The European Commission (EC) has issued the final regulation supplementing the Corporate Sustainability Reporting Directive (CSRD) regarding sustainability reporting standards to be followed in the European Union (EU).
The European Sustainability Reporting Standards (ESRS) apply to all companies within the scope of CSRD. As the final text of the ESRS is now available, companies within their scope need to get ready now. It is important to note, some reporting entities within the scope of CSRD will have to apply ESRS for reporting periods commencing on or after 1 January 2024.
What does the ESRS package include?
The package contains the EC’s Delegated Act which sets out two cross-cutting standards and ten other sustainability standards for the disclosure of environmental, social and governance (ESG) information. Together they will become law in the EU from 1 January 2024. The package (sometimes called the first set of ESRS) also contains two appendices. Appendix I sets out the revised 12 ESRS and Appendix II provides a list of acronyms and a glossary of terms.
The 12 ESRS that have been issued are:
Two cross cutting Standards which apply to all sustainability matters
- ESRS 1 – General Requirements
- ESRS 2 – General Disclosures
- ESRS E1 – Climate change
- ESRS E2 – Pollution
- ESRS E3 – Water and marine resources
- ESRS E4 – Biodiversity and ecosystems
- ESRS E5 – Resource use and circular economy
- ESRS S1 – Own Workforce
- ESRS S2 – Works in the value chain
- ESRS S3 – Affected communities
- ESRS S4 – Consumers and end-users
- ESRS G1 – Business Conduct
These Standards are closely aligned with the structure for the Task Force on Climate-related Financial Disclosures (TCFD).
Key changes to ESRS Standards
The EC carried out consultations on the draft ESRS Standards that were issued by EFRAG in November 2022. It has made the following notable changes to the draft standards previously issued:
Companies will have to report on items considered to be material, taking into account both the impact on people and the ESG issues creating financial risks and opportunities for the company.
All the ESRS, including all disclosure requirements and data points included within each Standard, are subject to a materiality assessment being made by the reporting entity, except for the ’General Requirements’ and ’General Disclosures’ Standards; ESRS 1 and ESRS 2. This updated requirement is expected to significantly reduce the burden for reporting entities making disclosures under the CSRD.
Previously, EFRAG had also wanted the climate Standard (ESRS E1) to be mandatory for all reporting entities that fell within its scope. And for any reporting entities that had more than 250 employees, they wanted some disclosure requirements relating to the undertaking’s own workforce (ESRS S1), to also be mandatory. However, when a company concludes that climate is not material it is required to disclose why this is the case.
In addition to the phasing-in proposed by EFRAG, the EC has provided some additional phasing-in that will help reporting entities, particularly smaller entities that would be subject to sustainability reporting requirements for the first time. The additional phasing-in introduced by the EC is:
- For reporting entities with less than 750 employees, they may omit:
- For the first year of applying the standards, scope 3 GHG emissions data and the disclosure requirements specified in the standard on ‘Own Workforce’.
- For the first two years of applying the standards, the disclosure requirements specified in the standards on biodiversity and on value-chain workers, affected communities, and consumers and end-users.
- For all reporting entities in the first year of applying the standards, they may omit:
- The anticipated financial effects related to non-climate environmental issues (pollution, water, biodiversity, and resource use). They can then provide qualitative disclosures only on the financial impacts of these disclosures for a further two years.
- Certain datapoints related to their own workforce (social protection, persons with disabilities, work-related ill-health, and work-life balance). All these datapoints are included in ESRS S1 ‘Own Workforce’.
The EC has decided that many of the disclosures and datapoints that were mandatory in the first draft of the ESRS should now become voluntary. These include biodiversity transition plans (ESRS E4), certain indicators about ‘non-employees’ in the undertaking’s own workforce (ESRS S1) and an explanation of why the undertaking considers that a particular sustainability topic is not material.
Further flexibilities in certain disclosures
The EC has also introduced some flexibility around the disclosure of mandatory datapoints. For example, they have given more flexibility in disclosing the financial effects arising from sustainability risks and on engagement with stakeholders, and in selecting which methodology should be used for the materiality assessment process. Furthermore, the EC has modified some of the datapoints linked to the disclosure of corruption and bribery to protect whistleblowers from self-incrimination.
The EC and EFRAG have worked closely with the International Sustainability Standards Board (ISSB) to increase interoperability between the two sets of Standards. On the release of these Standards, the three bodies have confirmed that there is now ‘a high degree of climate-disclosure alignment’. It is also worth mentioning that the definition of financial materiality found in ESRS and ISSB Standards is now the same.
However, companies applying ESRS will not automatically meet the requirements of ISSB Standards and therefore it is important to check the differences between the two Standards if both sets of requirements are being applied.
EFRAG is working on a mapping table between ISSB and ESRS Standards and a draft version is available on their website.
Companies in the scope of the CSRD need to start preparing for these Standards as soon as possible. We are currently working on some more detailed documents on scoping and FAQs so watch out for these.