On July 31, 2023, the European Commission has adopted the European Sustainability Reporting Standards (“ESRS“). EU and non-EU entities subject to the new EU Corporate Sustainability Reporting Directive (“CSRD“) will have to report to the ESRS, making the development important for entities preparing to report under the CSRD regime.
The CSRD, which came into effect on January 5, 2023, creates detailed sustainability reporting requirements and expands the number of EU and non-EU companies subject to the EU sustainability reporting framework. The ESRS provide the basis for the implementation of the sustainability information required under the CSRD. The requirement for entities subject to the CSRD to report under the ESRS will be phased in over time, with the first reports from certain entities due in 2025. Whether and when an entity falls within the scope of the CSRD can be a complex analysis – read our legal update here for more information about the CSRD and how it may apply to both EU and non-EU entities.
As discussed in our previous blog posts (which you can read here and here), the draft ESRS were initially published by the European Financial Reporting Advisory Group (“EFRAG“) on April 29, 2022 and made available for public consultation until August 8, 2022. Following the public consultation, EFRAG amended the draft ESRS and submitted the amended draft to the European Commission on November 16, 2022. The European Commission subsequently consulted with other EU bodies, including the European Environment Agency and the European Central Bank, and subsequently released an amended draft ESRS for feedback on 9 June 2023. Following the closure of the feedback window on 7 July 2023, the European Commission has now adopted the final ESRS as a delegated arrangement.
Overview of the disclosure obligation
The ESRS includes twelve standards: two cross-cutting standards (ESRS 1 and ESRS 2) that provide general reporting concepts (including dual materiality and reporting limits) and overarching disclosure requirements; and ten current standards with specific disclosure requirements for ESG matters.
The 12 standards are as follows:
|Water and marine resources
|Biodiversity and ecosystems
|Resource use and circular economy
|Employees in the value chain
|Consumers and end users
For a more detailed overview of the disclosure requirements under the ESRS, please read our previous blog posts here and here.
Main changes to the ESRS
The European Commission has made a number of changes to the draft ESRS submitted to it by EFRAG in November 2022, including:
- making reporting requirements more ‘subject to materiality’ (i.e. allowing companies to omit information if it is not relevant in their particular circumstances). This has drawn criticism from some quarters as a dilution of the standards, while the European Commission has stated that the change was made to provide reporting entities with additional flexibility and avoid unnecessary costs. Ultimately, the European Commission decided that all reporting requirements should be subject to materiality, with the exception of ESRS 2;
- by adding a requirement where reporting entities conclude that a data point derived from compliance with disclosure obligations under other EU law (e.g. the SFDR) is not material, they must explicitly state that the data point is “not material”. In addition, the ESRS will require that a table be made public showing all data points derived from other EU legislation, indicating where such data points are located in the reporting entities’ sustainability statements (or stating “not material”, if as applicable).
- updating the terminology related to financial materiality to better align it with the definition of financial materiality in the ISSB Sustainability Disclosure Standards (for more information on the ISSB, read our previous update here);
- changing disclosure requirements and data points related to certain topics from mandatory to voluntary, including biodiversity transition plans and certain indicators on “non-employees” in the entities’ workforce; And
- introducing additional provisions to phase in a number of reporting requirements (including those on biodiversity), mainly applicable to entities with fewer than 750 employees.
The delegated regulation will now be assessed by the European Parliament and the Council of the EU. If none of these bodies reject the delegated regulation, it will enter into force from 1 January 2024.
In the area of international interoperability, the European Commission, EFRAG and ISSB will soon release interoperability guidelines, which are intended to help reporting entities understand the various disclosures required by the ESRS and the ISSB Sustainability Disclosure Standards. It is expected that ERFRAG will also publish additional guidance in due course to support the interpretation and application of the final ESRS.