European Commission Adopts Revised European Sustainability Reporting Standards

On 3 July 2026, the European Commission ("EC") adopted revised European Sustainability Reporting Standards ("ESRS") and, for smaller companies, a voluntary reporting standard.

The revised ESRS are intended to simplify sustainability reporting under the EU Corporate Sustainability Reporting Directive ("CSRD"). The target of the EC is to reduce the administrative burden on EU businesses whilst maintaining high-quality disclosures. The revised ESRS are clearer and more succinct – the ESRS streamline processes by reducing the number of mandatory datapoints by more than 60% and the total number of datapoints by more than 70%. These changes are expected to reduce reporting costs by more than 30% per company.

Background

The CSRD requires in-scope EU undertakings to report on sustainability matters in accordance with the ESRS. The first set of ESRS was adopted by the EC in July 2023 by way of delegated regulation (which you can read more about here).

The first set of ESRS included two cross-cutting standards, ESRS 1 and ESRS 2, and 10 topical standards covering various ESG-related matters. The standards were, however, widely criticised for containing too many datapoints and for lacking sufficient clarity. As a result, in March 2025, as part of the EU's Omnibus proposals (which you can read more about here), the EC mandated EFRAG to deliver technical advice for substantial simplification of the first set of ESRS. EFRAG subsequently published exposure drafts in July 2025 and submitted its final technical advice in December 2025. The EC's May 2026 draft delegated regulation was based closely on EFRAG's draft revised ESRS (which you can read more about here).

Key changes

Materiality

The revised approach to materiality is the most significant practical change to the ESRS, as a top-down approach is emphasised. This means that the company starts from its business model and strategy and focuses on areas where material impacts, risks and opportunities are likely to arise by reference to such factors as sector, geography and activities.

In this approach, if the materiality or non-materiality of one or more impacts, risks or opportunities is not evident based on the analysis, the undertaking performs a specific assessment of the impacts, risks or opportunities in question. Undertakings are not expected to meet the specific information needs of each individual user and that they "shall not" disclose information that is not material except in defined circumstances.

Fair presentation

The EC has also introduced clarifications on fair presentation, confirming that the assessment applies to the sustainability statement as a whole rather than to each individual datapoint. Fair presentation requires that the undertaking disclose information that is comparable, verifiable and understandable, as well as entity-specific information. When applying ESRS, including both the materiality filter and entity-specific disclosures, where necessary, this allows for a sustainability statement that achieves fair presentation.

The revised ESRS therefore give undertakings greater discretion when considering whether specific geographical contexts are relevant to the materiality assessment. This further clarifies that the level of disaggregation used for that assessment does not necessarily dictate the level of disaggregation required in the sustainability statement. If a material impact, risk or opportunity determined at group level is not relevant for all subsidiaries or activities in the group, the information may be provided at a disaggregated level, covering only the subsidiaries or activities for which the impact, risk or opportunity is relevant.

Omission of information and anticipated financial effects

Another flexibility includes provisions allowing the omission of information that would be seriously prejudicial to the undertaking's commercial position. All of the following criteria must be met to omit such prejudicial information:

1. The omission does not prevent a fair and balanced understanding of the undertaking's development, performance and position or of its material risks or impacts;
2. The undertaking has determined that it is impossible to disclose the information in a manner, such as at an aggregated level, that would enable it to meet the objectives of the disclosure requirement without seriously prejudicing its commercial position;
3. For each datapoint omitted, the undertaking discloses the fact that it has used this exemption; and
4. The undertaking reassesses at each reporting date whether the information may still be omitted.

The revised ESRS also:

1. Introduce the possibility to limit the reporting scope for a metric where obtaining reliable data would involve undue cost or effort;
2. Clarify that anticipated financial effects may involve estimates that can later be updated without constituting an error; and
3. Introduce flexibility to use either the financial control approach or the operational control approach when defining the greenhouse gas reporting boundary.

Extended transition reliefs have also been introduced for anticipated financial effects. Undertakings required to report on sustainability for financial years starting between 1 January 2024 and 31 December 2026 may omit all information about anticipated financial effects for financial years prior to financial year 2028 and may omit quantitative information for financial years prior to financial year 2030. Undertakings required to report for financial years starting on or after 1 January 2027 may omit all such information for their first two financial years of reporting and quantitative information for their first four financial years of reporting.

Separately, the undertaking shall correct material prior period errors by restating comparative amounts unless it is impracticable to do so.

Greenhouse gas emissions and climate transition plans

The revised ESRS align more closely with global sustainability reporting standards by giving undertakings the flexibility to use either the financial control approach or the operational control approach when defining the greenhouse gas reporting boundary. In relation to climate transition plans, the text requires undertakings that report transition plans with targets that are not compatible with a 1.5°C target to be transparent about this.

VSME

Alongside the revised ESRS, the EC has published a Voluntary Reporting Standard for SMEs ("VSME") covering "protected undertakings" (i.e., undertakings that are not subject to mandatory CSRD reporting and do not exceed an average of 1,000 employees during the preceding financial year). VSME is based on EFRAG's 2024 voluntary SME standard, which was later endorsed by the EC. The overarching aim for VSME is, similar to ESRS, reducing reporting burdens by replacing fragmented and cumbersome reports with a streamlined framework.

The voluntary standard has two key objectives:

1. to facilitate voluntary reporting through a simple and standardised framework; and
2. to address the "trickle-down effect" of value chain reporting by limiting the information that may be requested from protected undertakings.

The latter is significant because information requests from small and medium-sized enterprises have historically been disproportionate and overlap with other questionnaires, resulting in additional burden. The VSME is also designed to operate as a "value-chain cap". This means that CSRD in-scope undertakings cannot require protected undertakings in their value chains to provide information beyond the applicable cap. Protected undertakings have a statutory right to refuse to provide information exceeding those limits. Only essential datapoints are covered by the value chain cap, and every datapoint under the cap is listed in Annex II of the VSME. Certain essential disclosures have been marked as "voluntary" for companies with 10 employees or fewer, providing those undertakings with extra protection from the trickle-down effect.

Non-EU parent undertakings

The delegated regulations do not cover the separate sustainability reporting standards for non-EU parent undertakings that fall within the scope of the CSRD. Those standards, recently renamed by EFRAG as the "ESRS for Third-Country Groups" ("ESRS-TC"), will apply to large non-EU groups generating significant turnover in the EU and with at least one large EU subsidiary or branch.

The draft ESRS-TC was approved by the EFRAG Sustainability Reporting Board on 1 July 2026, and EFRAG is expected to publish it for public consultation later this month. The EC expects to adopt the ESRS-TC in 2027. Non-EU groups should therefore continue to monitor developments closely, particularly as the content of the ESRS-TC is likely to be influenced by the revised ESRS.

What next?

The revised ESRS and VSME will now be scrutinised by the Council of the EU and the European Parliament for two months in the review period, which can be extended by a further two months if exceptions are raised. Provided that no objections are raised within the review period, the revised ESRS and VSME will be published in the Official Journal of the EU.

The delegated regulation amending the ESRS will enter into force four months and one week after its adoption and will apply to financial years beginning on or after 1 January 2027. For financial years beginning between 1 January 2026 and 31 December 2026, undertakings already in scope of the existing ESRS may choose to apply either:

1. the existing ESRS (as amended by the 'Quick Fix' Delegated Act);
2. the revised ESRS in full; or
3. the existing ESRS with certain reliefs introduced by the revised ESRS.

The VSME enters into force on the third day following publication in the Official Journal. Article 3 on the value chain cap will apply from financial years beginning on or after 1 January 2027. From the date of entry into force, the VSME is available for use by undertakings with no more than 1,000 employees that wish to report on sustainability on a voluntary basis.