Comprehensive Reform Of Sustainability Legislation: The Omnibus Proposal

I. INTRODUCTION

The European Commission ("European Commission") published the Omnibus Package on February 26th to simplify the EU sustainability reporting standards and reduce bureaucratic burdens. Designed to create a more prosperous and competitive EU economy, the proposal was developed based on the Draghi Report, which explores the future of Europe's competitiveness. Former European Central Bank President Mario Draghi authored this report, providing key insights for shaping the proposal.

The Omnibus Package introduces significant amendments to several key regulations that fall under sustainability legislation, including the Corporate Sustainability Due Diligence Directive ("CSDDD"), the Corporate Sustainability Reporting Directive ("CSRD"), the Carbon Border Adjustment Mechanism ("CBAM"), and the EU Taxonomy Regulation. Given that many companies are currently preparing to comply with reporting obligations, understanding the impact of this proposal is crucial for shaping their strategic roadmaps.

II. FUNDAMENTAL PRINCIPLES

1. Basis of The Omnibus Package: What Does the Draghi Report Say About Europe's Competitiveness?

Upon the request of European Commission President Ursula von der Leyen, renowned economist Mario Draghi presented his report to the European Commission, The Future of Europe's Competitiveness, on September 9, 2024. The report focuses on three key areas: (i) closing the innovation gap between the United States and the European Union, (ii) aligning decarbonization with competitiveness, and (iii) ensuring economic security by reducing dependencies.

Therefore, the report highlights findings that indicate the need to reassess Europe's growth model. One of the key points in this context is aligning decarbonization with competitiveness, which plays a crucial role in Europe's ability to compete with countries like the U.S. and China. According to the report, if clean energy does not lead to lower prices, inequality will continue to grow.

Draghi also stresses the need for more flexible and business-friendly regulations. He critiques the high regulatory costs imposed on small and medium-sized enterprises (SMEs) and advocates for a regulatory pause in the next EU institutional cycle. He calls for thorough consultations and well-justified regulations, ensuring that future policies are practical, cost-effective, and do not hinder growth.

2. What Is the Main Objective of the Omnibus Package?

The Omnibus Package, published by the European Commission, primarily aims to simplify the reporting obligations imposed by the EU's sustainability framework. As highlighted in the Draghi Report, this initiative is driven by the need to strengthen Europe's competitive position and foster economic growth. The European Commission believes that these changes will help create high-quality job opportunities, attract investments, and mobilize the necessary funding for a transition to a more sustainable economy. In line with this vision, the Commission has also embraced the Clean Industrial Agreement, which integrates climate and competitiveness policies.

The Omnibus Package identifies redundant, repetitive, and disproportionate rules that place unnecessary burdens on EU companies, particularly regarding sustainability reporting, corporate practices, and compliance requirements. The proposal suggests revisions to key regulations, including the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), the Carbon Border Adjustment Mechanism (CBAM), the EU Taxonomy Regulation (Taxonomy), and the InvestEU Regulation.

a. What are the Key Changes Introduced by the Omnibus Package to the CSRD?

The proposed changes brought by the Omnibus Package to the CSRD can be summarized as follows:

• First of all, the scope of companies subject to reporting obligations has been narrowed. Currently, companies meeting at least two of the following criteria: (i) net revenue over 50 million euros, (ii) total balance sheet over 25 million euros, and (iii) more than 250 employees, are considered large companies and are required to report. Additionally, SMEs listed on a regulated market within the EU are also included in this scope. According to the Omnibus Package, only companies with more than 1,000 employees will be subject to reporting obligations. Once the threshold of 1,000 employees is exceeded, the obligation will be determined based on other financial criteria.
• For SMEs, which will not be included within the scope of obligations, voluntary reporting standards will be established. Additionally, the information that large companies and banks can request from these companies will be limited.
• Moreover, companies located in third countries outside the EU that previously were subject to the regulation if they generated more than 150 million euros in the past two years or had a subsidiary in the EU generating more than 40 million euros annually, will now be subject to the scope if they generate more than 450 million euros or 50 million euros annually.
• Expected Outcomes:These proposed changes will likely lead to around 80% of the companies currently within the scope of CSRD being removed from its obligations.
• No delay in reporting obligations for companies reporting in 2025, but for large companies that have not yet applied the CSRD and listed SMEs, the obligation will be postponed for 2 years.
• The European Commission will review the European Sustainability Reporting Standards and reduce the types and amounts of data companies need to report, clarify ambiguous provisions, and align the rules with other regulations.

b. What are the Key Changes Introduced by the Omnibus Package to the Corporate Sustainability Due Diligence Directive (CSDDD)?

The changes brought by the Omnibus Package to the CSDDD can be summarized as follows:

• Indirect supply chain due diligence: A change has been proposed regarding the "indirect supply chain due diligence" obligation, which we evaluate could directly impact Turkish companies' commercial relationships. The proposal suggests limiting the due diligence obligation to direct suppliers only. Companies will be required to conduct an investigation into indirect suppliers only when they suspect adverse impacts and have reasonable justification for such suspicion. For example, if reliable sources such as civil society organizations or media provide information regarding adverse impacts from indirect suppliers, companies would then be required to conduct additional investigations.
• ransition plans: Under the proposal, the obligation to adopt and implement a transition plan to mitigate climate change will only be mandatory for adopting the plan, thereby removing the obligation for the plan's implementation.
• Extension of deadlines: Companies will be given time to implement the new framework concerning their sustainability obligations under the Omnibus Package. Consequently, the deadline for applying CSDDD requirements for large companies will be extended from July 26, 2027, to July 26, 2028. During this time, the release of the necessary guidelines prepared by the European Commission will also be postponed until July 2026.
• Sustainability due diligence requirements: The frequency of periodic evaluations will be extended to 5 years, and the obligation to update due diligence measures when reasonable grounds show that the measures are insufficient or ineffective will be clarified. Additionally, the obligation to terminate business relationships will be removed.
• Limitation on information requests: Similar to the changes introduced to the CSRD, the information that large companies and companies within the scope of obligations can request from small and medium-sized business partners has been limited.
• Transition plan requirements: The requirements related to transition plans will be aligned with the CSRD, and provisions for aligning due diligence requirements will be expanded to ensure a level playing field for competition within the EU.

c. What are the Key Changes Introduced by the Omnibus Package to the EU Taxonomy?

The changes brought by the Omnibus Package to the Taxonomy can be summarized as follows:

• Voluntary Taxonomy Reporting for Large Companies: In the future, large companies with more than 1,000 employees and net revenues up to 450 million Euros, which fall under the scope of CSRD, will have voluntary Taxonomy reporting.
• Simplification of Reporting Requirements: The European Commission has proposed simplifying reporting formats to reduce the reporting burden on companies under the Taxonomy regulations. Additionally, exemptions will be provided for activities that account for less than 10% of a company's total revenue, capital expenditures, or total assets, removing the Taxonomy reporting obligation for these activities.

d. What are the Key Changes to the Carbon Border Adjustment Mechanism (CBAM) Under the Omnibus Package?

The changes brought by the Omnibus Package to the CBAM can be summarized as follows:

• Exemption for Small Importers: The European Commission has proposed that importers who bring goods under the CBAM framework with emissions equivalent to less than 50 tons per year (approximately 80 tons of CO2 per importer) will no longer be subject to CBAM obligations. This means that only importers bringing more than 50 tons of CBAM-covered goods to the EU annually will remain within the scope.
• Simplification for Remaining Importers: For importers who continue to be subject to CBAM obligations, the proposal includes simplifying the authorization process for declarations, as well as making emissions calculations and reporting requirements clearer and easier to follow.

III. CONCLUSION

Based on the findings that the European Union's casuistic regulations regarding sustainability and decarbonization policies are limiting its competitiveness, particularly against rivals such as the United States and China, the new policy aims to ease the sustainability reporting requirements for both small and medium-sized companies, as well as large enterprises. The regulations are designed to reduce administrative burdens on companies while also addressing the disadvantage of small and medium-sized companies compared to large enterprises within the European Union. This approach intends to free up administrative costs, which can then be redirected toward innovation and economic growth. In any case, it is essential for the companies in question to monitor the proposed recommendations and changes, including the Omnibus Package, and update their implementation plans in accordance with sustainability and corporate responsibility frameworks.

The full text of the Proposal can be accessed here.

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