The European Central Bank (ECB) has cautioned that recent changes to the EU’s sustainability reporting regime could significantly undermine transparency for investors, following a major overhaul of the European Sustainability Reporting Standards (ESRS).
According to ESG Today, in a newly published staff opinion, the ECB warned that measures introduced under the European Commission’s Omnibus I initiative – designed to simplify reporting requirements under the Corporate Sustainability Reporting Directive (CSRD) – risk diluting the availability and comparability of critical sustainability data.
The Omnibus process has removed approximately 90% of companies from the scope of the CSRD, dramatically narrowing the number of firms subject to mandatory sustainability disclosures.
The revisions to the ESRS, finalised by the European Financial Reporting Advisory Group (EFRAG) in early December, aim to reduce the regulatory burden on companies. The updated standards cut mandatory datapoints by 61%, eliminate all voluntary disclosures and expand the use of estimates. They also ease requirements for direct supplier data collection and introduce extended relief measures and phased implementation timelines.
While the ECB welcomed several simplifications intended to clarify and streamline reporting, it stressed that the balance between reducing administrative burden and preserving policy objectives must be carefully maintained. In particular, the central bank highlighted concerns around permanent relief measures, lengthy phase-ins and exemptions from disclosure requirements, as well as interoperability with international frameworks such as the IFRS Foundation’s ISSB standards.
A central criticism relates to what the ECB described as a “long list of permanent reliefs and phase-in provisions applicable to many disclosure requirements, as well as certain explicit and implicit exemptions for the financial sector.” The staff opinion warned that these changes “will significantly reduce transparency for investors and other market participants, as well as negatively affecting the overall availability and comparability of financial risk-relevant information necessary for adequate risk management and financial stability purposes.”
Climate change and biodiversity standards were singled out as particularly weakened. The ECB noted that the revised ESRS significantly reduced these topical standards, which it described as “particularly important for assessing and managing physical and transition risks.” When combined with relief measures and phased reporting, the bank said this “can significantly weaken the availability, comparability, and decision-usefulness of the topical disclosures considered most relevant by the ECB.”
To address these risks, the ECB recommended introducing time limits to certain reliefs, especially those related to disclosure metrics and data quality, in order to “avoid creating permanent blind spots for users and hindering appropriate risk management.” It also suggested shortening the six-year phase-in period for reporting quantitative information on anticipated financial effects.
The staff opinion further warned that while alignment with international standards has improved in some respects, certain newly introduced reliefs “go beyond IFRS and hence constitute a loss of interoperability with IFRS.” According to the ECB, this “could weaken the comparability of EU corporate data, reduce investor confidence and hamper the ability of EU firms to attract sustainable finance.”
Concerns appear to be shared by investors. An EFRAG study released following the revised ESRS found that a majority of investors were worried about the impact of simplification on data quality, citing reduced comparability, the loss of key climate-related information and diminished disclosures resulting from metric reliefs.
The ECB also questioned the suitability of the revised standards for banks and financial institutions, warning that “some of the changes made to the ESRS lead to a curtailing of the value chain dimension of the disclosures, and this could be detrimental to the quality of disclosures by banks.”
With the significant contraction in CSRD scope, voluntary sustainability reporting is expected to play a larger role. However, the ECB noted that the existing voluntary sustainability reporting standard for SMEs (VSME) was “developed for a very different purpose” and was originally intended for non-listed SMEs with fewer than 250 employees. Under the new regime, it could potentially apply to more than 40,000 companies, including large and listed firms with complex global risk profiles.
As an alternative, the ECB suggested that the revised ESRS could serve as a more appropriate voluntary framework, citing its flexibility and its reliance on the materiality principle to accommodate companies of varying size and complexity.
Commenting on the publication, ECB head of the climate change centre Irene Heemskerk said: “Sustainability information is not a nice to have. It provides important insights in the risks and resilience of corporates, as well investment opportunities and how corporates are preparing for the future.”
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