The European Commission is calling for public feedback on the final draft of its revised sustainability reporting standards. Compliance teams should note that the draft retains most of the double materiality requirements that some hoped they would drop, but clarifications over how to approach materiality assessments may reduce compliance time and costs.
Once the consultation is over, the revised European Sustainability Reporting Standards (ESRS) and a voluntary reporting standard for smaller companies will be formally adopted and submitted to the EU Parliament and Council before entering into force.
The EU is under pressure to reduce the complexity of its landmark sustainability regulations. We reported recently that Hester Peirce, commissioner on the US Securities and Exchange Commission (SEC), told Compliance Week’s National Conference the EU is realizing that its ESG requirements are limiting growth in the eurozone and giving the US a competitive advantage.
She was speaking a day after the SEC submitted a proposal to the Office of Information and Regulatory Affairs (OIRA) to rescind its climate-related disclosure rule.
Simpler and clearer
The Directorate-General for Financial Stability, Financial Services and Capital Markets Union, which issued the consultation on May 6, said in a statement that the standards aim to cut the administrative burden for EU businesses, while preserving the quality of sustainability disclosures.
The revised standards are the last major step in building on the EU’s Omnibus I Directive of simplification measures, which came into force on March 18. This took smaller organizations (those with less than €450 million in revenue and fewer than 1,000 employees) out of scope of the Corporate Sustainability Reporting Directive (CSRD) requirements, cutting the number of in-scope companies by 90 percent.
The Directorate said the simplifications should reduce corporate reporting costs by more than 30 percent. “The draft revised ESRS reduce mandatory datapoints by over 60 percent and total datapoints by over 70 percent. The new ESRS are shorter and clearer, introduce new flexibilities for companies, and simplify the materiality assessment used to determine what must be reported,” it said.
Its draft voluntary standard aims to encourage sustainability reporting by smaller companies. One important change in the Omnibus is the introduction of a “value chain cap” so that companies reporting under CSRD cannot require suppliers with fewer than 1,000 employees to provide information beyond what is set out in the voluntary standard.
Most companies will use the revised ESRS from financial years beginning on or after 1 January 2027. “Wave 1″ companies – now in their second reporting period under the original ESRS – may choose to apply the revised ESRS for the financial year 2026.
Data and double materiality
Alexandra MacBean and Sarah-Jane Benton, associate and director of operational risk and environment at law firm Travers Smith, warned in a briefing on May 13 that reducing data points will not necessarily reduce the reporting burden. “The fact that the revised version states a requirement in one sentence rather than five paragraphs does not change the nature or substance of the underlying disclosure requirement.”
They added, “perhaps the most significant change, and the one with the highest potential to reduce the overall reporting burden, is the way that the revised ESRS approach materiality.” This will ease pressure on those who were attempting an intensive “bottom-up” approach to the double materiality assessments (DMA), they said.
“The revised ESRS emphasises instead a ‘top-down’ approach to materiality in which the company considers as a starting point its business model and strategy, rather than a long list of potentially relevant IROs,” they said. A bottom-up assessment is still possible, but the lawyers said it is “helpful that the updated ESRS confirms that the materiality assessment does not need to consider every possible impact, risk or opportunity, but can focus on areas where material IROs are likely to arise on account of factors such as sectors, geographies and nature of activities.”
They also noted that it does not introduce mechanisms to enable companies to align CSRD reporting fully with ISSB standards. Companies must continue reporting for both separately, although terminology amendments should “maximise scope for reusing narrative sections and metrics.”
A compliance gear shift
Andromeda Wood, vice-president of regulatory strategy at Workiva, said no one envisaged such a radical update so soon. “Compliance teams now find themselves shifting gears to manage a compliance transition,” she warned.
She said they must understand the update process, make the best use of the development timeline, and run an orderly and auditable transition process (or, for companies not yet reporting, an orderly update to the implementation plan).
She advised compliance to take advantage of having a final text of the revised ESRS a couple of months before the process reaches legal activation, particularly if they intend to apply the new standards for the 2026 financial year.
Actions include:
- Ensure the current state (reporting or getting into double materiality) is controlled and auditable. This will significantly reduce work tracking and managing future changes. Technology helps manage auditability and compliance.
- Refresh your approach to double materiality to reflect increased process flexibility and understand changes arising from the new emphasis on fair presentation.
- Seek efficiencies in data collection and management processes – the consultation includes multiple refinements to the core of ESRS, but only minor changes to topical disclosures.
What to watch
The revised ESRS are significantly less granular and “contain multiple refinements to clarify the intent and approach in processes such as double-materiality and data collection,” Wood said. She pointed to two key impacts:
“As the updated standards lean heavily into the financial reporting concept of fair presentation, they place more emphasis on the significance of the double-materiality assessment and the judgment of the teams preparing the report,” she warned. “In some areas, the revised standards include more choice, for example, in the use of estimates, the scoping of emissions reporting, and the timing of some disclosures.”
Compliance teams should focus more on managing and documenting nuanced decision processes instead of direct disclosure outputs.
She also highlighted updates to optionality. “For instance, the revised ESRS removes optional disclosures and places the information into a new category of guidance. Other changes revise language to clarify obligations – such as changing ‘shall’ to ‘may’.”
Non-material information must not be included in the report, so Wood recommended a compliance review of the impact on current or planned disclosures alongside work to map the new requirements.
Voluntary compliance drivers
“While interest in the voluntary reporting standards has so far been limited, it is important to note that the standards define the CSRD value-chain cap,” Wood added. “Compliance teams working in the CSRD supply chain should therefore consider reviewing the standards.”
The changes mean that a large group of companies is now in the supply chain but no longer falls within the scope of CSRD itself. Even though they no longer need to comply with ESRS, Wood said some may choose to do so because the simplified standards provide a solid foundation, allowing companies to keep up with their peers and provide compatible value-chain data.
