On 31 July 2023, the European Commission adopted the first set of 12 European Sustainability Reporting Standards (ESRS). The ESRS are the rules and requirements for companies to report on sustainability-related impacts, opportunities and risks under the Corporate Sustainable Reporting Directive (CSRD). The ESRS cover the full range of environmental, social, and governance issues, including climate change, biodiversity and human rights. They provide information for investors to understand the sustainability impact of the companies in which they invest.
Development of the ESRS
In November 2022, EFRAG submitted its final ESRS draft in the form of technical advice, after having run a public consultation on initial draft standards earlier in the year. This final draft eased the administrative burden on companies and reduced the number of reporting requirements.
In June 2023, the European Commission released a proposed version of the final ESRS, with a number of its own changes. The most notable change proposed that all disclosure requirements, with the exception of a set of general disclosures, will be subject to materiality assessments. This allows companies to focus reporting on sustainability factors that they consider material to their businesses.
The European Commission’s other modifications include the phasing in of certain reporting requirements such as Scope 3 emissions and biodiversity-related topics. Depending on the topic, the new phase-in provisions postpone the corresponding reporting requirement for 1 or 2 years for the companies concerned. These additional phase-ins mainly apply to companies with fewer than 750 employees.
The European Commission further converted several mandatory datapoints proposed by EFRAG into voluntary datapoints. The datapoints concerned are those considered most challenging or costly for companies, such as reporting a biodiversity transition plan and certain indicators about self-employed people and agency workers in the undertaking's own workforce.
What do the standards require?
The ESRS to be used by entities for their sustainability reporting are set out in Annex I and Annex II of the draft regulation. Annex I contains two sets of standards. ESRS 1 (“General Requirements”) sets general principles to be applied when reporting according to ESRS and does not itself set specific disclosure requirements. ESRS 2 (“General Disclosures”) specifies essential information to be disclosed irrespective of which sustainability matter is being considered. ESRS 2 is mandatory for all companies under the CSRD scope.
Annex I also contains a set of specific standards on:
- Environmental disclosures covering climate change, pollution, water and marine resources, biodiversity and ecosystems, and resources and the circular economy.
- Social disclosures, covering an organisation's own workforce, workers in the value chain, affected communities and customers and end-users.
- Governance, which covers business conduct.
Annex II contains the list of acronyms and the glossary of definitions to be used for the ESRS.
The specific standards listed above, and the individual disclosure requirements and datapoints within them are subject to a materiality assessment. This means that the company will report only relevant information and may omit the information in question that is not considered material to its business model and activity.
Disclosure requirements subject to materiality are not voluntary. The information in question must be disclosed if it is material, and the undertaking's materiality assessment process is subject to external assurance in accordance with the provisions of the Accounting Directive. If a company concludes that climate change is not a material topic and therefore does not report in accordance with that standard, it has to provide a detailed explanation of the conclusions of its materiality assessment with regard to climate change.
Implementation and development
Following the adoption of the new sustainability reporting rules, the Commission’s ESRS delegated act will be passed along to the EU Parliament and Council for a two-month scrutiny period, with each body able to reject, but not amend, the Act.
Once implemented, companies that were previously subject to the NFRD and large non-EU listed companies with more than 500 employees will be required to begin reporting under ESRS for financial year 2024, with the first reports to be issued in 2025, while other large companies starting a year later.
Listed SMEs, including non-EU listed SMEs, will begin issuing their first ESRS sustainability statements in 2027, although they may decide to opt out for up to two years. The reporting requirements will also apply to non-EU companies that generate more than €150 million of revenue annually in the EU and that have a branch in the EU with revenue over €40 million or a subsidiary that is a large company or a listed SME, beginning with financial year 2028 with first reporting in 2029.
With thanks to Dani Bass, trainee solicitor, for her assistance in preparing this briefing
