As part of the latest milestone in the Corporate Sustainability Reporting Directive (CSRD), the European Commission has released its revisions to the initial draft of the European Sustainability Reporting Standards (ESRS) . If you're curious about the nature of these recommendations, the remaining steps towards finalization, and the potential implications for your company, you've come to the right place!
As mentioned in our previous articles, the main objective of the CSRD is to enforce transparent, comparable, and reliable sustainability reporting from approximately 50,000 companies and subsidiaries based in the European Union. To facilitate this, the European Financial Reporting Advisory Group (EFRAG) has been assigned the responsibility of formulating the ESRS, which comprises a set of standards outlining the reporting requirements that companies must adhere to in order to comply with the CSRD.
EFRAG has developed an initial set of draft standards, which underwent a review process after a consultation. The second draft was subsequently submitted to the European Commission for their assessment, ensuring alignment with the CSRD requirements. After completing their review, the Commission has now released the "European sustainability reporting standards – first set," also known as the draft delegated act. At the same time, they have initiated a brief, four-week consultation period that concludes on July 7, 2023. If there are no objections from the European Parliament or the European Council, the final standards will be officially adopted through the final delegated act.
Formalities aside, what are the changes being proposed now?
While the overall scope remains largely unchanged, the Commission has proposed several significant updates aimed at providing companies with greater control over their disclosure requirements and timelines. The main updates are as follows:
Expansion of the principle of double-materiality: Instead of specific mandatory disclosures, companies will use this principle to determine what needs to be reported across all topics, except for the general disclosures which remain mandatory.
Phased approach to certain disclosures: In certain areas, organizations will have the flexibility to begin with smaller disclosures and gradually expand over time. Specifically:
Smaller companies (under 750 employees) can exclude scope 3 GHG emissions data and certain disclosure requirements outlined in the "own workforce" standard in the first year. They can also omit several whole standards (e.g., biodiversity, value-chain workers, affected communities, and consumers and end-users) in the first two years of applying the standards.
Larger companies have the option to omit anticipated financial effects related to non-climate environmental issues (pollution, water, biodiversity, and resource use), as well as certain points concerning their own workforce (social protection, persons with disabilities, work-related ill-health, and work-life balance) in the first year.
Use of less prescriptive language for certain disclosures: In some areas, language such as "shall disclose" has been replaced with "may disclose," particularly in the standards identified as more complex for certain organizations.
Other edits for compliance and interoperability: Additional edits have been made to ensure compliance, and notable adjustments have been implemented to facilitate interoperability with the International Sustainability Standards Board (ISSB), which will be beneficial for many multinational organizations.
That said, what are the next steps?
After the public consultation ending July 7th and which can be accessed by clicking here, the final ESRS will become EU law by means of a delegated act adopted by the European Commission. This adoption process is anticipated to occur by the end of July 2023 or the beginning of August 2023. As per the Corporate Sustainability Reporting Directive (CSRD), the delegated act must be adopted before the end of August 2023 to ensure the applicability of ESRS for financial years commencing on or after January 1, 2024. Consequently, all companies subject to CSRD will directly adhere to ESRS.