Explaining the proposal to simplify the European Sustainability Reporting Standard (ESRS) - How should Japanese companies respond to the amendments to the CSRD?

Director of Zeroboard Research Institute Tomoo Machiba
Josephalisa Michelle

The European Sustainability Reporting Standard (ESRS), which serves as the disclosure standard under the Corporate Sustainability Reporting Directive ( CSRD ), has been under consideration for simplification since the European Union (EU) announced the 1 part of its "Omnibus Package" in February 2025. A revised draft was published in early July, with public comments accepted until September 29. This article introduces the background to the ESRS revision, outlines the simplification proposal, and points of contention leading up to its finalization, and offers suggestions for how Japanese companies doing business in Europe and that may be subject to the CSRD should respond.

Establishment and composition of CSRD/ESRS

In the EU, since the New Economic Regulation (NRE) was enacted in France in 2000, there has been a movement to legislate voluntary sustainability disclosure based on the Global Reporting Initiative (GRI) guidelines (now the GRI Standards) and other standards, and in 2014 the EU Non-Financial Reporting Directive (NFRD) was enacted, which applies to listed companies with 500 or more employees. In January 2023, the Corporate Sustainability Reporting Directive (CSRD), which significantly expanded the scope of companies subject to reporting obligations, came into effect, and the European Sustainability Reporting Standard (ESRS) was established as a set of detailed disclosure requirements.

The main purpose of the CSRD, as part of the European Green Deal, is to support the realization of the EU's climate and sustainability goals, including a 55% reduction in GHG emission amount(compared to 1990 levels) by 2030, by providing investors, citizens, and other stakeholders with reliable and comparable Company, thereby enabling rational decision-making in areas such as investment and consumption behavior based on data. As the CSRD applies not only to the approximately 5 companies within the EU, but also to non-EU companies with subsidiaries or offices within the EU, attention has been drawn to its global ripple effects, despite being a European system.

The first distinctive feature of the ESRS is that it aims to adopt "dual materiality," which requires companies to evaluate both the significant impacts of their activity on the environment and people (society), as focused on by the GRI Standards, and the significant financial risks and opportunities that sustainability Issue, as advocated by the IFRS Sustainability Disclosure Standards (IFRS S) and Japan's SSBJ Standards, may pose to the company. In addition, all reported information must be digitally tagged according to a taxonomy to make it easier to access, and third-party assurance (gradually shifting from limited assurance to reasonable assurance) must be obtained to ensure the reliability of the information. * 1)

The ESRS framework, based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), covers 4 aspects: the foundations of disclosure preparation (BP), followed by governance (GOV), strategy, business model, and value chain (SBM), impact, risk, and opportunity management (IRO), and metrics and targets (MT). Disclosure items consist of 2 general/cross-cutting disclosures (ESRS 1 and ESRS 2) and ESG topics: environmental (5), social (4), and governance (G1) (Figure 1 ). The 1 version of the ESRS, finalized in July 2023, specifies over 1,000 data points. The " 1 wave" of companies subject to the NFRD have already begun this year (2025) and are gradually issuing their 2024 reports based on the ESRS.

Figure 1: Structure of disclosure items in the European Sustainability Reporting Standard (ESRS) (Reference: ESRS * 2)

Background to the Omnibus Package and ESRS Simplification

However, a report on European competitiveness compiled by Mario Draghi, former president of the European Central Bank (ECB) and Italian Prime Minister, on behalf of the European Commission in September 2024, significantly changed the course of Green Deal policy. The so-called "Draghi Report" expressed concern that Europe was falling far behind the United States and China in productivity, in response to the rise of right-wing and far-right forces in the June 2024 European Parliament elections and anti-ESG movements under the US administration. It placed emphasis on strengthening competitiveness, calling for increased innovation and investment in human resource development, while also calling for a significant reduction in the burden on companies imposed by various regulations * 3) .

In response to this recommendation, the European Commission announced the 1 part of the "Omnibus Package" in February 2025. While maintaining core climate and sustainability goals, it reduced the reporting burden for large companies by 25% and for SMEs by 35%. It called on the European Financial Reporting Advisory Group (EFRAG) to submit a simplified ESRS amendment proposal by the end of 10 of that year (later extended to the end of 11 ). As a "stop-the-clock" measure, the application of the new standard was temporarily postponed for 2 years for " 2-wave" and "3 wave" companies, which were previously required to issue ESRS reports in 2026 and 27 , respectively. Furthermore, large companies with fewer than 1,000 employees and listed SMEs were exempted, reducing the number of companies subject to the standard by approximately 80% to approximately 9,000. The development of sector-specific disclosure standards, which had been initially planned, was canceled. The requirement to adopt third-party reasonable assurance standards was also removed, with only limited assurance required for the time being. * 4

EFRAG rushed to revise the regulations and published a simplified version in early July. After 2 months of public comment, the agency plans to take into account the opinions received and submit a final revised version to the European Commission. This will be the basis for the Create of the ESRS Delegated Act, which will then undergo further discussions in the European Parliament and the European Council, with the 2 version of the ESRS expected to be released in mid-2026 * 5) .

overview of the ESRS simplification proposal

The simplified revised ESRS is 55% shorter than the current standard in terms of page count. However, it is still too long to read the entire document. However, the main changes include more flexibility in materiality assessment, a significant reduction in disclosure items, a clearer distinction between mandatory and voluntary disclosure, and the ability to use estimated values ​​for supply chain information without collecting primary data (Figure 2).

Figure 2: Main points of simplification of ESRS (Reference: ERM * 6)

More flexibility in materiality assessment

Regarding materiality assessment, the current ESRS 1 requires a "bottom-up" approach, in which companies score the relevance of listed topics to their company and identify significant impacts, risks, and opportunities (IROs). However, the simplified proposal allows for a more flexible "Top-down" approach, in which companies first select important topics based on their business domains and business models. While the specifics of this Top down approach remain to be seen, it will significantly reduce the time required for disclosing companies to assess materiality. Paragraph 26 of the simplified proposal stipulates that companies should begin by identifying impact materiality and then move on to financial materiality, clarifying the definition and treatment of "double materiality" (note that there are also financial risks and opportunities that are not attributable to impact).

Significant reduction in data points

The total number of data points requiring disclosure and described in English with the expression "shall" was reduced by 57%, from 803 to 347, and the number of qualitative items, which tend to be ambiguous and difficult to interpret, was narrowed from 572 to 185 (a 68% reduction). Specific application requirements (ARs) for required items were separated from the main text and placed in tables. All voluntary disclosure data points described with the expression "may" were removed from the main text, and some were incorporated into non-mandatory item example guidance (NMIG). The complex structure of data points, which was divided into 4 levels (topic, subtopic, sub-subtopic, and item), has been consolidated into 2 levels (topic and subtopic), which also improves the uniformity of terminology and consistency of format (Table 1).

Table 1: Data point reduction rate of ESRS simplification proposal (Reference: EFRAG * 7)
whole

By topic

Main revisions in each ESG area (E1 to G1)

The main changes in each ESG topic are as follows * 8) .

・E1 (Climate Change): Submission of a transition plan is not required, and only the main points are to be disclosed. Regarding GHG emission amount, the change in base year has been relaxed, and principles have been clarified, such as Total emissions(offset cannot be included), consistency with the 1.5°C target, and the description of calculation and target ranges. Regarding Energy consumption, the requirement to disclose renewable energy by type and Intensity has been removed.

E2 (Pollution): Add new pollutants such as secondary microplastics. Clarify the definition of pollution and remove disclosure of indoor pollution. Companies can use their own pollution measurement methodology.

- E3 (Water): Marine resources have been removed from the scope of E3 and are now covered in E1, E2, E4, and E5. Information is not comprehensive, but is focused on important water-related Issue and areas with high water stress.

E4 (Biodiversity and Ecosystems): Avoid duplication with climate change in resilience assessments. Disclose key points of biodiversity transition plans. Seek consistency with the Kunming-Montreal Biodiversity Framework and planetary boundaries.

E5 (Resource Use and Circular Economy): Policy disclosure will be simplified. Regarding resource use, water, which is covered in E3, will be excluded and the disclosure will be limited to major raw materials and intermediate materials. Disclosure by category regarding waste disposal methods will be relaxed, and a disclosure option will be established for cases where final disposal is unknown.

・S1 (Your own employees): Clarify the distinction with the scope of workers covered in S2. Consolidate disclosure of employee engagement, grievance procedures, and redress processes. Reduce required disclosure data items and move them to NMIG. Multinational companies can narrow the disclosure scope to employees in the top 10 countries.

S2 (value chain workers): Fixed the gap with the definition in ESRS 1. Removed overlap with ESRS 2 and S1.

・S3 (Affected Community): Avoid duplication with ESRS 2 and unify disclosure of Community engagement, grievance mechanisms, and redress processes. Disclose whether a grievance mechanism exists, how its effectiveness is evaluated, and whether a mechanism for protection from retaliation exists.

S4 (Consumers and end users): Consolidate disclosure of consumer engagement, complaint handling procedures, and redress processes. Require a list of channels for communicating complaints. Clarify that the impact of illegal use or misuse of products and Service by consumers and end users is out of scope.

G1 (Corporate Ethics): Avoid duplication with ESRS 2 and narrow the scope to corporate behavior. Unify disclosures regarding anti-corruption and anti-bribery. Organize data points related to corruption into the number of identified cases, number of convictions, and total amount of fines.

Commentary on simplification

The proposed simplification of the ESRS appears to be generally positively received by both Industry, investors and other users of disclosed information, as well as consultants and experts who have promoted ESG, who say that it promotes disclosure that focuses on principles and materiality and that the information and format have been significantly streamlined.

However, experts and others are concerned that the rapid revision schedule will limit in-depth, evidence-based discussion and that the significant simplification could have negative effects. They also say that the reduction in data points and explanations could reduce comparability between companies. They also say that the shift from voluntary disclosure items to NMIGs will hinder understanding of the background to disclosures and required actions. They also worry that disclosures related to value chain information and biodiversity will be weakened.

Furthermore, the scope of companies to which the CSRD applies has been significantly narrowed, increasing uncertainty about the achievement of the European Green Deal's goals and raising concerns that this could have a domino effect, weakening related regulations such as the EU Taxonomy, the Carbon Border Adjustment Mechanism (CBAM), and the Corporate Sustainability Due Diligence Directive (CSDDD) * 9) .

On the other hand, for the "1 wave" of companies that have already submitted their fiscal year 2024 disclosures based on the current ESRS, this will require a significant restructuring of the standards, requiring significant resources for the transition. The European Commission's request to EFRAG to revise the ESRS included improving alignment with international sustainability disclosure standards. However, there are many discrepancies between the ESRS and the financial materiality-based IFRS S and SSBJ standards, and the impact-based GRI Standards, in terms of disclosure items, scope, and terminology, making it difficult for reporting companies to use. GRI, citing the GRI Standards' guidance (GRI 3) as a means of defining and assessing materiality, has stated that the ESRS's definition and assessment methodology are still unclear, and is calling for reference to international standards in areas not covered by the ESRS, such as tax and sector-specific disclosure items. * 10

EFRAG has the heavy responsibility of reviewing the large number of comments and finalizing the revised draft in just the next 2 months, but we await the extent to which the draft will be revised from the original when it is made public at the end of 11.

What Japanese companies need to do

While the application of the CSRD to European companies affected by the " 2 and 3 waves" has been postponed for 2 years, no new decision has been made regarding its application to parent companies outside the EU that have subsidiaries or branches within the EU, and the requirement to report based on the ESRS (to be issued in 2029) from fiscal year 2028 remains in place. The application of double materiality and the need for third-party assurance, albeit limited, remain unchanged.

Even though discussions on simplification are currently underway, Japanese companies subject to the CSRD may find themselves regretting it later if they delay complying with the CSRD. The CSRD stipulates that subsidiaries are exempt from separate disclosure requirements if their parent company outside the region makes consolidated disclosures using equivalent disclosure standards. Therefore, companies can begin preparations now using IFRS S/SSBJ and GRI standards without waiting for the ESRS to be finalized. We recommend that companies conduct thorough double materiality assessments and quickly establish systems that use data collection and analysis tools to reliably collect a variety of ESG information from each location and supply chain.

* 1)European Commission, Corporate Sustainability Reporting website. https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en ;

* 2)European Commission, Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 supplementing Directive 2013/ 34/EU of the European Parliament and of the Council as regards sustainability reporting standards. https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=OJ:L_202302772 ;

* 3) Mario Draghi, The Future of European Competitiveness – A Competitiveness Strategy for Europe, European Commission, September 2024. https://commission.europa.eu/topics/eu-competitiveness/draghi-report_en ;

* 4)Euractive, “Commission's new omnibus slashes green reporting to catch up with US”, 26 February 2025. https://www.euractiv.com/news/commissions-new-omnibus-slashes-green-reporting-to-catch-up-with-us ;

* 5)Workiva, FAQ: What you need to know about the ESRS consultation https://www.workiva.com/ESRS-consultation

* 6)ERM, The EU's Sustainability Shift: What you need to know about the new ESRS Exposure Drafts, 14 August 2025. https://www.erm.com/insights/the-eus-sustainability-shift-what-you-need-to-know-about-the-new-esrs-exposure-drafts ;

* 7)EFRAG, Draft Amended ESRS: Basis for Conclusions, July 2025. https://www.efrag.org/sites/default/files/media/document/2025-07/Amended_ESRS_Exposure_Draft_July_2025_Basis_for_Conclusions.pdf ;

* 8)Coolset, ESRS July 2025 Update: What's changed and what companies need to do, 7 August 2025. https://www.coolset.com/academy/esrs-july-2025-update-whats-changed-and-what-companies-need-to-do ;

* 9) Please refer to the following comments.

Ropes & Gray, Summer of CSRD Redux: An In-Depth Look at EFRAG's Proposed Changes to the ESRS, 14 August 2025. https://www.ropesgray.com/en/insights/viewpoints/102kzwq/summer-of-csrd-redux-an-in-depth-look-at-efrags-proposed-changes-to-the-esrs- 1 ;

Latham & Watkins, EFRAG Releases Proposed Amended ESRS for Public Consultation, 12 August 2025. https://www.lw.com/en/insights/efrag-releases-proposed-amended-esrs-for-public-consultation　 

EY, EU Sustainability Developments – ESRS; Exposure Drafts Update (Vol. 4), August 2025. https://www.ey.com/content/dam/ey-unified-site/ey-com/en-gl/technical/ifrs-technical-resources/documents/ey-gl-eu-sustainability-developments-v4-08-2025.pdf ;

* 10)Global Reporting Initiative, Impact Focus of the ESRS Must Be Strengthened, 25 September 2025. https://www.globalreporting.org/news/news-center/impact-focus-of-the-esrs-must-be-strengthened ;