International Sustainability Reporting – Divergence and Equivalence

As part of the Commission’s Omnibus review, the ESRS are undergoing considerable simplification, with the Commission publishing draft revised ESRS for consultation in May 2026. During the process, various groups lobbied for the ESRS better to align to the ISSB standards, with at least one proposal that the ESRS should allow companies to report information under financial materiality and impact materiality in separate sections, thereby allowing companies to publish an ISSB-compliant report, with add-on material to satisfy ESRS impact materiality. In the event, the draft revised ESRS contained no such flexibility, reflecting an unwillingness on the part of the Commission to introduce any type of hierarchy between financial and impact factors, and arguably undermine the European Union’s double-materiality principle.

The draft N-ESRS state that if a reporting company prepares sustainability information covering risks and opportunities under a local reporting framework, it may refer to that information in its N-ESRS report, provided it presents the information in a neutral way to give a balanced presentation of positive and negative contextual information. 

In the Commission’s review of the ESRS and N-ESRS, it did not significantly advance equivalence of these with ISSB standards, nor restructure the ESRS to accommodate better companies that report under both standards. Given any equivalence decision is conditional on the non-EU sustainability reporting standards embodying the double-materiality principle, it is unclear whether the European Union will ever consider ISSB-derived standards as fully equivalent.

Both the ISSB and the European Union have emphasised the close connection between financial and impact materiality. In its guidance, the ISSB states that “Describing ISSB Standards as ‘outside-in’ is an incomplete, and therefore incorrect, description. The effect of an entity’s activities on resources and relationships—including on people and the environment—might give rise to sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects and thus are relevant when applying ISSB standards.” The European Union has also been clear that many matters may be material from both an impact and a financial perspective—in other words, that financially material topics often arise either from impacts that a company makes on society or the environment, such as pollution, or from a company’s “dependencies” on natural or human resources, such as water use or elements of its supply chain which are prone to environmental risk. The proposed N-ESRS standards state that reporting on impacts only under the standards does not exclude non-EU groups from reporting on impacts which do or may result in sustainability-related risks and opportunities. It is also worth noting that, under ISSB, companies report on financial risks and opportunities linked to sustainability that can be expected to affect a company’s prospects—without specifying a minimum financial impact or time horizon, which the company will determine.

The interplay between impact and financial materiality reflects the European Union’s unwillingness to separate each materiality lens into two separate parts of the report. In practice, one distinction between impact and financial materiality may be that certain impacts that a company identifies will not become financially material for many years—although it is unclear whether companies will wish to distinguish reporting on material impacts on this basis.

1 We omit consideration of the U.S. Securities and Exchange Commission’s efforts to develop climate-related reporting requirements, which the SEC has recently moved to rescind, as well as U.S. state-level initiatives to mandate GHG emissions and climate risk reporting, such as in California.(go back)

2 At the time of writing, the ESRS are in near-final form and will be adopted shortly as a Delegated Act before entering into force following approval from the EU institutions. EFRAG has published the N-ESRS, which are subject to the Commission’s input.(go back)

3 Note that CSRD contemplates the Commission determining that a third country’s reporting standards are equivalent to the full EU ESRS, as opposed to the non-EU ESRS. Hence, a company that has prepared a sustainability report in accordance with the Global Sustainability Standards Board’s Global Reporting Initiative, which covers impact reporting, cannot discharge its obligations under N-ESRS.(go back)

4 The ISSB has indicated that it is working to incorporate nature-related disclosures into IFRS S1 and S2 rather than releasing new standards.(go back)

5 This guidance relates to the “pre-Omnibus” ESRS and as a result may change.(go back)