EU Sustainability Reporting: Less is more?

As we reported in our previous briefing, the EU Commission has recently concluded a major legislative initiative to revise two cornerstone sustainability laws: CSRD and the Corporate Sustainability Due Diligence Directive ("CSDDD"). The Omnibus I Directive entered into force on 18 March 2026, dramatically reducing the number of companies in scope. The Directive also envisaged a simplification of the reporting standards themselves. A large part of the unrest around CSRD compliance centred on the depth and breadth of the ESRS – nearly 300 pages of dense text filled with cross references to other legislation, requiring (where material) disclosures via over a thousand detailed data points on everything from whether its discrimination policy covers social origin, to its processes for collecting data for pollution-related accounting.

In parallel with the legislative changes, EFRAG, the EU body that advises the Commission on reporting standards, prepared and submitted to the Commission its technical advice on revised simplified ESRS. The Commission has now published a draft delegated regulation for consultation until 3 June 2026 setting out the proposed updated reporting standards (based closely on the EFRAG drafts).

Once implemented, companies will need to use the revised ESRS from financial years beginning on or after 1 January 2027, which will be the first reporting period for the vast majority of companies – all EU non-listed businesses that meet the revised thresholds. "Wave 1" companies – now in their second reporting period under the original ESRS - may choose to apply the revised ESRS earlier for financial year 2026.

Overall structure preserved. The changes are generally ones of degree, scope, and precision rather than fundamental structural change. For example, the same topics remain reportable, however data points within them have in many instances been cut back and the language used to explain reporting obligations has been updated and clarified (see specific examples below).

Reduction in data points. The Commission has affirmed the bulk of EFRAG's December 2025 proposals, reportedly reducing mandatory data points ("shall disclose") by over 60% and total data points (including "may disclose") by over 70%. These changes are expected to reduce reporting costs per company by more than 30%, according to the Commission's press release. However, it is not universally agreed that a reduced number of data points amounts to an equivalent reduction in 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.

Aggregation and disaggregation for groups. The revised text states that the level of disaggregation used for reporting purposes is determined separately from the level at which the materiality assessment takes place. This is a confirmation of the existing position, that for group reporting the materiality assessment is undertaken at the level of the consolidated group but the reporting company must (where relevant) disaggregate and present information at a subsidiary or geographic level where there are differences between material sustainability impacts, risks and opportunities ("IROs") at a group level vs those at a subsidiary/ geographic level.

Value chain information for undertakings managing investments. A new Application Requirement (AR) has been added to clarify the extent of downstream value chain information that asset managers must disclose. Managers who expected to be in the scope of CSRD (though many now find themselves outside it) were adopting different positions in respect of the investments of their funds, with some - justifiably, in our view - taking the position that portfolio companies were not part of the value chain. The revised ESRS provide that "where the undertaking manages investments subject to a fiduciary duty on behalf of its clients without retaining risks or rewards of ownership, that undertaking is not expected to provide data on those investments". This is a potentially helpful clarification for asset managers, provided they properly assess whether they can meet both limbs of being subject to a fiduciary duty and not retaining risks or rewards of ownership.

Other targeted changes. The Commission made a number of additional modifications to EFRAG's draft including adding greater flexibility for companies to define the reporting boundary for greenhouse gas emissions, with the option now being available to use equity share or operational rather than financial control. For groups with complex ownership structures — joint ventures, minority stakes, or project finance vehicles — this is potentially a significant change. The draft also adds a requirement for a company disclosing a climate transition plan with GHG reduction targets that are not compatible with a 1.5°C pathway to explain how its target value(s) compare with the reference value(s) and how it has considered future developments.

A revised approach to materiality.

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. Under the previous version, many early report preparers undertook or were considering a painstaking, time-consuming and expensive double materiality assessment ("DMA") undertaken which looked at every aspect of potential impacts of their operations and those within their value chain (a "bottom-up" assessment).

Materiality Assessment: 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, many of which will be clearly immaterial for the company or its group. While a bottom-up assessment is still possible, if the company prefers, 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. This shift towards a more proportionate, risk-based approach aligns well with international due diligence frameworks (such as the OECD Guidelines for Multinational Enterprises). The standards also confirm that a company is not expected to meet the specific information needs of each individual user of its sustainability report, but rather should focus on information needs of groups of users.

Full ISSB integration not included. Despite reported pressure from corporates, the ISSB, and others, the Commission has not incorporated mechanisms into the revised ESRS to allow companies to fully align CSRD reporting with ISSB standards. It was rumoured that the ESRS would be reformulated to allow for ISSB reports to be cross-referenced from or copy/pasted into the sustainability statement (satisfying the requirement for financially material information), with an additional section addressing impact materiality (together, satisfying the need for double materiality). Though the reasons for the Commission resisting this have not been explicitly stated, this is likely due, at least in part, to concerns that such an approach would undermine the EU's concept of double materiality as a single, integrated and indivisible exercise, under which financial and impact materiality are assessed together, rather than treating it simply as financial materiality with an additional impact layer bolted on. As such, those hoping for a single integrated report covering both frameworks will need to continue working with the two separately, though the revised ESRS do include amendments for even closer alignment of terminology. This should maximise scope for reusing narrative sections and metrics.

Non-material disclosures. The revised ESRS now state clearly that a company "shall not" disclose information prescribed by the ESRS that is not material. EFRAG had suggested a statement that the company "is not required to" report such information, whereas the original ESRS did not clarify this question at all. This change is a meaningful one, and a key point of alignment with the ISSB standards, where materiality relates primarily to disclosable information rather than sustainability topics. Companies planning to fold CSRD reporting into existing voluntary sustainability reports should still be able to do so, as the restriction on the inclusion of non-material information only applies to information prescribed by the ESRS (including entity specific information). The revised ESRS also clarify that non-material information can be included "to meet the data demands of a specific user" (subject to some conditions around presentation).

Fair presentation. The revised standards clarify that when considering whether it has met the requirement to fairly present its material sustainability risks, impacts and opportunities, a reporting company must consider the sustainability statement as a whole. Aligning with the approach applied by the IFRS to both financial and sustainability reporting (under ISSB), this is a practical clarification: companies should focus on whether the overall picture they present is accurate and complete, rather than focusing only on ensuring that each individual disclosure is fairly disclosed in isolation (which a company must also do). It is explained that, for group reporting, this may require adding entity-specific or other disaggregated information.

Background

In 2023 the European Commission tasked EFRAG with developing the VSME. By definition, companies that might use the VSME are not in scope of CSRD itself. The standard is designed to give smaller businesses a simpler framework to voluntarily report on sustainability issues, aiming to create better opportunities to access green financing and assist them in responding to enquiries from larger business partners subject to mandatory reporting. While the VSME was intended to remain outside the formal CSRD framework, the reduction of companies in scope as a result of the Omnibus Directive has increased its importance, and the revised Directive now explicitly empowers the Commission to adopt the VSME by 19 July 2026.

Value chain cap

The VSME currently under consultation is an updated version of the previously published VSME, endorsed by the Commission in its August 2025 Recommendation ((EU) 2025/1710). The revised VSME - importantly - is now also designed to be a legal "value chain cap", effectively meaning companies in scope of mandatory CSRD reporting may only request information from companies that are not in scope of CSRD (referred to as "protected undertakings" under the revised legislation) where that information is covered in the VSME. Protected undertakings have a statutory right to refuse requests that go beyond that limit.

Key Changes to the Revised VSME

As per the previous version, the draft revised VSME has two modules: the Basic Module is the minimum requirement for most undertakings and the target approach for micro-businesses, whereas the Comprehensive Module provides additional data points likely to be requested by banks and investors.

Unlike the previous iteration, the revised VSME would categorise disclosures as "necessary" (required for all undertakings), "necessary if applicable" (required only in specific circumstances), "voluntary" (optional), or "consideration when reporting sector information" (appropriate where relevant to the sector).

Additionally, for undertakings with 10 or fewer employees, certain disclosures (particularly more demanding environmental metrics) that would otherwise be "necessary" are instead voluntary — meaning they fall outside the value chain cap for those very small businesses.

Voluntary reporting would need to be accompanied by a compliance statement, in which the company confirms which of the modules it has disclosed against, where it has omitted certain disclosures and which entity(/ies) are covered by the disclosures.

Other specific changes include the introduction of a size-based threshold (10 employees) for GHG and energy reporting, the removal of a requirement to report on progress towards targets (supporting the transition towards a sustainable economy) and the specification that gender pay gap disclosures are necessary only if applicable (e.g. already required by EU or national law).

The value chain cap will apply from financial year 2027 for undertakings in scope of mandatory reporting.

Under Article 40a of the CSRD, non-EU groups generating over EUR 450 million per year in the EU and having either an EU branch or subsidiary with, in each case, turnover exceeding EUR 200 million will need to report on sustainability impacts at group level for financial years beginning on or after 1 January 2028. Separate standards for such groups, the "nESRS", were to be developed for this purpose. These standards were originally listed on a Commission "kill list" of "non-essential empowerments", which the Commission proposed to either amend or repeal. Despite that, the Omnibus did not delete the power for the Commission to adopt standards for reporting by third country undertakings, and EFRAG picked back up this workstream once it delivered the draft revised EU ESRS to the Commission. The Accounting Directive as amended requires adoption of the nESRS by 30 June 2026.

A 26 February 2025 exposure draft of the nESRS is available on the EFRAG website (see our earlier briefing covering the draft). That version includes an option for non-EU groups to limit disclosures on matters, other than climate, to impacts connected with the sale of products or provision of services to EU customers. In practice, this distinction might not be straightforward, but it nonetheless poses a potentially attractive means of limiting the scope of potentially global, group-wide disclosures. No further drafts have yet been made available, but EFRAG is actively working on them and consultation can be expected shortly given the imminent deadline for publication by the Commission (which looks very likely to be missed).