Brussels Moves to Simplify Sustainability Reporting, but Regulators Draw Red Lines

Key Takeaways

• Simplification With Guardrails: EU regulators support streamlining the European Sustainability Reporting Standards but caution that certain “permanent” reliefs risk weakening disclosure quality and comparability.
• Time Limits Under Scrutiny: Both the European Securities and Markets Authority and the European Banking Authority recommend introducing time limits to selected permanent reliefs to prevent a structural erosion of quantitative sustainability data.
• Burden-Shifting Concerns: Regulators warn that reduced disclosure requirements may shift the data collection burden onto investors and financial institutions, particularly banks that rely on sustainability information for risk management.
• Pragmatic Early Supervision: ESMA has instructed national competent authorities to apply proportionate and realistic supervision during the initial ESRS years, acknowledging uneven CSRD transposition and structural constraints across Member States.
• Climate Risk Exposure Remains Elevated: The EBA’s latest ESG dashboard shows overall stability in climate risk indicators, but banks’ exposure to climate-sensitive sectors remains high at approximately 62%, reinforcing the need for robust sustainability reporting.

Deep Dive

The European Commission’s push to simplify sustainability reporting is gaining institutional support, but not without caveats. Over the past week, both the European Securities and Markets Authority and the European Banking Authority have backed efforts to streamline the European Sustainability Reporting Standards. At the same time, they have urged the Commission to tighten specific elements before the revised standards are locked in through a delegated act expected by summer 2026.

The tone from regulators is not confrontational. It is calibrated. Simplification is welcome. Permanence, in certain cases, is not.

The Relief Question

At the heart of the debate are so-called “reliefs” embedded in the draft revised ESRS developed by EFRAG. These provisions allow companies to scale back or delay certain disclosures, particularly quantitative metrics, in the name of proportionality and burden reduction.

ESMA’s formal opinion concludes that the revised standards are only partly capable of meeting the objective of supporting investor protection and financial stability unless specific technical issues are addressed. Among its core recommendations:

• Introduce time limits to certain permanent reliefs
• Refine requirements on transition plans
• Strengthen reporting on the sustainability competences of administrative, management and supervisory bodies
• Enhance transparency on financial resources allocated to sustainability actions
• Adjust how subsidiaries excluded from consolidated financial statements due to immateriality are treated for sustainability risk reporting

ESMA’s message is subtle but firm. Reliefs have their place, particularly during a transition. But if they are permanent, broad, and cumulative, they risk hollowing out the very disclosures the ESRS were designed to standardize.

The EBA’s opinion echoes that concern from a different vantage point. If quantitative disclosures shrink too far, banks and other financial institutions may find themselves compensating through bilateral data requests to counterparties in order to meet their own risk management obligations. In other words, the reporting burden does not disappear. It simply moves.

The EBA also cautions that permanent reliefs could undermine interoperability with international sustainability standards, a priority since the inception of the Corporate Sustainability Reporting Directive.

Enforcement Reality: A Learning Curve in Motion

While the policy debate unfolds in Brussels, supervision is already beginning on the ground.

Under ESMA’s Guidelines on Enforcement of Sustainability Information, national competent authorities are expected to oversee ESRS compliance. But ESMA has explicitly acknowledged that the first years of application will involve a learning curve, compounded by uneven transposition of the CSRD and the ongoing Omnibus legislative revisions.

The guidelines contain built-in flexibilities. National authorities can adapt their supervisory focus and use dialogue and informal measures before escalating to enforcement actions.

A recently published compliance table shows a patchwork landscape across Member States. Some authorities report full compliance with the guidelines. Others intend to comply once domestic legislation is updated. A handful cite structural or legal limitations, including gaps in investigative powers or resource constraints.

This does not signal a retreat from enforcement. It reflects the practical reality that sustainability reporting supervision is being built in real time.

Meanwhile, the Climate Data Keeps Flowing

On the same day the regulatory debate intensified, the EBA released its latest ESG risk dashboard update.

The headline is stability. Climate-related risk indicators, based on data through the second quarter of 2025, remain broadly in line with previous editions.

But beneath that stability lies a more nuanced picture. Banks’ exposures to sectors that significantly contribute to climate change remain elevated at around 62% of their non-financial corporate portfolios. That figure underscores why regulators remain focused on the quality and consistency of sustainability disclosures.

There are signs of progress. Environmental data quality is improving, and reliance on proxy indicators has declined since late 2023. Physical risk metrics, however, remain heterogeneous across jurisdictions, reflecting methodological differences and the complexity of measuring climate exposure across diverse geographies.

The dashboard is now integrated into the EBA’s Data Access Portal, reinforcing the broader supervisory push toward transparency and comparability.

The Commission’s Balancing Act

The European Commission now faces a delicate balancing act. On one side is the political and economic imperative to reduce reporting burdens and enhance competitiveness. On the other is the structural objective embedded in the CSRD, to provide high-quality, decision-useful sustainability information that supports investor protection, financial stability, and the functioning of EU capital markets.

ESMA and the EBA are not rejecting simplification. They are asking for guardrails.

The question heading into summer 2026 is not whether the ESRS will be simplified. It is how far those simplifications will go, and whether temporary flexibilities quietly become permanent features of Europe’s sustainability reporting regime.

For issuers, banks, investors, and supervisors alike, the shape of those final adjustments will determine whether the next phase of sustainability reporting feels lighter, or merely redistributed.

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