On 31 July 2023, the European Commission formally adopted the first set of EU sustainability reporting standards (ESRS), bringing the new EU corporate sustainability reporting regime one step closer.
Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union, said that the standards “are ambitious and are an important tool underpinning the EU’s sustainable finance agenda."
Legal Elements of the ESRS
The Corporate Sustainability Reporting Directive (CSRD) is an EU directive that requires, on a phased basis, in-scope companies to report extensive sustainability information to an auditable standard (see: CSRD: EU Sustainability Reporting with a Global Reach).
The ESRS are contained in a Commission Delegated Regulation which is secondary legislation made under article 29b(1) of Accounting Directive (2013/34/EU). The ESRS will be mandatory for companies that are obliged by the Accounting Directive to report prescribed sustainability information. This first set of ESRS is sector-agnostic, meaning that the standards will apply to all undertakings within the scope of the CSRD, regardless of the sector(s) in which the undertaking operates.
Evolution of the ESRS
EFRAG (formerly the European Financial Reporting Advisory Group) developed the draft ESRS and, following feedback, scaled back the disclosure requirements and data points. The Commission then carried out a wide-ranging consultation on the draft ESRS with EU agencies. It held a public consultation in June 2023, setting out the proposed final version of the first set of standards.
The Commission proposed significant modifications to EFRAG’s draft ESRS, key among them being that:
- all standards and disclosure requirements and data points (other than 'General Disclosures') are only required where determined to be material;
- additional phase-in periods for certain disclosures were introduced for all companies;
- additional phase-in periods for certain disclosures were introduced for companies with less than 750 employees;
- a number of disclosures were made voluntary on the basis that the data collection exercise required would be too challenging; and
- drafting changes were made to ensure interoperability with other global standards such as those of the International Sustainability Standards Board and the Global Reporting Initiative.
Scope of the ESRS
Annex 1 of the Delegated Regulation contains:
- Two sets of cross-cutting ESRS:
- General requirements (including an explanation of the double materiality concept, the value chain and how to prepare and present sustainability information)
- General disclosures (including on governance, strategy, and impact, risk and opportunity management, and on metrics and targets).
- A set of ESRS environmental disclosures, related to climate change, pollution, water and marine resources, biodiversity and ecosystems, and resources and the circular economy.
- A set of ESRS social disclosures, relating to an organisation’s own workforce, workers in the value chain, affected communities and customers and end-users.
- An ESRS on governance, relating to business conduct.
What happens next?
The Delegated Regulation, as adopted by the Commission, will next be sent to the European Parliament and the Council for formal scrutiny. The scrutiny period runs for two months, extendable by a further two months. The European Parliament or the Council may reject the measure, but they may not amend it.
The CSRD also requires the Commission to adopt by June 2024, sector-specific standards, proportionate standards for listed SMEs, and standards for non-EU companies. EFRAG is currently working on the second set of draft ESRS (although in March 2023 the Commission asked EFRAG to prioritise work related to the implementation of the sector-agnostic ESRS).
The Commission confirmed that the much-needed provision of guidance from EFRAG in relation to the practicalities of materiality assessments will be published soon.
How Matheson can help
Our ESG Advisory Group is working with clients to help them in the transition to the new corporate sustainability reporting regime. If you would like more information on this or other ESG matters, please get in touch with the partners below or with your usual Matheson contact.