Why Fashion's Sustainability Investment Could Not Outlast Its Compliance Deadline

The Omnibus I Directive entered into force on 18 March 2026, and the revisions it introduced are substantial. The Corporate Sustainability Reporting Directive, originally designed to bring roughly 50,000 European companies into a standardised sustainability reporting framework, now applies only to firms with more than 1,000 employees and €450 million in annual turnover, up from 250 employees and approximately €50 million in net turnover under the large undertaking threshold of the Accounting Directive. The Corporate Sustainability Due Diligence Directive has been narrowed further still, applying only to companies with more than 5,000 employees and €1.5 billion in global turnover.

According to WWD's analysis of the directive's scope changes, over 80 percent of the companies originally in scope are no longer covered. Due diligence requirements are now limited to direct Tier 1 suppliers rather than deeper supply chain tiers, in-depth assessments are required once every five years instead of annually, and climate transition plans are no longer mandatory, with Article 22 of the CSDDD deleted in its entirety. The harmonised EU-level civil liability regime, set out in Article 29(1) of the original CSDDD, has been removed; companies' liability for supply chain harms now falls back to national law, with Member States required to ensure victims retain access to effective remedies and full compensation. Separately, the supervisory penalty provision was revised: where the original CSDDD required Member States to set a maximum penalty of no less than 5 percent of a company's net worldwide turnover, the Omnibus caps that maximum at 3 percent. The European Commission framed this as necessary simplification, citing expected savings for businesses of €6.3 billion annually in reduced administrative costs. Industry groups welcomed it. Civil society organisations condemned it. The debate that followed was almost entirely about whether the regulations should have been diluted, but what companies were doing with their sustainability budgets in the months before any law had changed received far less attention.

Four years of voluntary acceleration that did not happen

According to the Apparel Impact Institute's "Taking Stock of Progress Against the Roadmap to Net Zero" report, published in July 2025, apparel sector emissions grew by 7.5 percent in 2023. This was the first year-on-year increase since the institute began tracking industry climate progress in 2019. Total sector emissions reached 944 million tonnes, representing nearly 2 percent of global emissions. The increase was driven by higher production volumes and a growing dependence on virgin polyester, which now accounts for 57 percent of global fibre production. The industry entered 2023 carrying a large portfolio of net-zero pledges, science-based targets, and supplier codes of conduct, and emissions rose anyway.

The NewClimate Institute's Corporate Climate Responsibility Monitor 2025, released in July of that year in collaboration with Carbon Market Watch, assessed five major global fashion companies: Adidas, H&M Group, Inditex, Lululemon, and Shein. None received a rating of "reasonable" or "high" for the integrity of their climate strategies. Three were rated "moderate" (Adidas, H&M, and Inditex, primarily on the strength of their GHG reduction targets), while Lululemon received a "poor" rating and Shein a "very poor" one. The report's central finding was that stronger targets, which several companies had established, were not translating into the changes required for meaningful emissions reductions. Companies were replacing coal in their supply chains with biomass and fossil gas rather than committing to electrified, renewable-powered manufacturing, and none had incorporated production volume reductions into their public decarbonisation plans.

Roughly 70 percent of fashion's emissions occur upstream in textile processing and material production, which means the cost of decarbonisation falls primarily on suppliers rather than on the brands making public commitments. McKinsey's 2023 analysis with Fashion for Good found that brands could reduce their emissions by more than 60 percent for less than one to two percent of their revenues, a figure that sounds accessible until you recognise it is calculated at the brand level. Suppliers operating on thin margins, without capital access, face upfront investment requirements in new energy systems and equipment that their financials cannot support without external funding, and only 6 percent of assessed brands, according to the NewClimate Institute, disclosed any investment support provided to suppliers for decarbonisation.

Why the cuts began before the Omnibus existed

McKinsey and Business of Fashion's State of Fashion 2025 report, published in November 2024, found that sustainability had fallen to the tenth-ranked priority among fashion executives, down from second the year before, with only 18 percent naming it a top risk for growth and C-suite sustainability positions being cut across the industry. This was happening against a political backdrop that had been shifting toward regulatory simplification since that summer: Von der Leyen's political guidelines for the incoming Commission, published in July 2024, placed competitiveness at the centre of the EU's agenda, the Draghi competitiveness report in September reinforced that direction, and the US election results in November added further external pressure, all before the Omnibus had been proposed by name.

The contraction happened because the investment was justified internally as regulatory risk management, and the regulatory risk was receding, though not uniformly across the industry. Cascale, the multi-stakeholder organisation whose membership includes H&M Group, Nike, and Inditex, called the Omnibus a step backward, with its senior director of public affairs warning, as reported by WWD, that companies not investing in sustainability would gain a competitive advantage over those that did. Mandatory compliance had been creating a shared cost condition: when all companies above a certain size face the same reporting and due diligence requirements, absorbing the cost of sustainability investment does not place a company at a disadvantage relative to its competitors. Once the probability of those requirements fell, that shared condition began to dissolve, and companies adjusting their budgets downward in late 2024 were responding to exactly that shift.

Jason Judd and Sarosh Kuruvilla of Cornell University's ILR Global Labor Institute noted in a joint statement, also reported by WWD, that three decades of voluntary corporate sustainability schemes in fashion had largely failed to prevent harm to workers and the environment, and that CSRD and CSDDD were designed precisely as responses to that record. For the vast majority of companies now outside the revised scope, the Omnibus does not return the industry to a neutral starting point but to the conditions under which that failure accumulated.

Nate Herman, senior vice president of policy at the American Apparel and Footwear Association, noted after the Omnibus announcement that several AAFA members had conducted double materiality assessments and advanced supply chain due diligence work despite never having been within scope of CSRD or CSDDD. The Apparel Impact Institute documented genuine operational emissions reductions at H&M, Fast Retailing, Puma, and Inditex, including H&M's 23 percent reduction in scope 3 emissions between 2019 and 2024, as well as Artistic Milliners' $100 million commitment to renewable energy at the supplier level. These companies operate at a scale where energy costs carry direct margin implications, or under ownership structures that reduce short-term return pressure, conditions that make the operational case for decarbonisation hold independently of any reporting requirement. Most fashion companies do not share those conditions, which is precisely why the compliance floor mattered.

The compliance architecture that survived the Omnibus

Two regulatory instruments survived the Omnibus, and their scope makes clear what the rollback removed. The Ecodesign for Sustainable Products Regulation, which entered into force in July 2024, and the Digital Product Passport system, whose central registry is scheduled to become operational by July 2026, both operate at the product level rather than at the company level. ESPR sets minimum requirements for durability, repairability, recyclability, and waste reduction on products sold in the EU market, with delegated acts covering fashion and textiles expected in 2027 and enforcement following 12 to 18 months after that. DPPs embed supply chain origin, material composition, and end-of-life data into individual products. A product that does not meet ESPR standards cannot be sold in the EU market. A product without a DPP, once the requirement is active, cannot enter EU trade.

CSRD and CSDDD worked differently. A company could satisfy its reporting and due diligence obligations through disclosure systems and internal processes, independent of whether the products it manufactured were more or less sustainable. Product reality and company-level reporting could diverge, and the emissions data from 2023 suggests they frequently did. ESPR and DPP close that gap at the product level, but they do not reach the areas the Omnibus removed from scope entirely. Neither instrument requires due diligence on labour practices in deep supply chain tiers. Neither compels emissions performance commitments or climate transition plans. The harmonised civil liability mechanism, which required Member States to set maximum supervisory penalties of at least 5 percent of a company's net worldwide turnover and established a Union-wide civil liability regime for supply chain harms, has been substantially curtailed: penalties are now capped at 3 percent, and the harmonised civil liability regime has been replaced by a return to national law. ESPR and DPP govern product characteristics and material transparency, while the accountability for what happens to the people and ecosystems producing those products — which is precisely what CSDDD was designed to address — has been removed for the vast majority of the industry.

The voluntary reporting standard the European Commission committed to develop as part of the Omnibus package will give companies outside the new scope a framework for continuing disclosures if they choose. For most of the industry, voluntary disclosure is now the primary instrument available, and the previous decades have demonstrated what that means: investment calibrated to the probability of compliance requirements rather than to the cost of inaction.

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