Why Gutting the CSRD and the CSDDD Means Environmental Harm, Economic Inefficiency and Risks to Financial Stability

Daniel Knott, MSC International Political Economy

Image: Guillaume Périgois / Unsplash

With their Omnibus, the European Commission & the European Parliament claim to “simplify” the EU’s reporting requirements on sustainability without watering them down. The reality, however, is that the agreed changes far exceed a mere simplification and instead represent a thorough dismantling of European sustainability rules. The consequences: Long-term financial stability risks and a significant regression in the ecological transformation. 

The Availability of Sustainability Information Will Deteriorate

Three years ago, through the Corporate Sustainability Reporting Directive (CSRD), the EU created a standardised framework for sustainability reporting. The directive makes sustainability performance transparent and comparable, aiming to steer capital towards sustainable investments while strengthening preparedness for sustainability-related risks. In February 2025, the European Commission proposed drastic changes to sustainability reporting obligations through its “Omnibus”-package. The proposal entailed a strong reduction of the scope of the requirements: Under the Commission-proposal, 80% of companies originally covered by the CSRD would have been excluded. In November, the European Parliament agreed its negotiating position with a centre-right to far-right majority, demanding even stronger deregulation than the European Commission originally proposed. In December the European Parliament then approved a provisional agreement between MEPs and EU governments to limit reporting to companies with more than 1000 employees more than €450 million net turnover – bringing the number of previously covered companies now excluded to 90%.

Overview over the positions on CSRD-scope for tripartite negotiations
European Commission	European Parliament	Council of the EU
Companies with >1000 employees & annual >50 mio. € turnover or >25 mio. € balance sheet total	Companies with >1750 employees & >450 mio. € annual turnover	Companies with >1000 employees & >450 mio. € annual turnover → adopted

Source: Linklaters (2025) (see for more detailed outline of negotiating positions).

For companies still subject to reporting obligations, their depth is also to be reduced. Sustainability reports under the CSRD follow the European Sustainability Reporting Standards (ESRS). The European Commission supports a draft proposal that aims to significantly scale back these standards, proposing a 57% reduction in mandatory data points and a 68% reduction in data points overall, including the voluntary ones. In addition, no sector-specific reporting standards are to be developed, contrary to the original plan. These were intended to ensure the relevance of the reported information. As a result, the Omnibus drastically reduces the availability of sustainability information not only by excluding a wide swath of companies from the CSRD, but also by severely gutting its depth.

Regulatory Component	Original Legislation	Adopted Changes
Corporate Sustainability Reporting Directive (CSRD)
Scope of application	Companies with >250 employees and >50 mio. € net annual turnover	Companies with >1000 employees & >450 mio. € annual turnover
Entry into force	In three steps depending on company size (1st January '24m '25, and '26)	"Stop-the-Clock": Steps 2 and 3 postponed by two years each, to '27 and '28 (passed April 14th, 2025)
Double materiality	Compulsory	Requirement retained—but depth weakened by ESRS-changes
Sector-specific standards (ESRS)	Mandatory sector-specific standards were in development	Deleted—no sector-specific standards will be incorporated in ESRS
Data points (ESRS)	1178 data points (includes 265 voluntary ones)	Reduction by 57% (compulsory data points) or 68% (all data points)
Transition plans	Plans compatible with transition to 1.5°C economy	Retained
Corporate Sustainability Due Diligence Directive (CSDDD)
Scope of application and entry into force	Companies with >1000 employees & >450 mio. € turnover; implementation in three steps acc. to company size (2027 - 2029)	Companies with >5000 employees and >1.5 bn. worldwide turnover; Application moved to 2029 ("Stop-the-Clock")
Transition plans	Mandatory adoption & implementation	Fully removed
Harmonisation	Member states can implement stricter standards - CSDD as a minimum standard	"Gold-plating" prohibited, member state divergence very limited— CSDDD as maximum standard
Civil liability	EU-level harmonisation of liability regime	EU-wide regime scrapped, liability defined by national law

Source: Updated and adjusted summary based on D. Carlin (12/2025); expanded with Tagesspiegel Background on ESRS (in German), Stop-the-Clock Directive.

Sustainability Risks Become More Difficult to Detect

Experts warn that the physical consequences of climate change could induce grave and increasing losses to insurers and financial institutions due to increasing nature hazards that the financial system is inadequately prepared for. Added to this is the risk of so-called “Stranded Assets”. These are assets that could lose significant value due to the global move away from oil, coal and gas, and thus become “stranded”. These systemic sustainability risks carry the potential to trigger a financial crisis. One example: extreme weather events cause major losses concentrated among insurers and other companies. Financial institutions are unaware, due to a lack of crucial information, of the scale of the risk and collapse in the face of heavy losses. The crisis could then spread across the entire financial system and threaten financial stability.

The CSRD obliges companies to systematically record and disclose both the impact of sustainability risks on their business and the impact of their business on the environment (“double materiality”). Based on this data, financial institutions and investors can assess the sustainability profile of their investments and the risks they are exposed to. If a large share of this data, especially from medium-sized companies disappears, robust risk assessment becomes more difficult. This is why financial institutions and the European Central Bank have themselves warned against weakening reporting obligations. 

The Transformation Inhibited—A Threat to Resilience

The availability of comprehensive information on the sustainability of different business models is meant to steer capital flows towards sustainable investments. When sustainability data is missing, financial institutions and investors struggle to assess the actual sustainability of investment targets and assets. This will hit banks that finance small and medium-sized enterprises (SMEs) particularly hard. In some European countries, such as Germany and Austria in particular, financing the transformation depends on the targeted funding of sustainable and future-proof business models by smaller regional credit institutions.

At the same time, regulatory pressure decreases as a consequence of deregulation. Both the CSRD and the Supply Chain Due Diligence Directive (CSDDD) provide for the preparation of “transition plans”, in which companies explain how they intend to meet the requirements of the Paris Climate Agreement. While the transition plan element, at risk of being watered down, was retained in the CSRD, it will now apply to far fewer companies, severely limiting its impact. Furthermore, the full removal of transition plan requirements from the CSDDD voids a core pillar of orienting business models towards improved incorporation of environmental and human rights concerns. The CSDDD is further weakened, and even becomes an obstacle for environmental policies, by restricting the ability of EU member states to implement supply chain legislation that goes beyond the CSDDD requirements (“gold-plating”-ban) and by removing plans to implement a EU-wide liability regime, instead leaving it to member states to implement their own – increasing fragmentation and limiting the ability of civil society to hold companies to account.

As a result of the changes, the ecological transformation becomes harder to finance, while pressure on companies to align their business models with sustainability objectives over the long-term substantially declines, slowing down the transformation. This enables the continuation of non-viable business models, which increases transitional risks for financial institutions.

Instead of Simplification: Fragmentation and Uncertainty

The strong narrowing of the CSRD’s scope means that many companies no longer have to report comprehensively and in a standardised way. At the same time, financial institutions still need ESG data to assess risks and meet prudential requirements. This means that financial institutions and insurers would be naturally inclined to return to individually requesting information from their business partners – information that would otherwise have been part of CSRD-reporting.

To prevent fragmented individual data requests from companies, the ability to request information is set to be largely limited to the Voluntary Sustainability Reporting Standard for SMEs (VSME) under the “value-chain-cap”-provision. However, the data contained in this standard is often insufficient for assessing sustainability and ESG risks – key elements such as double materiality or the mandatory reporting of indirect greenhouse gas emissions along the value chain (Scope 3) are missing. 

Without this information, financial institutions would likely continue to request data via their own questionnaires. SMEs could then face increased administrative burdens. Associations and advisory bodies do recommend voluntarily reporting key elements such as double materiality, but the VSME standard does not provide a standardised method for doing so – voluntary additions would be difficult to compare. Turning to alternative data sources, such as publicly available environmental data, is also not a real solution, as those are neither sufficiently comparable across sectors nor sufficiently substantive for the assessments that financial institutions would undertake. As a result, the capture of ESG risks would become more incomplete, more fragmented and therefore more time-consuming and costly – for both SMEs and financial institutions.

	CSRD pre-Omnibus	CSRD post-Omnibus	Voluntary Standard: VSME
Scope	Companies with >250 employees and >50 mio. € net annual turnover	Companies with >1000 employees & >450 mio. € annual turnover	Voluntary for companies not covered by CSRD
Double materiality	Compulsory	Compulsory	Not included
External audits	Planned to move to "reasonable assurance"	"Limited assurance" auditing only	Not included
Data points	1178 data points (includes 265 voluntary ones)	Reduction by 57% (compulsory data points) or 68% (all data points)	Approx. 140 data points (does not include i.a. Scope-3 emissions, transition plans)

Sources: Own representation based on: Deutscher Nachhaltigkeitskodex, Germanwatch e.V. (in German)

Inefficiency and uncertainty are also created by the “Stop-the-Clock” mechanism, which, in most cases, postpones the entry into force of the CSRD and CSDDD by two years. This punishes first-mover companies that have already developed capacities for compliance with the original legislation, while rewarding latecomers.

Rushed and Risky—The Omnibus Will Not Get Europe to its Destination

The Omnibus represents a serious step backwards: missing sustainability data makes sustainability risks harder to identify, while risks intensify further due to the slowdown of the transformation. This increases threats to financial stability in the long term.

The European Commission expected its Omnibus proposal to generate annual savings of around €6 billion – possibly larger now that the eventual agreement went even beyond the initial proposal. But the question arises: what does Europe lose through sustainability risks neither recorded nor accounted for, and a slowed transformation? A genuine improvement and streamlining of the CSRD and the CSDDD by incorporating learnings from already implemented elements would have been desirable. The Omnibus, as it has now been passed, represents the exact opposite: a precipitous deregulatory excess that undermines the ecological transformation and puts the long-term stability and resilience of financial markets at risk.