Filip Gregor
Head of the Responsible Companies Team
The European Commission has published its draft Delegated Regulation revising the European Sustainability Reporting Standards (ESRS). The revision follows the Omnibus I Simplification Package and is presented as a burden-reduction measure. Some of it is - but a closer reading reveals a set of changes that go well beyond simplification, departing from EFRAG's technical advice and disregarding formal recommendations from the European Supervisory Authorities. Many of these changes have significant implications for the quality and comparability of sustainability data available to the market and public.
On the positive side, the Commission withstood an intensive lobbying effort to accept the ISSB's demand that double materiality be split between financial and impact information, on the grounds that financial information would otherwise be "obscured." Had this prevailed, it would have created a convoluted architecture of sustainability disclosures, forcing companies to duplicate much of the information and making it difficult for users to find what they need.
The draft also preserves core principles integrated in EFRAG’s technical advice: double materiality, fair presentation, and alignment with sustainability due diligence.
The Commission was legally obliged to consult the European Supervisory Authorities. In their opinions, ESMA, EBA, and the ECB asked the Commission to incorporate a time-limit of FY2029 on the use of reliefs that allow companies to omit disclosures where they cannot provide reliable data without incurring undue cost or effort. The EBA was unambiguous in its opinion: "Simplification should not lead to a situation of permanent unavailability of relevant quantitative sustainability data, which would have negative implications for the mispricing of risks and financial stability and for the flow of lending to the real economy."
The Commission did not follow this recommendation. On the contrary, the draft text highlights the possibility for companies to use concerns over their commercial position to permanently omit quantitative information on the anticipated financial effects of sustainability-related risks, including those arising from climate transition. This option effectively allows the companies facing the greatest risks and transition challenges to remain opaque in this regard. The European Supervisory Authorities had, by contrast, welcomed EFRAG's decision to require such information to be disclosed.
The Commission introduced several changes that went beyond EFRAG's technical advice.
The most evident is a new exemption for those financial market participants that manage investments on behalf of its clients. While the defined exemption allows for multiple interpretations and the text does not provide a clear list of investor types to be exempted, this could cover a significant segment of investors. Combined with the proposed abolition of entity-level reporting by such investment companies under the Sustainable Finance Disclosure Regulation, it creates a lack of transparency in the sector, except for individual investment products that are marketed as SFDR-compliant.
The original ESRS required disclosure of GHG emissions across all entities under the reporting undertaking's financial or operational control, ensuring both completeness and comparability.
EFRAG's advice had already narrowed this to financial control, with operational control reporting made optional. The Commission went further, permitting companies to freely choose their consolidation method for GHG emissions provided in the GHG Protocol, including equity share.
This unconditional choice seriously undermines the comparability of data and hands companies a tool to minimise their reported footprint precisely where transparency and standardised, comparable data matters most.
The draft also introduces a number of smaller changes to metrics across individual standards. These modifications not only lack a clear justification, but they can also be easily exploited to conceal critical information.
The most consequential include:
These changes can be explained by pointing out that the specific requirements were replaced by references to the general obligation to disclose material information, and should therefore lead to the same result. But this raises an obvious question: what is the purpose of these changes? At best, they create a new grey area in which disclosures will be at the discretion of companies resulting in diverging practices. At worst, they will be abused. It is reasonable to expect both.
Perhaps the least visible but most significant change concerns the value chain information cap.
This is based on the parallel Draft Delegated Regulation on voluntary standards — itself drawn from EFRAG's original advice for a voluntary standard for SMEs with fewer than 250 employees. Under the Omnibus changes, this standard sets the legal ceiling on what in-scope companies can request from value chain partners with fewer than 1,000 employees for reporting purposes. The Commission has now excluded a substantial set of datapoints from this cap.
Under the Commission's proposal, companies would not be able to request information from suppliers who have between 10 and 1000 employees on sustainability certifications or labels (including, as currently formulated, EMAS or ISO 14001), GHG emission targets, description of transition policies or practices, climate risk data, Scope 3 emissions, pollution metrics, information on whether a supplier's site is in a biodiversity-sensitive area, water consumption in water-stressed areas, materials use, gender pay gap data, the extent of use of non-employee workers such as those supplied by agencies, convictions and fines for corruption and bribery, the scope of human rights policies, or actions taken to address human rights incidents.
From very small suppliers with fewer than 10 employees, reporting undertakings will not be able to request any environmental information.
For large companies and financial institutions that need to understand impacts and risks in their value chains, this is a significant constraint. It also creates a warped dynamic: companies operating in jurisdictions with low social and environmental standards would be shielded by the value chain cap, while European manufacturers subject to stricter regulations would be competitively disadvantaged.
Evidence from the first year of CSRD implementation shows that the original framework was already producing meaningful improvements in the quality and comparability of sustainability disclosures — particularly on climate risks, GHG data, and transition plans, but also on the disclosure of material impacts more generally.
To ease the burden on companies, EFRAG's technical advice had already presented a balanced yet far-reaching simplification package that removed over 70% of datapoints, while the Omnibus Directive removed 90% of companies from the CSRD scope.
It is therefore a serious concern that the Commission has chosen to diverge from that technical advice and from the opinions of the European Supervisory Authorities (ESMA, EBA, and ECB). Many of the changes introduced by the Commission are not clearly justified by the need for simplification or by making reporting easier. They do, however, create dangerous loopholes and will inevitably result in less transparency on some of the most critical sustainability issues.
By approaching sustainability strategically, companies can turn corporate reporting into a powerful tool to identify their exposure to climate and social risks in their value chains, future-proof the resilience of their business model and build trust with investors, customers and partners alike.
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