Revised EU Sustainability Reporting Standards Adopted

The new ESRS will apply to all European companies within the CSRD scope from 2027. The  first-wave companies can may already use them from 2026. They will also form the basis for the version of the standards that will apply to third-country groups, i.e. those with parent companies outside of the EU, known as the ESRS-TC.

The EU Commission has largely respected the technical expert advice delivered by the EU standard-setter (EFRAG). However, facing intense lobby pressure, it weakened and modified several important disclosure requirements - including on GHG emissions and specific environmental and human rights disclosures.

Against this pressure, it is highly positive that the final standards: 

• Explicitly retain fair presentation as a foundational principle ensuring reporting focuses on material impacts and risks rather than a mere compliance checklist, while guiding companies to produce shorter, but more meaningful, decision-useful reports. 
• Maintain the requirement to quantify anticipated financial effects. Although subject to extensive reliefs that can be misused and an extended delay, this information is critical to understanding a company’s strategic position and the quality of its transition planning. The Commission did, however, further extend the phase-in period for these disclosures by another year, to 2031.
• Protect reporting under the double materiality principle, rejecting proposals to require artificially separation of impact and financial disclosures, a move that would have forced companies to duplicate disclosures and made it harder for investors and other users to understand companies’ impacts, risks and their connectivity. The push for this separation never made much sense for European companies. 
• Retain the requirement to benchmark workers' wages against adequate wages that takes into account  ILO criteria on estimating living wage rather than mere minimum-wage compliance, ensuring meaningful social disclosure in line with the EU’s own due diligence legislation (CSDDD).

However, the Commission made several changes that significantly undermine transparency, without meaningfully reducing reporting burden:

• Rolling back improved, yet more flexible rules for GHG emission calculation in line with the recommendations of the GHG Protocol's own Corporate Standard Technical Working Group that is currently revising its standards. The EU Commission, however, did not go back to the original ESRS rules, and decided instead to allow complete flexibility in choosing between  financial control, operational control, or equity share when setting organisational boundaries in their GHG emissions calculation. The EFRAG advice as well as the original ESRS rules were already aligned with options allowed in the GHG Protocol, but provided criteria and discipline designed to ensure the comparability and relevance of this most critical climate disclosure, and prevent gaming the boundaries to make emissions appear lower. These rules and discipline will be gone.
• Deleting requirements to disclose on secondary microplastics (i.e those that form when plastic products break down) which effectively limits reporting on microplastics only to those that are intentionally manufactured. The EU Commission has warned of the risks and dangers of secondary microplastics,estimated to make up 69–81% of all microplastics found in the oceans.This is particularly hard to justify given that EFRAG's technical advice had already limited the requirement to qualitative information only. This means that it was not a question of burden for companies, as there was no requirement to calculate or estimate specific numbers.  
• Further limiting disclosure on human rights incidents, by adding more layers of conditionality and interpretive flexibility for companies. Instead of reporting on all complaints and ongoing cases, companies could report only on those that they themselves decide are substantiated and those confirmed in formal findings by courts. Frank Bold's research shows that companies less committed to human rights tend to report fewer incidents.

Filip Gregor, Head of Responsible Companies at Frank Bold and member of EFRAG’s Sustainability Reporting Board states: 

“On balance, the Commission has respected the technical advice and careful considerations by EFRAG, which delivered a genuinely significant outcome: a framework that is substantially simpler, more accessible to companies, and yet designed to produce meaningful reports rather than compliance exercises. Where the Commission chose to override the technical advice, it seems to have listened to those who wanted to less transparency - from GHG emissions to microplastics to human rights. These changes will not reduce reporting burden, but they will create gaps in information available to investors and stakeholders. That said, even with these dilutions, the standards retain their core integrity, and companies applying them in good faith will be far better placed to provide relevant and genuinely useful sustainability information."

Companies reporting under the CSRD, and those that voluntarily choose to follow EU disclosure rules designed for large businesses, will be able to apply the revised ESRS from next year. The standards now enter a two-month scrutiny period, during which co-legislators (the European Parliament and the Council) may raise an objection or allow them to pass without opposition.

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