On 3 July 2026, the European Commission adopted the revised, simplified European Sustainability Reporting Standards (“ESRS”) and Sustainability Reporting Standard for Voluntary Use (“VESRS”) for smaller companies outside the scope of the Corporate Sustainability Reporting Directive (“CSRD”). The Commission published a staff working document which sets out the development of the standards and supporting reasoning for amendments, including expected cost savings. Below we explain some of the rationale and the key changes included in these drafts.

The original ESRS were adopted by the Commission on 31 July 2023 but have been amended as a consequence of the amendments to the CSRD under the omnibus simplification package on corporate sustainability reporting and due diligence (“Omnibus I”).

Omnibus I has narrowed the scope of companies required to report under CSRD (for example only EU companies with more than 1000 employees and EUR 450 million turnover in the EU are now required to report, and there is also reduced scope for non-EU entities and parent companies) and has reduced the datapoints which are required to be reported on. The revised ESRS reflect this reduced number of datapoints and intend to reduce the cost of compliance under CSRD. The Commission reports that only 15% of the original companies in scope for CSRD are now required to report following the Omnibus I amendments (approx. 6753 companies of which 1,535 have already reported under ESRS)¹. Read more here and here.

The Commission has made a number of targeted modifications to EFRAG’s technical advice on the ESRS amendments. These changes are intended to increase the likelihood of favourable cost savings for users. Changes to revised and final drafts of the ESRS update the Commission’s May draft, including:

• Materiality and materiality assessment – an undertaking is not expected to meet the specific information needs of each individual user and stresses that the objective of the standards is to ensure the reporting of information that is decision-useful for users. It specifies that undertakings “shall not” report information that is not material, except in certain clearly defined circumstances and stresses that a “top-down” approach to materiality assessment is needed to avoid unnecessary work.
• Fair presentation – fair presentation applies to the overall sustainability statement and does not apply to each datapoint. The application of ESRS should result in fair presentation and the changes to the materiality and materiality assessment should also facilitate the application of the principle of fair presentation.
• Level of aggregation and disaggregation – Users will have greater discretion to determine specific geographical contexts when carrying out the materiality assessment. It also clarifies that the level of disaggregation for materiality assessment does not imply that information must be reported at that same level of disaggregation.
• Omission of information – Undertakings may omit certain information in certain circumstances, including information that could be seriously prejudicial to the commercial position of the undertaking (including in relation to reporting anticipated financial effects – see below).
• Anticipated financial effects – (i) Reporting anticipated financial effects is likely to involve estimates and that these can be updated in the future in light of new information without this constituting a reporting “error”; (ii) undertakings may omit certain information in certain circumstances, including where seriously prejudicial to their commercial position; and (iii) an additional year of phasing-in is introduced for both qualitative and quantitative information.
• Greenhouse gas emissions – Undertakings have the flexibility to use either the financial control approach or the operational control approach when defining the reporting boundary to be applied.
• Climate transition plans – Undertakings that report transition plans with targets that are not compatible with 1.5°C target to be transparent about this.
• Microplastics – Disclosure requirements are limited to primary microplastics, undertakings are not required to report metrics on secondary microplastics.
• Emission of pollutants – The decision on which pollutants are material for reporting purposes should be taken following a managerial assessment that considers the undertaking’s activities and sector of operation.
• Substances of very high concern – A new phase-in provision of one-year is introduced for reporting on substances of very high concern for undertakings that are users of articles containing such substances.
• Coherence with Corporate Sustainability Due Diligence Directive (“CSDDD”) – A number of technical modifications have been introduced regarding due diligence to ensure better alignment with the CSDDD.
• Human rights incidents and incidents of discrimination – Only - “substantiated verified” instances are to be reported, and that not all instances are necessarily substantiated instances. It also deletes the reference to “initiated” for the judicial and non-judicial proceedings.
• Asset management activities – New provisions have been included to allow financial institutions that manage investments subject to a fiduciary duty on behalf of clients pursuant to a mandate agreed with those clients to not disclose information in relation to those investments in their sustainability statement. This is to avoid disproportionate administrative burden and duplication with reporting under the Sustainable Finance Disclosure Regulation.

We note that the delegated act confirms that undertakings required to report for financial years beginning between 1 January 2026 and 31 December 2026 (i.e. for reporting in 2027) can choose to apply the final amended ESRS if they wish.

EFRAG has been developing Voluntary Sustainability Reporting Standard for non-listed SMEs (“VSME”) since mandated to do so in 2023. Under Omnibus I, EFRAG was mandated to develop a Voluntary Sustainability Reporting Standard for undertakings not required to report under CSRD but that nonetheless want or need to report sustainability information.  The VESRS are based on VSME and only introduce limited and targeted modifications compared with VSME. 

As part of the Omnibus I negotiations it was acknowledged that companies not subject to mandatory reporting under CSRD (“smaller companies”) should not be subject to excessive information requests from larger business partners that are obliged to report under CSRD. Information requested from smaller companies should be proportionate to their size and resources. To implement this proportionality, companies with 10 employees or less have fewer essential disclosures in the VESRS.

Therefore the VESRS have been introduced as a “value chain cap”, which means that smaller companies will not be obliged to provide information beyond that required by the VESRS and they will have the right to decline to provide any such “additional” information. For the purposes of the value-chain cap, companies reporting under the CSRD can only require companies in their value chain to provide the information corresponding to disclosures listed in Annex II of the VESRS.

The delegated act revising the ESRS and the delegated act establishing the VESRS will now be transmitted to the European Parliament and the Council of the EU for scrutiny. The measures will apply once the scrutiny period of two months, which can be extended by a further two months, is over and the delegated acts are published in the Official Journal of the EU.  We expect the delegated act to enter into force in Q4 2026. 

EFRAG is in the process of drafting a third set of reporting standards for non-EU companies not listed on the EU regulated markets that generate net turnover in the Union exceeding EUR 450 million in each of the last consecutive financial years, and that have either EU branches with net turnover exceeding EUR 200 million in the preceding financial year or are the ultimate parent of EU subsidiaries with net turnover exceeding EUR 200 million in the preceding financial year. They were previously called “N-ESRS” but have been renamed “ESRS-TC” – the “TC” stands for third-country. The latest unapproved ESRS-TC draft is available here. We understand that the launch of the 100-day consultation and field test is likely to start on 23 July 2026 after the EFRAG stakeholder webinar on the exposure draft has been held.

The cover note also sets out a tentative timeline:

• Around 23 July 2026 – public consultation expected, closing in mid-/end-Oct 2026
• January 2027 – EFRAG technical advice to be delivered to Commission
• Mid-July 2027 – ESRS-TC adoption expected

Our global Sustainable Finance & Investment group brings together a multidisciplinary global team that provides clients with best-in-market support. We are following developments relating to ESG regulation, so please get in touch if you would like to discuss.

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This note is intended to be a general guide to the latest ESG developments. It does not constitute legal advice.

Authored by Emily Julier and Rita Hunter.