Changes to ESRS reduce transparency on corporate sustainability impacts /
May 2026
Shift’s response to the EU delegated act
The European Commission has published a near-final version of the European Sustainability Reporting Standards (ESRS). These standards set out the information that companies must disclose about their environmental and human rights impacts in order to comply with the Corporate Sustainability Reporting Directive (CSRD). On May 6, the European Commission opened a public consultation on the revised ESRS, which largely reflect the recommendations submitted by the advisory body EFRAG to the Commission in late 2025. Stakeholders have until 3 June to respond to the consultation.
The revised standards mark a final step in the wider revision process for EU sustainability legislation. In February the European Union adopted an Omnibus Directive which amended the CSRD and the Corporate Sustainability Due Diligence Directive (CSDDD), including by reducing the number of companies covered by CSRD. As Shift remarked at the time, this reduction in the scope of transparency requirements for companies headquartered or operating in the EU is a step backwards. Many of those now excluded are likely to find themselves facing varying information demands from investors and others, given the lack of an ESRS-based report. We hope that the reduced scope of coverage will be reversed in future years as the value of companies producing single, sufficient and coherent sustainability reports is demonstrated.
For now, Shift welcomes the fact that the revised ESRS issued by the Commission remain closely aligned with the UN Guiding Principles on Business and Human Rights (UNGPs) and the CSDDD. The standards reflect a risk-based approach to determining which material impacts should be reported and require disclosures across all stages of due diligence. They also retain the strengthened reporting expectations recommended by EFRAG on the payment of adequate wages for companies’ employees. However, some of the Commission’s revisions introduce additional elements that risk creating more confusion and less transparency.
Alignment with the CSDDD and international due diligence standards /
With the exception of one point highlighted below, the revised ESRS demonstrate a high level of alignment with the CSDDD as well as the international due diligence standards that the CSDDD is based on: the UNGPs and the OECD Guidelines for Multinational Enterprises. This is important, as it allows companies to meet expectations under due diligence and reporting standards, as well as wider investor and lender expectations, through a single, coherent methodology. With the draft ESRS, the European Commission reaffirms that:
- The criteria to determine when negative impacts are material for reporting purposes are identical to the requirements that companies should use if they need to prioritize impacts for action as part of their due diligence efforts;
- For companies that have already conducted due diligence, including engagement with affected stakeholders, this will provide the key input when they determine their material negative impacts for the purpose of reporting;
- A company’s material impacts and dependencies are the basis for determining the company’s material sustainability-related risks and opportunities.
- Companies need to disclose meaningful information related to all steps of due diligence: how they identify, assess and prioritize impacts, the actions they take to address them, and how they track the effectiveness of those measures, in addition to their processes for engaging with affected stakeholders and the use and results of grievance mechanisms.
Importantly for the quality of social disclosures, the Commission also follows the EFRAG advice to create alignment between the ESRS and the CSDDD with regard to adequate wages. Whereas the current ESRS allow companies to disclose payment of minimum wages as ‘adequate’, the new ESRS require benchmarking against living wage estimates that comply with the criteria for such estimates set by the International Labour Organization.
A small but problematic revision that would change companies’ responsibilities /
Despite these positive elements, one small but critical Commission revision to the draft ESRS is problematic in ways it may not have intended. Since their adoption in 2011, the UNGPs and the OECD Guidelines clarify that companies can be involved with adverse human rights impacts in three ways: they may cause or contribute to impacts through their own activities, or impacts may be directly linked to their operations, products and services through their business relationships. These three ‘levels of involvement’ also determine companies’ obligations under the CSDDD.
In the revised ESRS, however, the European Commission replaces ‘direct linkage’ with the term ‘other connection’. This introduces a novel, undefined and open-ended category that may significantly stretch the scope of companies’ responsibilities in unhelpful and unfounded ways.
Take the example of a supplier with two factories – one where there is child labor and a second where there is none. If a company’s products are made in the factory where there is no child labor, it has no ‘direct link’ to abuse. The fact that it has a connection to the supplier is not sufficient to create a responsibility for the child labor in the second factory. The European Commission’s introduction of ‘other connection’, however, would be grounds for it to have a responsibility regarding how things are made in both factories, based simply on its connection to the supplier. While that may be attractive to some in principle, in practice it creates an unworkably expansive form of responsibility that would divert from the core expectation of companies: that they be accountable for how their products and services are sourced, made, delivered and (within limits) used.
Sustainability reporting by financial institutions /
Another problematic change compared to the version submitted by EFRAG is the novel provision allowing financial institutions to disregard impacts, risks and opportunities related to investments they manage on behalf of clients where the institution does not retain the risks or rewards of ownership. This exemption is fundamentally misaligned with the established interpretation and application of the UN Guiding Principles and OECD Guidelines in the context of asset management. Both the OECD and the Office of the UN High Commissioner for Human Rights have clarified that institutional investors and asset managers can be directly linked to adverse impacts through their business relationships, irrespective of whether they hold legal ownership of the underlying assets or act pursuant to fiduciary duties. Investors and investor groups have routinely written about and acted on the understanding of this responsibility.[1]
The ability to influence investee companies through stewardship, engagement, voting rights, and investment decisions is central to responsible investment practice and reflects due diligence expectations under international standards. Exempting managed assets from consideration therefore risks creating a significant blind spot in sustainability reporting and undermines the coherence between the ESRS and internationally recognized standards on responsible business conduct and responsible investment.
Phase-ins for social reporting /
Under the existing timeline, large non-listed companies within the scope of the CSRD would be required to report on impacts, risks and opportunities related to workers in the value chain, affected communities, and consumers and end-users (S2, S3 and S4) from fiscal year 2027 onwards. Indeed, a considerable number of companies are already preparing CSRD-aligned reports for 2026 on a voluntary basis. However, the Commission’s revisions to the ESRS would allow them to postpone reporting on these topics for an additional two years. This further reduces transparency of human rights impacts in companies’ value chains.
Allowing less-prepared companies to omit disclosures on these material topics until 2029 undermines comparability and creates an uneven playing field. Importantly, it also reduces the availability of decision-useful information on material social impacts. For most companies, the most material human rights impacts – the source of many material risks – will sit outside of their own workforce. Any review of social-related lawsuits, complaints, operational disruptions and reputational harm will quickly show that they are particularly prevalent in relation to companies’ value chain workers and affected communities. Delaying for another two years any requirement to report specific information about such impacts, risks and opportunities would create a significant gap for investors and other users of sustainability information. It also undermines interoperability with other reporting requirements.
Summary of Shift recommendations for the consultation on the draft ESRS: /
Under the existing timeline, large non-listed companies within the scope of the CSRD would be required to report on impacts, risks and opportunities related to workers in the value chain, affected communities, and consumers and end-users (S2, S3 and S4) from fiscal year 2027 onwards. Indeed, a considerable number of companies are already preparing CSRD-aligned reports for 2026 on a voluntary basis. However, the Commission’s revisions to the ESRS would allow them to postpone reporting on these topics for an additional two years. This further reduces transparency of human rights impacts in companies’ value chains.
Allowing less-prepared companies to omit disclosures on these material topics until 2029 undermines comparability and creates an uneven playing field. Importantly, it also reduces the availability of decision-useful information on material social impacts. For most companies, the most material human rights impacts – the source of many material risks – will sit outside of their own workforce. Any review of social-related lawsuits, complaints, operational disruptions and reputational harm will quickly show that they are particularly prevalent in relation to companies’ value chain workers and affected communities. Delaying for another two years any requirement to report specific information about such impacts, risks and opportunities would create a significant gap for investors and other users of sustainability information. It also undermines interoperability with other reporting requirements.
- Maintain the high-level of alignment with the CSDDD and international due diligence standards.
- Apply the established terminology of ‘cause, contribute, directly linked’ instead of introducing the novel and open-ended concept of ‘other connection.’
- Remove the exemption for reporting on investments that are managed on behalf of clients where the institution does not retain the risks or rewards of ownership.
- Remove the additional two-year phase-in for reporting on workers in the value chain, affected communities and consumers and end-users.
Footnotes /
[1] PRI: An introduction to responsible investment: Human rights (2024). Available at: https://public.unpri.org/an-introduction-to-responsible-investment-human-rights/12026.article#downloads; OHCHR: Taking stock of investor implementation of the UN Guiding Principles on Business and Human Rights (2021). Available at: https://www.ohchr.org/sites/default/files/Documents/Issues/Business/UNGPs10/Stocktaking-investor-implementation.pdf; IAHR: Investor Toolkit on Human Rights (2020). Available at: https://investorsforhumanrights.org/sites/default/files/attachments/2022-03/Full%20Report-%20Investor%20Toolkit%20on%20Human%20Rights%20May%202020_updated_0.pdf; OECD: Responsible business conduct for institutional investors (2017). Available at: https://www.oecd.org/content/dam/oecd/en/publications/reports/2017/01/responsible-business-conduct-for-institutional-investors_3f5732a1/8b9e240a-en.pdf; OHCHR: The issue of the applicability of the Guiding Principles on Business and Human Rights to minority shareholdings (2013). Available at: https://www.ohchr.org/sites/default/files/Documents/Issues/Business/LetterSOMO.pdf
