Policy Digest: May 2026
The May edition of the Policy Digest covers Europe's sustainability reporting overhaul—where regulators are prioritising simplification and proportionality—alongside continued global momentum as jurisdictions adopt or align with ISSB standards as the baseline for sustainability disclosure.
- EU Sustainability Reporting Simplification Push
- Streamlined European Sustainability Reporting Standards (ESRS): The Commission's final draft cuts mandatory datapoints by 60% and overall datapoints by 70%, targeting a ~30% reduction in compliance burden.
- Proportionality for smaller players: Parliament is consulting on lighter requirements for suppliers under 1,000 employees, drawing from the voluntary SME standard (VSME). A value chain cap limits reporting obligations passed down to small providers.
- Banking supervision overhaul: The European Banking Authority is eliminating duplicate disclosures (e.g., BTAR appearing in both Pillar 3 and Corporate Sustainability Reporting Directive - CSRD) and mandating direct links between ESG metrics and financial reporting (FINREP) to embed sustainability in risk management and capital planning.
- Sustainable Finance Disclosure Regulation (SFDR) product categories: A three-tier system—Sustainable, Transition, ESG Basics—is taking shape. European Parliament's negotiation position includes mandatory PAI disclosures, higher taxonomy-alignment thresholds for the Sustainable and Transition categories, and portfolio construction rules for ESG Basics.
- EU Deforestation Regulation (EUDR) adjustments: New guidance clarifies lighter obligations for small operators; leather has been removed from the scope.
- Switzerland mandates sustainability reporting for large companies: The Federal Council is aligning its sustainability reporting requirements with ESRS and other recognised frameworks and proposing due diligence law mirroring the EU’s proportionality logic.
- ESG Ratings Regulation Maturing Across Europe
- EU: European Securities and Markets Authority (ESMA) is consulting on how EU-based providers can endorse non-EU rating agencies.
- UK: The Financial Conduct Authority (FCA) launched a voluntary pilot for providers to test proposed regulatory metrics.
- ISSB Adoption Underway in Emerging Markets
- Bangladesh: Proposed mandatory sustainability standards for listed entities.
- Nepal: Published local IFRS S1/S2 equivalents (NFRS S1 and S2).
- South Africa: Proposed mandatory IFRS S1/S2-aligned disclosures for large listed companies.
- Nature and Environment Risk Standards: The next frontier of sustainability reporting
- ISO: Updated environmental management standards to integrate climate and biodiversity with measurable outcomes.
- IFRS Foundation: Developing a separate Practice Statement on nature reporting alongside S1/S2.
Firms should track these developments closely, as the converging timelines across European simplification measures, global ISSB adoption, and emerging nature-risk frameworks will shape compliance strategies into 2027 and beyond.
INTERNATIONAL
- ISO releases updated Environmental Management Standard
The ISO 14001:2026 builds on its widely adopted predecessor, used by over 670,000 certified organizations worldwide. The ISO 14000 series enables organizations to implement environmental management systems—establishing policies, identifying impacts, setting targets, implementing controls, and continually improving performance. Certification typically involves a gap analysis, internal audits, management reviews, and a final external audit. The updated standard offers clearer guidance, improved navigation, and a sharper focus on climate change, biodiversity, and resource efficiency. It provides a framework for integrating environmental management into business strategy and demonstrating measurable results—reflecting today's expectations on leadership to manage sustainability risks across the value chain. Read more
- IFRS Foundation proposes way forward with nature reporting standard
The International Sustainability Standards Board (ISSB) is proceeding with the development of nature-related risk assessment to complement the IFRS S1 General Requirements and the IFRS S2 Climate-related Disclosures. ISSB adoption is underway in over 37 jurisdictions worldwide, impacting an estimated 130,000 companies globally. To minimize disruption in jurisdictional implementation, the nature-related disclosures will be integrated in the form of an IFRS Practice Statement, giving preparers illustrative guidance on how to furnish material information on nature-related risks and opportunities. The ISSB is set to publish an exposure draft for public comment in October 2026, where stakeholders may opine on whether the IFRS Practice Statement translates to a practical form of nature-related disclosures. Read more
EUROPE
- European Commission seeks feedback on simplified ESRS
The European Commission has invited feedback on the final draft of the simplified European Sustainability Reporting Standards (ESRS). The revised ESRS package, published for consultation last week, includes a draft Delegated Act for the revised ESRS, and an Annex containing the revised and updated ESRS standards. Aimed at reducing the administrative burden on reporting entities, the streamlined framework cuts 60% of mandatory datapoints and 70% of datapoints overall. It also introduces clearer reporting requirements and illustrative guidance to improve disclosure quality and comparability. The Commission estimates that the targeted adjustments could reduce compliance costs by 30%, easing the reporting burden without undermining the overarching objectives of the CSRD.
Earlier in April, the EU was considering a plan to integrate the ISSB standards into the ESRS framework — an approach it has now dropped. Instead, the Commission is now doubling down on the ESRS as the core reporting framework, which post-Omnibus will apply to companies above the revised threshold of 1,000 employees and EUR 450 million in net turnover. Read more
- EU consults on voluntary standard for value chain sustainability reporting
The Commission has published a draft Delegated Act containing proposed voluntary sustainability reporting standards for companies in the value chain with fewer than 1,000 employees. The voluntary standard for SMEs (VSME), originally adopted on July 30, 2025, draws on the ESRS reporting framework and topics, while applying them in a more proportionate manner. The proposal follows the Omnibus I Directive, which introduced a value chain cap limiting the sustainability information that in-scope companies can request from smaller suppliers. In line with the broader ESRS simplification agenda, the Commission’s draft Delegated Act provides that, given the reduced scope of the Omnibus I package, a voluntary standard similar to the VSME is appropriate for entities with fewer than 1,000 employees. Following closely on the publication of the final draft ESRS, the Commission is now proposing a reduced set of datapoints under the VSME to ensure greater alignment with the revised ESRS framework. The draft also clarifies the applicability of the value chain cap, disclosure requirements, and exemptions for suppliers with 10 or fewer employees using the standard. The new voluntary standard is expected to apply from 2027, although undertakings may continue to report under the ESRS framework in the interim. The consultation on the draft Delegated Act closes on June 3, 2026. Read more
- ESMA releases report on enforcement of sustainability reporting
The European Securities and Markets Authority (ESMA) has published a report assessing the enforcement of first-year ESRS-aligned sustainability reporting across the EEA, focusing on materiality assessments, the structure of sustainability statements, and Article 8 Taxonomy disclosures. Based on a targeted sample of issuers, enforcers identified generally satisfactory compliance with ESRS requirements, while also highlighting areas for improvement including overly generic materiality disclosures, limited connectivity between sustainability and financial reporting, and inconsistencies in Taxonomy-related reporting. Enforcement actions were taken against 15 issuers, with an additional 19 investigations still ongoing. ESMA also emphasized a proportionate and pragmatic supervisory approach as companies navigate the first years of ESRS implementation alongside ongoing Omnibus reforms. Read more
- European Parliament’s draft SFDR strengthens disclosure and investment requirements
EU regulators have finally broken their silence on enhancements to the Sustainable Finance Disclosure Regulation (SFDR). The European Parliament’s negotiating position establishes the disclosure requirements and qualifying criteria for the three product categories introduced in 2023 – ‘Sustainable’, ‘Transition’, and ‘ESG Basics’. The new product classification system introduces mandatory PAI disclosures, alongside material PAI indicators where relevant, to improve usability and comparability for end investors. The draft also raises taxonomy-alignment thresholds for the Sustainable and Transition product categories, noting that over 44% of labelled funds already meet the proposed criteria. Among several measures designed to tighten the SFDR regime, the ESG Basics category will also impact fund design and portfolio construction through a requirement to eliminate the bottom 20% of rated securities. The same 20% threshold will apply where a fund outperforms on a specific sustainability indicator.
Since its application in 2021, SFDR has effectively become the EU’s de facto fund labelling regime. However, the effectiveness of its implementation has increasingly come under scrutiny, with financial market participants (FMPs)– including asset managers and investors – arguing that it may be a flawed mechanism for combating greenwashing. In particular, Article 8 products have been criticized for potentially overstating the extent of ESG integration, while some investors have mistakenly interpreted Article 9 ‘dark green’ funds as being fully sustainable. In its revised form, the framework reinforces the objectives of the EU’s Sustainable Finance Framework and seeks to further mobilize capital allocation towards sustainable investments. Once the regulation enters into force, firms will have a 24-month implementation runway to comply, alongside additional relief measures. Read more
- EBA proposes simplification of ESG supervisory reporting requirements for banks
The EBA’s proposal introduces a suite of new and revised templates aimed at providing supervisors with granular, comparable data to monitor ESG risks. EBA is proposing to cut reporting requirements across supervisory reporting frameworks, including ESG by approximately 50%. The framework is built on the principles of proportionality and alignment with existing regulations (e.g., CSRD), but its requirements are extensive. A tiered approach will be applied to manage the reporting burden:
- Large, Listed Institutions (LIs) (with over €30 billion in assets): will face the full reporting scope, encompassing seven detailed templates. LIs will no longer have to report GAR/BTAR as part of Taxonomy-alignment metrics but will be required instead to focus on environmental exposures encompassing physical and transition risk.
- Other Listed Institutions & Large Subsidiaries: will report using a simplified set of six templates.
- Small and Non-Complex Institutions (SNCIs) & Other Non-Listed Institutions: will have the most streamlined obligation, using a single, consolidated template (D 01.01) to report a reduced set of essential data points.
A critical point within the EBA's proposal is the decision not to replicate the highly detailed Green Asset Ratio (GAR) and Banking Book Taxonomy Alignment Ratio (BTAR) templates from the previous Pillar 3 framework. This should not be misinterpreted as a signal from the EBA that Taxonomy alignment is immaterial for prudential supervision. The EBA's intention is rather to avoid duplicative reporting, as this data is already mandated for public disclosure under the Taxonomy Regulation and CSRD. By requiring ESG metrics to be reported alongside and consistent with financial data (FINREP), the EBA is integrating sustainability into core risk management. ESG factors will need to be incorporated into credit risk models (PD, LGD), stress testing, and capital planning (ICAAP). The deadline for the public consultation is July 10, 2026. Read more
- EU Deforestation Regulation may be ‘weakened’
The European Commission has published a report on the simplification review of the EU Deforestation Regulation (EUDR), projecting a 75% reduction in compliance costs for companies subject to EUDR obligations. Among the latest measures, the Commission has released updated guidance and FAQs that provide clarifications on obligations for downstream suppliers, as well as scaled-back or light-touch requirements for micro and small primary operators. The guidance includes supply chain reporting use cases and sheds further light on topics such as e-commerce, geolocation modalities, and the harmonization of reporting and enforcement across Member States. In parallel, the simplification review has amended the draft delegated act to revise the scope of the regulation, excluding certain products including leather, soluble coffee, and specific palm oil derivatives from the list of covered forest-risk products. The targeted amendments may, however, appear to contradict the original objective of the EUDR, which is to prohibit the production and sale of commodities linked to deforestation within the EU market. Read more
- ESMA launches consultation on draft guidelines on endorsement under ESG Ratings Regulation
European Securities and Markets Authority is seeking feedback from stakeholders, including ESG ratings providers, on its proposed approach to the endorsement of non-EU ESG ratings providers. The guidelines outline the information that EU-based providers would need to submit when applying to endorse ESG ratings providers located outside the Union. The primary objective of the guidelines is to support the consistent application of the endorsement regime while maintaining the integrity and transparency of ESG ratings in the EU market. Read more
- Switzerland proposes sustainability reporting and due diligence law
On April 2, 2026, the Swiss Federal Council launched a consultation on the Federal Act on Sustainable Corporate Governance (NUFG), aiming to align with relevant international standards. The proposed law would broadly harmonize Swiss sustainability reporting with the EU's CSRD and CSDDD frameworks. Mirroring the EU's proportionality approach, the NUFG would require large Swiss companies—those with over 1,000 employees and CHF 450 million in revenue—to report against ESRS or an equivalent standard, while exempting small and medium-sized enterprises. The Federal Council estimates around 100 companies would fall within scope. Separate due diligence obligations would apply to companies with over 5,000 employees and CHF 1.5 billion in revenue, requiring them to identify, mitigate, and manage supply chain risks. Approximately 30 companies would be affected by these requirements. The consultation on the proposed legislation closes on July 9, 2026. Read more
UNITED KINGDOM
UK FCA launches pilot for ESG Ratings Providers regulatory requirements
- The UK’s Financial Conduct Authority (FCA) is proposing a regulatory regime for ESG ratings providers to improve the quality, transparency of methodologies, introduce governance, systems and controls, while preventing conflict of interest. The proposed regime would combine existing FCA baseline requirements for authorized entities with ESG ratings-specific conduct rules, in alignment with such as International Organization of Securities Commissions (IOSCO, 2021) and International Capital Market Association (ICMA). In April 2026, the FCA rolled out a voluntary pilot scheme for ESG ratings providers to test regulatory reporting metrics and provide feedback on the proposed requirements. The FCA is expecting to publish final rules in Q4 2026 and anticipates the regime will enter into force in June 2028. Read more
NORTH AMERICA
- SEC’s climate risk disclosure rule faces full rollback
The implementation of the SEC’s climate risk disclosure rule was first legally challenged by Republican-led states in 2024, with the U.S. Fifth Circuit Court of Appeals granting a temporary stay on the rule. In March 2025, the SEC voted to end its legal defense of the regulation in light of the ongoing challenges. The rule now appears increasingly unlikely to survive, with reports in May 2026 indicating that the agency has filed a notice with the U.S. Office of Management and Budget (OMB) and is preparing a recommendation to formally rescind the Biden-era regulation. Despite the federal rollback, investors continue to push for decision-useful disclosures on climate-related risks. As federal regulation retreats, states such as California and New York remain at the forefront of climate risk reporting requirements, with state-level policymaking likely to become the primary avenue of ESG and climate disclosure obligations across the United States. Read more
ASIA-PACIFIC
- Bangladesh announces forthcoming adoption of IFRS S1 & S2 Standards
Bangladesh’s Financial Reporting Council (FRC) has issued a pre-publication notice for the adoption of the IFRS S1 and S2 standards. Bangladesh fully adopted the ISSB standards in 2025 which introduced mandatory sustainabliity reporting for scheduled banks and finance companies. The FRC’s notice, if adopted, would mean the IFRS S1 and S2 reporting requirements would extend to listed entities (~350 companies as of 2025). Read more
- Nepal set to adopt ISSB standards within national regulatory framework
The Accounting Standards Board (ASB) of Nepal has published two exposure drafts ‘NFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information’ and ‘NFRS S2: Climate-related Disclosures’ to locally implement the ISSB standards. Nepal is taking a significant step towards adoption of the ISSB standards and is soliciting public feedback on the proposed sustainability reporting requirements. The consultation will close on June 6, 2026. Read more
AFRICA & MIDDLE EAST
- South Africa proposes mandatory implementation of ISSB
The Financial Sector Conduct Authority (FSCA) announced that it is developing a practical approach to introduce sustainability disclosure requirements for large listed entities. The FSCA will develop a National ISSB Adoption Roadmap to ensure the pathway for large listed entities remains consistent with national direction and supports regulatory coherence across the sustainability disclosure landscape. The Sustainable Finance Update Report 2026, published in April 2026, indicates a shift from principles-based reporting to mandatory, IFRS S1 and S2-aligned disclosures. Other points in the Report highlight the need for prevention and oversight of greenwashing and strengthening the Green Finance Taxonomy. Read more
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