A complete look at the revision of the European Sustainability Reporting Standard (ESRS) - The impact of the simplification of the CSRD on Japanese companies and practical responses

Global Sustainability Standards Board (GSSB) Board Member
GHG Protocol Technical Working Group (TWG) Members
Director of Zeroboard Research Institute Tomoo Machiba

The European Sustainability Reporting Standard (ESRS), which came into effect in January 2024, has placed a significant practical burden on Japanese companies due to its extensive disclosure requirements. However, Europe's ESG disclosure rules are now at a historic turning point, undergoing a dramatic simplification.

The final revised draft submitted by the European Financial Reporting Advisory Group (EFRAG) reduces the number of required disclosure items (data points) by 61% from the first edition and significantly raises the threshold for companies that must comply. At first glance, this move appears to be a "relaxation of regulations," but in reality, it is not simply a reduction in burden. This is an important revision that aims to elevate sustainability disclosure from a "punitive checklist" to a "strategic communication tool," including by improving consistency with IFRS sustainability disclosure standards and strengthening "fair presentation."

This document was written by Tomoo Machiba, Director of Zeroboard Research Institute, who also serves as a board member of the Global Sustainability Standards Board (GSSB) and a member of the GHG Protocol Technical Working Group (TWG). It provides a detailed explanation based on primary information, covering everything from streamlining the complex "double materiality assessment" to specific revisions to the Environmental (E), Social (S), and Governance (G) standards.

Furthermore, the book covers insights directly linked to practice, such as "relief measures" that dramatically reduce the burden of data collection, and strategies for Japanese companies to counter excessive data requests from EU business partners. From reevaluating your own company's scope of application to rebuilding your future sustainability strategy with an eye toward IFRS S1/S2 and SSBJ standards, this book is packed with all the "practical measures that Japanese companies should take now" to compete in the global market.

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Introduction: The Journey to Simplifying the ESRS

This article explains how the massive disclosure requirements of approximately 1,100 data points in the first edition of the ESRS, which will come into effect in 2024, were revised, leading to the submission of a "simplified ESRS draft" in December 2025, and explains the background to the progress of the practical redesign of European sustainability regulations.

1. Review of CSRD Scope and Schedule (Summary)

This book will clarify the full scope of the drastic reduction measures, which will reduce the number of EU companies subject to reporting obligations by approximately 90% by raising the thresholds to new thresholds (more than 1,000 employees + sales of 450 million euros, etc.). It will provide a detailed explanation of the new sales and employee thresholds that will apply to non-EU companies (Japanese companies), the "consolidated parent company level reporting logic" that will directly affect Japanese companies, and the change in the application schedule from fiscal year 2028 (issued in 2029), encouraging you to reassess when and at what level your company will be subject to the new thresholds.

2. Overall structure of ESRS and "Qualitative characteristics of information" (Summary)

This book explains the basic architecture that will remain in place even after the simplification, as well as the principles of "fair representation" - complete, neutral and accurate - which have been strengthened to ensure consistency with the IFRS sustainability disclosure standards. It also provides practical suggestions for audit and assurance purposes.

3. Significant reduction in reporting requirements and simplified structure (Summary)

This paper explains how approximately 1,100 data points were reduced by 61% and how duplicate qualitative explanations were eliminated. It also provides a detailed explanation of practical rationalization measures, such as clarifying the "Top-down approach" that can eliminate irrelevant topics at an early stage and making reporting boundaries more flexible, in the "double materiality assessment" (DMA), which has been criticized for its complexity.

4. Disclosure Requirements and Major Revisions of the Environmental (E) Standards (Summary)

The revisions and impacts for each standard will be clarified, including the incorporation of the GHG Protocol's "Financial Management Approach" in E1 (climate change) as a standard and the disclosure of internal carbon prices, and the introduction of a materiality-based approach to pollutant disclosure and the concept of key raw materials in E2 to E5.

5. Disclosure requirements and major revisions of the Social (S) Standards (Summary)

This section explains the changes to the structure that will reduce burdens and emphasize the effectiveness of human rights due diligence, including a new definition of "appropriate wages" for a company's own workers (S1), requirements for stakeholder engagement for workers in the value chain (S2), and a significant simplification of remedies.

6. Disclosure Requirements and Major Revisions of the Governance (G) Standards (Summary)

We will explain the clarification of the information structure and measures to reduce practical burdens, such as narrowing the requirements regarding corruption and limiting reporting on supplier payment practices to "small and medium-sized enterprises with Issue."

7. Relief measures to reduce practical burdens (summary)

The report will provide a full explanation of five powerful special measures that will directly support companies, including the use of "alternative estimates" (exemptions from excessive costs and effort) when data collection is difficult, the protection of confidential information, and a grace period (phase-in) until fiscal 2029 for financial impact forecasts.

8. Limited Third-Party Warranties (Summary)

Regarding the required level of third-party assurance, we will explain the background behind the withdrawal of the transition to reasonable assurance and the retention of "limited assurance," as well as the impact on practice of the introduction of a transitional regime for third-country auditors (2025-2030).

9. Summary of the impact of the amendments on businesses

While there are benefits such as a reduced burden of data collection (estimated reduction in reporting costs of approximately 34%) and improved consistency with IFRS S1/S2, we will also unravel the hurdles that require highly transparent information disclosure based on "usefulness for decision-making."

Conclusion: How Japanese companies should respond and what they should learn (Summary)

Even Japanese companies that are not directly subject to disclosure will be unable to escape data requests from EU business partners. How should they negotiate and defend themselves using the VSME (Voluntary Disclosure Standard for Unlisted Small and Medium-Sized Enterprises) as a shield? We will also offer expert advice on strategic and practical actions to be taken for future ESG disclosure strategies, such as an integrated approach that overcomes the differences between IFRS S, SSBJ standards, and ESRS.

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