examples include (amongst others):

• The EU Taxonomy Regulation (2020/852) (Taxonomy), which establishes a classification system defining environmentally sustainable economic activities to guide investment and financial flows towards sustainability.
• Corporate Sustainability Reporting Directive (2022/2464) (CSRD), which expands and standardises sustainability reporting requirements for large companies and certain SMEs, mandating disclosures on material ESG information.
• Corporate Sustainability Due Diligence Directive (2024/1760) (CS3D), which requires companies to identify, prevent, mitigate, and account for adverse human rights and environmental impacts across their operations and value chains.

The EU’s ambition is high; it has positioned itself as a global leader in sustainability.  But there is a business cost to compliance, particularly for SMEs. [1]

There is also a widespread perception that the growing compliance burden has an inhibiting impact on European innovation, competitiveness and prosperity, with two thirds of companies reporting that regulatory burdens are a key obstacle to long-term investment. This was one of the central findings of the September 2024 report commissioned by the European Commission from the former President of the European Central Bank Mario Draghi on The Future of EU Competitiveness (the Draghi Report). [2]

Actions taken by the EU

Against this backdrop, at the Budapest Conference on 8 November 2024, the European Council reiterated the goal of reducing reporting burdens by 25% “without delay” and committed to launching a regulatory “simplification revolution, ensuring a clear, simple and smart regulatory framework for businesses”. The Council called on the European Commission to submit “concrete proposals” to that end “in the first half of 2025”.

That same day, European Commission President Ursula von der Leyen announced plans to introduce a regulatory “omnibus”, aimed at simplifying the burdens arising under the “triangle” of the Taxonomy, CSRD, and CS3D.  This responds to concerns and political pushback over the perceived complexity and time- and cost-intensiveness of complying with the three regulations. The Omnibus Simplification package aims to simplify and streamline the requirements in one amending regulation – i.e. it will not amend each law individually.

On 4 December 2024, the Commission confirmed that it planned to publish its ‘Omnibus package: Chapeau communication and omnibus proposal’ (Omnibus Simplification package, or Omnibus) on 26 February 2025,although, a recent press report has indicated it may be pushed back until March.

The Competitiveness Compass: does it provide direction?

On 29 January 2025, the EU Commission published its highly anticipated Competitiveness Compass. The Compass responds to the findings of the Draghi Report and sets out an EU-wide roadmap for increasing competitiveness, innovation and prosperity over the next five years. Amongst other things, the Compass sets out a joint roadmap for decarbonisation and competitiveness, provides more detail on the highly anticipated Clean Industrial Deal, and announces nearly 40 ‘flagship actions’ across key sectors that aim to promote innovation and investment, lower energy costs, and reduce administrative burdens on companies – starting with the Omnibus Simplification package.

The next day, the leaked draft Simplification Strategy called “A simpler and faster Europe: Communication on implementation and simplification” was published on online political news outlet Politico, providing useful information about the EU’s strategy around regulatory simplification.

What do these documents tell us about the incoming Omnibus?

     1. Scope and objectives of the Omnibus

The Competitiveness Compass and leaked draft Simplification Strategy confirm that the Omnibus aims to reduce the reporting burden by 25% for “all companies” and “at least 35% for SMEs”.

In terms of ambition, the Compass states that the Omnibus will “cover a far-reaching simplification in the fields of sustainable finance reporting, sustainability due diligence and taxonomy.”  It does not elaborate on this further, besides stating that the Commission will ensure:

• better alignment of the requirements with the needs of investors,
• proportionate timelines,
• financial metrics that do not discourage investments in smaller companies in transition, and
• obligations proportionate to the scale of activities of different companies.

Given the purported focus on reporting only it is unclear what other elements of the CS3D and Taxonomy could fall within the Omnibus’s current scope, and indeed which elements of the CS3D’s wider due diligence requirements and Taxonomy regulation will be amended – and to what extent.

Although the Commission is focusing on reducing reporting burdens first, it acknowledges that, since “reporting burdens are a subset of administrative burdens”, it aims “in the future” to expand the 25% and 35% emission reduction targets to the “costs of all administrative burdens, and not only reporting requirements”. Again, what this entails remains to be seen.

     2. Support for SMEs

Baked into the Omnibus’ objectives (as set out in the Compass and leaked draft Simplification Strategy) is a strong focus on increased support for small to medium sized enterprises (SMEs).  

Both the CSRD and CS3D require companies to report information from – and for CS3D, conduct mandatory human rights and environmental due diligence (or “mHREDD”) across – their value chains. This imposes an indirect burden on business partners and suppliers of in-scope companies to collect data and align their business practices with these new European standards.

According to the Compass (page 17), the Omnibus aims to mitigate this by addressing “the trickle-down effect to prevent smaller companies along the supply chains from being subjected in practice to excessive reporting requests that were never intended by the legislators”.

This may come as a welcome relief for small businesses indirectly in scope of CSRD and/or CS3D, but it is also worth noting that efforts to address this issue were already underway. For example:

• In December 2024, the European Financial Reporting Advisory Group (EFRAG), which developed the European Sustainability Reporting Standards (ESRS) mandated by the CSRD, launched a Voluntary Sustainability Reporting Standard for non-listed SMEs (VSME). The VSME aims to help micro and SMEs that fall outside the scope of CSRD to “provid[e] information that will help satisfy the needs of large undertakings requesting sustainability information from their suppliers”, amongst other things.  It introduces ‘basic’ and ‘comprehensive’ reporting frameworks for SMEs, with the objectives of standardising data collection and reducing the reporting burden for suppliers (i.e. avoiding scenarios where a supplier must submit multiple different due diligence questionnaires or surveys for each company it supplies).
   
• Furthermore, per its Article 10(2)(e), the CS3D will already require in-scope companies to provide “targeted and proportionate support” for SME business partners where necessary, considering the SME’s resources, knowledge and constraints. This includes providing or enabling capacity building, training, or upgrading management systems, or providing financial support (such as direct financing, low-interest loans, guarantees of continued sourcing, or assistance in securing financing) where necessary

Such measures seek to reduce the reporting burden on SMEs in the supply chain whilst still maintaining the ambition of the regulations. It is unclear at this stage whether the same can be said of the Omnibus. 

     3. Tailored regulation for 'small mid-caps'

To provide additional support to companies, the Compass introduces a new category of business, ‘small mid-caps’, that will “benefit from tailored regulatory simplification in the same spirit as SMEs”.

This idea was proposed in von der Leyen’s Political Guidelines in July 2024, where she committed to “introduce a new category of small midcaps and assess where existing regulation applying to large companies is too burdensome, disproportionate or a hindrance to their competitive development.” [SH1] [WL2] 

The precise definition of small mid-caps will “soon be proposed” but will capture “thousands of companies in the EU” that are “bigger than SMEs but smaller than large companies”. Based on existing EU definitions, this will likely encompass companies that have between 250 to 1,500 employees.  An earlier leaked draft of the Compass stated that this would benefit “up to 31,000 companies in the EU” that play a critical role in Europe’s economy.

It currently unknown what “tailored regulatory” measures for small mid-caps the Commission is planning, so further commentary is, at this stage, limited.

     4. Increased stakeholder engagement over future legislation

Increased stakeholder engagement, particularly with SMEs, appears to be central to the Commission’s proposals for regulatory simplification across all areas.

The introduction of “Implementation Dialogues”, “Reality Checks”, and “New SME and Competitiveness Checks” in the Compass and leaked draft Simplification Strategy suggest that the Commission intends to engage stakeholders in its entire simplification agenda (i.e. reviewing existing legislation), as well as consultation over new and proposed legislation.

However, the EU has attracted criticism from civil society (see, for example, letters from stakeholder representatives to the Commission here and here) for alleged lack of transparency and inclusivity its first Omnibus stakeholder roundtables on 5 and 6 February, which reportedly invited representatives from energy companies and  financial institutions but did not reportedly involve other stakeholders or SMEs.