Welcome to this month's sustainability policy update.
This month, I’m piloting a “What I’m reading” section. Sustainability disclosure is often downstream of developments in other areas; politics, technology, and macroeconomics to name just a few. I’m highlighting some of the stories I’m talking about at Watershed as I try to make sense of what lies ahead. Please let me know what you think at madhav@watershed.com!
Read on for updates from Europe, Australia, and Mexico.
Europe: Simplified ESRS consultation closes, final standards expected by early July
What happened: On June 4, the European Commission closed its public consultation on the Simplified European Sustainability Reporting Standards (ESRS), after having received over 450 submissions from companies, trade associations, and individuals. The Commission is now reviewing feedback before finalizing the standards.
Why it matters: This is the last step before companies know exactly what will be required to report under the CSRD. Once adopted, the standards will not change, and companies can start investing in new data collection and governance processes. The standards will take two to four months to become official after adoption, but don't wait—start planning now.
We don’t expect drastic changes to the Commission’s draft, though some consequential adjustments are possible. One area we’re closely watching: the required boundary for GHG emissions disclosure. This determines what business activities companies must include in their footprint, and whether companies can reuse footprints for other disclosures, or start from scratch.
What to do now: If you’re a Wave 1 company, start discussions internally about migrating from the original ESRS to the Simplified ESRS. For everyone else, no action needed yet. Watershed will publish detailed guides once the final standards are adopted.
Europe and Australia: regulators review first CSRD and AASB S2 reports
What happened: Early in May, the European Securities and Markets Authority (ESMA) published its review of corporate reporting in 2025, which included a review of more than 250 CSRD Wave 1 reports—the first regulator review of CSRD filings. Shortly after, the Australian Securities and Investments Commission (ASIC) published its review of companies' disclosures under AASB S2—the first regulatory assessment of mandatory ISSB-aligned reports anywhere in the world.
Why it matters: These are the first regulatory reviews of the two most adopted sustainability reporting standards in the world—the ESRS and ISSB (collectively covering close to 70 countries, or over 80% of world GDP). Critically, they demonstrate that regulators are closely reading companies’ sustainability statements, comparing them with financial reporting, and in some cases requiring corrective action.
In Europe, ESMA’s review highlighted that regulators were checking whether the scope of a company’s sustainability statement matched that of its financial report, and that these sustainability statements appropriately referenced the company’s financial statement. The review also noted areas where national regulators most commonly issued enforcement actions. Climate change reporting was the largest focus: 40% of enforcement actions by regulators were related to companies’ ESRS E1 disclosures. ESMA noted this was because climate reporting is more mature than other reporting areas, and therefore enforcer expectations are higher. Companies should take greater care when compiling their E1 disclosures, by documenting methodology choices and assumptions, as well as by cross-checking what assets and operations they include in their emissions inventory with those on their financial statements, and preparing documented responses for any gaps.
In Australia, ASIC emphasized that sustainability reports should be transparent (explain how they determined materiality, how they selected methodologies, and why), identifiable (readers of these statements should be able to easily find standardized data points), and aligned with financial reporting (e.g. risks and opportunities identified in one should appear in the other). Read our full analysis of ASIC’s review here.
Both regulators clarified that the goal of review and enforcement in the first years of mandatory reporting is to encourage improvement rather than penalise shortcomings—ESMA for instance required some companies to issue corrected or improved statements going forward, but didn’t discuss any punitive action or fines.
At the same time, civil society actors in Europe are pressing regulators to step up enforcement, (see this story by Responsible Investor describing how a collection of NGOs have written to ESMA to more actively police potentially misleading sustainability statements)—a sign that the window of regulatory patience is open now, but not permanently.
What to do now: As you look to 2027 reporting, establish processes and documentation that allow you to answer regulators’ questions. Pay special attention to your governance processes and methodologies around climate disclosure.
Check out our discussion of ASIC’s findings as well as general takeaways from Australia’s Group 1 reporting in our on-demand webinar.
Mexico: One-year scope 3 delay proposed for unlisted companies
What happened: Mexico launched a public consultation on updates to its NIS (Norma de Información de Sustentabilidad), the sustainability reporting standard for unlisted companies. The main change is a one-year delay to mandatory scope 3 quantification.
Why it matters: The first NIS scope 3 disclosures were due in 2027. Companies in-scope for NIS have an additional year to prepare their data collection and governance processes for scope 3 disclosure.
Major proposals within the consultation:
- Scope 3: For FY2026 reports (published in 2027), companies only need to identify and disclose the number of material scope 3 categories across the 15 GHG Protocol categories. Full quantification is required starting in 2028 (on FY2027 data).
- Sustainable investments: Companies may defer full reporting until 2028 (on FY2027 data), given the ongoing rollout of Mexico's Sustainable Taxonomy.
- Land use near biodiversity risk zones: "Near" is now defined as 100 meters (previously left undefined).
What to do now: If you report under the NIS, note the scope 3 timeline and review the new documentation requirements for qualitative policy indicators.
What I’m reading
Data centers and energy policy
- Gas's share of the G7 power mix is declining—but the rapid expansion of data centers may yet reverse that trend. In the US, the EPA said it will not set federal environmental standards for data centers, leaving the field to individual states. Data center policy in the US looks set to follow the path of climate disclosure and vehicle fuel standards, other areas for which the US federal government has elected not to impose regulations. This could lead to a patchwork of state policies on data center emissions, energy, water, and waste disclosures.
- In Europe, the draft Simplified ESRS includes a new provision requiring companies to disclose compute and data center emissions where significant (the precise requirement is in data point E1-30(c), AR 34).
- Watershed is developing a measurement framework that allows companies to calculate their AI-related emissions using data available today. We will share more with our customers as this development progresses.
European electricity markets
- Europe has too much clean power generation capacity. The challenge, as this Economist article points out, is electrifying final energy use, then either shifting consumption toward periods of high renewable supply or building storage to cover gaps when supply is lower.
- This connects directly to the ongoing scope 2 debate at the GHG Protocol over hourly versus annual matching for clean electricity purchases. Supporters of hourly matching might point to examples such as Europe to say the true problem is not enabling new clean power generation, but rather incentivizing storage or demand response programs.
China Decrees 834 and 835
- In April, China's State Council introduced two new regulations (Decree 834 and Decree 835) that, among other things, grant suppliers the right to refuse data requests (including sustainability-related data) from foreign-headquartered customers. This is generally being interpreted as a counter to European supply chain due diligence laws. For companies in scope for CSDDD or other due diligence regulations, this creates a potential conflict: European law may require reporting on upstream supply chain conditions that Chinese law now permits suppliers to withhold.
- These regulations are unfolding within broader EU-China trade negotiations, and no implementation guidance has been issued yet. It is currently unclear to what extent Chinese regulators intend to enforce the decrees versus use them as leverage in wider discussions.
- For now companies that believe they may be affected should discuss legal risk with counsel. We recommend watching for implementation guidance before making drastic changes to your supplier engagement strategy.
