On Monday, the European Commission adopted the final European Sustainability Reporting Standards. The ESRS contain the reporting requirements under the EU’s Corporate Sustainability Reporting Directive. In this post, we provide six takeaways from the ESRS and the FAQs published by the Commission.
The standards adopted by the Commission are based on technical advice (draft standards) from EFRAG. EFRAG (previously known as the European Financial Reporting Advisory Group) is an independent, multi-stakeholder advisory body, majority funded by the EU.
Most disclosures will be materiality-based – but that’s not a free pass
Disclosures under ESRS 2 (“General Disclosures”) will be mandatory for all reporting undertakings. (ESRS 1 (“General Requirements”) sets out principles of general application and does not contain specific disclosure requirements.)
The other standards and individual disclosure requirements only will require relevant information to be reported if material for the undertaking’s business model and activity. As noted in the Commission’s July 31 FAQs, disclosure requirements subject to materiality are not voluntary. In addition, the undertaking's materiality assessment process is subject to external assurance.
The FAQs also note that, if an undertaking concludes that climate change is not a material topic and it therefore does not report in accordance with that standard (ESRS E1), it must provide a detailed explanation of the conclusions of its materiality assessment with regard to climate change, since climate change has wide-ranging and systemic impacts across the economy.
Although EFRAG had proposed that the majority of the standards be subject to materiality, in addition to the ESRS 2 General Disclosures, EFRAG had proposed that the climate standard, some workforce reporting requirements and data points that correspond to reporting under the Sustainable Finance Disclosure Regulation be mandatory (SFDR requires reporting by financial market participants, benchmark administrators and financial institutions).
To align with SFDR reporting, if an undertaking concludes that an SFDR-derived data point is not material, it will be required to explicitly state this. It also will be required to provide a table with all such data points, indicating where they are to be found in its sustainability statement or stating “not material” as appropriate.
Smaller companies will have a longer phase-in for selected disclosures
The Commission has introduced additional phase-ins, beyond those previously proposed by EFRAG. These primarily are applicable to undertakings with less than 750 employees, on the theory that these undertakings have disproportionate compliance costs relative to their size and generally have not previously been subject to sustainability reporting requirements. The additional phase-ins focus on reporting requirements that the Commission considers more challenging for companies, such as certain reporting requirements relating to biodiversity and social issues. Depending on the topic, the new phase-in provisions postpone the corresponding reporting requirement for one to two years for undertakings that are below the size threshold.
More disclosures will be voluntary
The Commission has made some data points voluntary. The draft standards submitted by EFRAG already included a number of voluntary data points. The Commission designated additional data points as voluntary that it considers to be the most challenging or costly for undertakings. These include reporting a biodiversity transition plan and certain indicators relating to self-employed and agency workers in the undertaking's workforce.
Additional guidance will be forthcoming
The Commission has indicated that EFRAG will periodically publish additional non-binding technical guidance on the application of the ESRS. The Commission has suggested that EFRAG prioritize the development of guidance on materiality assessments and on reporting with regard to value chains. According to the Commission, EFRAG expects to publish draft guidance on these two issues for public consultation in the near future.
EFRAG also will host a portal for technical questions that companies or other stakeholders may have regarding the application of the ESRS.
The Commission also has indicated that, where it determines to be appropriate, it will consider providing guidance on questions concerning legal interpretation of the ESRS.
The ESRS are aligned with but not identical to the ISSB and GRI standards
The Commission has indicated that it worked to ensure a very high level of alignment between ESRS and the ISSB and Global Reporting Initiative standards.
In its FAQs, the Commission notes that many of the ESRS reporting requirements were inspired by the GRI standards. It also notes that, because the ESRS and the first two ISSB standards were developed in parallel, there were discussions among the Commission, EFRAG and the ISSB that resulted in a high degree of alignment where the two sets of standards overlap. Undertakings that are required to report in accordance with ESRS on climate change will to a large extent report the same information as companies using the ISSB climate standard, although climate change disclosures under ESRS go further, providing for additional information on impacts relevant for users other than investors.
Keep in mind that the ESRS contain topical standards covering a more fulsome range of ESG issues. To date, the ISSB has only published a detailed topical standard on climate. In addition, the ESRS take a double materiality approach, requiring reporting on the undertaking’s impacts on people and the environment, as well as on financial risks and opportunities. The ISSB standards in contrast are focused on financial materiality.
The Commission has indicated that EFRAG will continue its joint work with the ISSB on optimizing the interoperability of overlapping ESRS and ISSB standards.
The ESRS are not yet a done deal, but almost
The Commission has indicated that the ESRS delegated act adopted by it will be formally transmitted in the second half of August to the European Parliament and Council for scrutiny. The scrutiny period runs for two months, extendable by an additional two months. The European Parliament or the Council may reject the delegated act, but they may not amend it.
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