Key Takeaways:
- The EU narrowed CSRD to large companies and delayed most reporting to 2028–2029.
- ESRS standards were simplified, cutting disclosures by over 70% and allowing value-chain estimates.
- SMEs in Europe are now protected from excessive ESG data requests.
- The UAE mandates ESG and climate reporting for all companies from 2026, with penalties for non-compliance.
- UAE reporting links directly to a national carbon market, creating financial risk or opportunity.
- EU and UAE frameworks are aligning with ISSB and TCFD for a shared global baseline.
- Draft SBTi 2.0 guidance signals that emissions reductions remain the priority, with carbon credits playing a supporting role.
- Under SBTi’s proposed roadmap, residual emissions would increasingly need to be neutralized from 2035 onwards.
- ESG is moving from reporting to real performance, rewarding early action with compliance and investor confidence.
The ESG Reset: How Reporting Rules Are Shifting Across Europe and the Middle East
The EU has approved an “ESG Omnibus” simplification package that significantly narrows and delays new corporate sustainability reporting mandates under the CSRD (Corporate Sustainability Reporting Directive). The focus is now on Europe’s very largest companies, with lighter requirements and more time to comply. Key changes include:
Scope cut to the biggest players: Only companies with over 1,000 employees and very large turnover (hundreds of millions of euros) will fall under CSRD reporting. This slashes the originally expected number of reporting companies by roughly 80%, largely exempting mid-sized firms.
Timing relief: Firms that would have been in the next waves of CSRD now get a two-year delay. Many companies that were due to start sustainability reporting in 2026 or 2027 won’t need to report until 2028–2029, assuming the new rules are enacted.
Simplified standards: The European Sustainability Reporting Standards (ESRS) are being revised to eliminate less important disclosures and cut down the volume of data required. Plans to issue sector-specific ESG standards have been dropped to avoid adding complexity.
Less burden on smaller companies: New “anti-trickle-down” provisions shield small and medium enterprises in big companies’ value chains from excessive data requests. Large firms under CSRD will be limited in what ESG information they can demand from suppliers with under 1,000 staff, preventing undue pressure on smaller partners.
Pragmatic assurance: Companies will stick with limited assurance audits for their ESG reports for the foreseeable future. The Omnibus reforms removed the earlier plan to eventually tighten this to “reasonable assurance,” easing audit cost concerns.
Overall, the EU’s adjustments aim to maintain momentum on sustainability reporting while focusing on high-impact firms and reducing red tape. Large companies still in scope are expected to report robust ESG data, but with clearer priorities and support (including a forthcoming EU digital reporting portal). For many smaller companies across Europe, these changes mean breathing room and a more voluntary, partnership-based approach to ESG disclosure.
EFRAG’s New ESRS Drafts: Lighter and More Global-Friendly
In line with the EU’s simplification drive, EFRAG (the European Financial Reporting Advisory Group) has delivered a “Set 2” draft of revised ESRS standards to the European Commission in December 2025. These drafts overhaul the existing sustainability reporting standards to make them more practical, proportional, and aligned with international frameworks. Notable updates in the new ESRS drafts include:
Big cut in disclosure volume: Mandatory data points have been trimmed by over 70%, and all previously “voluntary” disclosures have been removed. The streamlined standards zero in on the most decision-relevant sustainability metrics, making reports shorter and more focused.
Sharper materiality focus: A new principle of “usefulness and fair presentation” lets companies filter out immaterial information. The once-onerous materiality assessment process is simplified with clearer guidance and less documentation, so firms can concentrate on what truly matters to investors and stakeholders.
Easier reporting on value chains: The draft standards remove the heavy emphasis on collecting data directly from suppliers and partners. Companies can now use estimates and industry averages more freely for supply-chain impacts, reducing the strain of chasing data from smaller entities. This ties in with the EU’s promise to shield small businesses from undue reporting burdens.
Phased implementation and reliefs: Recognizing certain disclosures are challenging (for example, some detailed social metrics), the revised ESRS provide longer phase-in periods and explicit exemptions where data is not yet available. This gives companies more time to build up reporting capacity in tough areas.
Alignment with global standards: The updated ESRS drafts better align with ISSB’s international sustainability standards (IFRS S1 and S2). They incorporate concepts from the global baseline – such as a focus on climate-related financial impacts – to ensure that companies reporting under EU rules can also meet international expectations with minimal duplication. (Notably, greenhouse gas emission definitions and other key measures are more closely synced with global norms.)
What’s next? The European Commission will review these drafts and is expected to adopt the final “simplified ESRS” via a Delegated Act in 2026, with the new standards likely effective for reports covering fiscal year 2027. For companies already reporting under CSRD, the changes should make second-year reporting smoother. And for those preparing to come on board later, the standards will be more user-friendly than the first iteration – but still require careful attention to governance, controls, and data quality for credible ESG disclosures.
UAE Mandates ESG Reporting, Aligned with Global Frameworks
Starting in 2026, the United Arab Emirates is implementing ground-breaking sustainability reporting regulations that move ESG disclosure from voluntary to mandatory for businesses. A new federal climate law – the first of its kind in the Middle East – now requires companies across the UAE to measure, report, and manage their greenhouse gas emissions and climate risks. Key points about the UAE’s approach:
Broad scope – “Everyone must report”: The law applies to virtually all companies operating in the UAE, including state-owned enterprises, private companies, and those in free zones. There are no major exemptions by size or sector – a bold step that brings even smaller and medium businesses into the ESG reporting fold (a contrast to the EU’s focus only on the largest firms).
Climate disclosures at the core: Companies must annually disclose their Scope 1, 2, and 3 greenhouse gas emissions, as well as climate-related risks and opportunities in their operations. This aligns closely with global standards like the TCFD recommendations and ISSB’s climate disclosure rules, meaning UAE firms will be reporting much the same kind of climate data that investors and regulators worldwide are increasingly expecting.
Enforcement with teeth: Compliance is backed by significant penalties. Regulators can levy fines (ranging from tens of thousands up to 2 million UAE dirhams) for failing to report or for providing inaccurate information, with higher fines and sanctions for repeat offenders. In practice, a company’s operating license and access to contracts (especially with government or large customers) could be at risk if it ignores the requirements – making ESG reporting a board-level compliance issue.
Built-in carbon market linkage: Uniquely, the UAE’s law connects reporting to a new national carbon credit market. Companies above a high emissions threshold (major emitters) are already required to register with the government’s carbon credit system. As reporting data comes in, the UAE is laying the groundwork for emissions trading and carbon pricing mechanisms. This means companies with efficient operations could potentially monetize excess reductions, while others may offset their footprint by purchasing credits – adding a financial incentive to cut emissions.
Global credibility and national strategy: The mandatory ESG reporting ties into the UAE’s Net Zero by 2050 strategic initiative and its role as a regional sustainability leader (underscored by hosting COP28). By aligning with international frameworks, the UAE aims to attract investment and stay competitive. For businesses, it means their UAE sustainability reports will be on par with global best practices, enhancing transparency to investors and partners. But it also means a scramble to build internal systems for carbon accounting, data verification (some sectors may need third-party assurance), and sustainability governance to meet the new legal obligations.
In summary, 2026 marks a turning point in the UAE: ESG reporting is now a must-do rather than a nice-to-have. Companies operating in the Emirates should ensure they have robust processes to gather emissions data, assess climate risks, and report in line with the new law – or face regulatory and reputational consequences.
SBTi 2.0: Offsets Get a Role (But Cuts Come First) in Net-Zero Plans
The Science Based Targets initiative (SBTi) – the leading framework for corporate climate targets – is rolling out Version 2.0 of its net-zero standard, refining how companies integrate carbon credits into their decarbonization strategies. The updated guidance confirms that deep emissions reductions remain the non-negotiable priority, while introducing a structured way for companies to go further by voluntarily offsetting emissions. Here’s what’s changing and why it matters:
No shortcuts with offsets: SBTi 2.0 makes clear that purchasing carbon credits cannot substitute for cutting your own emissions. Companies still must meet their science-based target through actual reductions in Scope 1, 2, and 3 emissions. In other words, a business can’t simply buy its way to a science-based target – it has to transform its operations and supply chain to emit less carbon. This principle remains at the heart of SBTi to ensure climate integrity.
“Ongoing Emissions Responsibility” – a new voluntary layer: Recognizing that even the best reduction plans leave some emissions in the near term, SBTi will now give companies credit (in the form of public labels) for voluntarily offsetting a portion of their unabated emissions during the transition to net-zero. Companies can opt into a “Recognized” level by offsetting at least 1% of their current emissions (a low bar set to encourage broad participation). A higher “Leadership” level applies if they go much further – for example, offsetting 100% of ongoing emissions by investing in high-quality carbon credits and internal carbon pricing. These actions won’t count toward meeting the core emission reduction targets, but SBTi will acknowledge them as a mark of climate leadership.
Towards mandatory neutralization of residual emissions: Starting in 2035, SBTi plans to require companies to neutralize an increasing share of their remaining emissions as they approach their net-zero date. By 2050, companies with net-zero targets will need to counterbalance 100% of any emissions they still have with carbon removals. Crucially, the rules stipulate a shift toward carbon removal projects (especially permanent removals) over time. This means that while all types of high-quality credits are acceptable now, in the long run businesses should plan to invest in solutions like direct air capture, reforestation, or other removal technologies to deal with emissions they can’t eliminate.
Implications for corporate climate strategy: In practice, SBTi’s evolving stance pushes companies to build a two-pronged climate strategy: first, aggressively reduce emissions through efficiency, clean energy, and new technologies; second, start integrating the use of carbon credits to take responsibility for what you can’t yet cut. For many firms, this will mean setting aside a budget for offsets (especially credible removal credits) as part of sustainability plans, on top of making operational changes. It also elevates the importance of transparent climate transition plans – SBTi 2.0 will expect large companies to publish detailed plans showing how they will reach net-zero, including how they’ll tackle any residual emissions. Investors and stakeholders can then track not just whether a company is cutting emissions on pace, but also whether it’s proactively addressing its climate impact via offsetting and innovation.
In short, SBTi Version 2.0 reinforces that there is no replacement for cutting emissions within a company’s own footprint. Offsets are framed as a complementary tool – useful for accelerating climate action and covering hard-to-abate emissions, but not a free pass. Companies committed to SBTi targets should review the new guidelines closely: expect to continue the hard work of decarbonization, while also stepping up scrutiny and planning around the quality and role of carbon credits in your journey to net-zero.
Catharina Ahmadi
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