EU Adopts First Sustainability Reporting Standards Amid Materiality Concerns

The European Commission has adopted the first set of European Sustainability Reporting Standards, establishing mandatory climate and ESG disclosure requirements for large companies operating in the EU. IEEFA welcomes the adoption but warns that expanded reliance on company-led materiality assessments risks introducing bias and inconsistency into disclosures.

The European Sustainability Reporting Standards were developed by the European Financial Reporting Advisory Group following a public consultation process, with a draft delegated act released by the European Commission in June 2023. The adopted text retains the principle of double materiality — requiring companies to assess both financial and environmental impacts — and includes a new requirement for detailed explanation of materiality assessment conclusions with respect to climate change. Companies must also clarify when a data point from the Sustainable Finance Disclosure Regulation or Capital Requirements Regulation is deemed immaterial.

IEEFA's central concern is that the materiality assessment process, as currently written, is non-binary and lacks a clearly defined threshold, leaving significant room for interpretation. When companies determine what sustainability information is material for disclosure, the outcome becomes highly variable across undertakings and sectors. This could impede comparability, restrict decision-making for investors and lenders, and distort capital flows — the precise problems the standards were designed to solve. IEEFA considers the final text weaker than the EFRAG recommendations of November 2022.

IEEFA recommends that the European Commission strengthen the rigour of materiality assessment processes over time to reduce subjectivity, and ensure that the standards deliver consistent, comparable sustainability data across the EU. For Indian companies with European exposure or seeking access to EU sustainable finance markets, the ESRS disclosure framework will increasingly shape due diligence requirements and investor expectations. As the EU Sustainable Finance Framework continues to evolve, aligned global standards will be critical to preventing regulatory arbitrage.

Key figure — First set of European Sustainability Reporting Standards adopted by the European Commission in July 2023.