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| 6 minutes read

CSRD: European Commission publishes draft delegated act with first set of sustainability reporting standards

On 9 June 2023, the European Commission published for consultation a draft Delegated Act (DA) with the first set of European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD). The consultation closes on 7 July 2023.

Draft Delegated Act 

The ESRS in the draft DA include significant revisions to the draft standards recommended by the European Financial Reporting Advisory Group (EFRAG) in November 2022, including additional phase-ins, making certain disclosures voluntary, and making all disclosure requirements (apart from a set of general disclosures) subject to materiality assessments. This is discussed in more detail below. (For more information on the EFRAG draft, see our previous blog post.)

The ESRS specify the sustainability information that companies will need to report on in accordance with the Accounting Directive as amended by the CSRD, including the information that financial market participants need in order to comply with their disclosure obligations under the Sustainable Finance Disclosures Regulation (SFDR).

Annex I to the draft DA sets out the proposed 12 ESRS, which are divided as follows:

  • two sets of cross-cutting ESRS:
    • ESRS 1 covers general requirements, including explaining double materiality, the value chain and how to prepare and present sustainability information, and
    • ESRS 2 covers general disclosures, including on governance, strategy, and impact, risk and opportunity management, and metrics and targets;
  • five ESRS on environmental disclosures, covering climate change, pollution, water and marine resources, biodiversity and ecosystems, and resources and the circular economy;
  • four ESRS on social disclosures, covering an organisation's own workforce, workers in the value chain, affected communities, and consumers and end-users; and
  • one ESRS on governance, which covers business conduct.

Annex II to the draft DA contains a list of acronyms and a glossary of definitions used in the ESRS.

The first set of ESRS are sector-agnostic, meaning that they apply to all undertakings under the scope of the CSRD regardless of the sector they operate in.

The draft DA says that sector-specific standards will be adopted by June 2024. EFRAG had announced in March this year that sector-specific ESRS will be delayed so that EFRAG can focus on helping companies implement the first set of ESRS (see here).

The ESRS  will apply from 1 January 2024 (for financial years beginning on or after 1 January 2024) to the undertakings that are already subject to the reporting requirements introduced by the Non-Financial Reporting Directive (NFRD).  Application to other in-scope entities will be phased-in as set out in Article 5 of the CSRD. Listed SMEs will have the option of meeting their reporting requirements under the CSRD by reporting according to separate standards that the Commission says in the draft DA it will adopt by end June 2024.

Key changes to the ESRS

When the draft standards were first submitted by EFRAG to the Commission in November 2022 there was concern from a number of respondents over some of the more challenging disclosure requirements and the need for additional guidance to be provided (not least to ensure consistency between the CSRD and other EU legislation). There were also concerns about the increased reporting burden that the ESRS as a whole would entail, in particular for companies that will be reporting on sustainability for the first time. It is worth bearing in mind that the CSRD is expected to cover over 50,000 undertakings, while the NFRD currently only covers around 12,000.

According to pp.5-7 of the draft DA, the Commission has made the following changes to the ESRS, which it says are expected to lead to a significant burden reduction and helps to ensure that the standards are proportionate:

  • Materiality: All standards, and all disclosure requirements and data points within each standard, will be subject to a materiality assessment by the undertaking, with the exception of the disclosure requirements specified in the “General Disclosures” standard.
  • Phasing-in certain requirements: In addition to the phase-ins proposed by EFRAG, the Commission has also introduced the following additional phase-ins:
    • undertakings with less than 750 employees may omit scope 3 GHG emissions data and the disclosure requirements specified in the standard on “own workforce” in the first year that they apply the standards;
    • the disclosure requirements specified in the standards on biodiversity and on value-chain workers, affected communities, and consumers and end-users in the first two years that they apply the standards;
    • all undertakings may omit the following information in the first year that they apply the standards: anticipated financial effects related to non-climate environmental issues (pollution, water, biodiversity, and resource use); and certain datapoints related to their own workforce (social protection, persons with disabilities, work-related ill-health, and work-life balance).
  • Making certain disclosures voluntary: The Commission has converted a number of the mandatory datapoints proposed by EFRAG into voluntary datapoints. This includes, for example: biodiversity transition plans; certain indicators about “non-employees” in the undertaking’s own workforce; and an explanation of why the undertaking may consider a particular sustainability topic not to be material.
  • Further flexibilities in certain disclosures: The Commission says it has also introduced certain flexibilities for some of the mandatory datapoints and modified datapoints regarding corruption and bribery and regarding the protection of whistle-blowers that might be considered to have infringed on the right not to self-incriminate.
  • There are also some technical modifications to ensure coherence with the EU legal framework and to ensure interoperability with global standard-setting initiatives.

It also worth noting that the Commission has only made few changes to EFRAG’s recommendations on the content of climate transition plans (such as, for example, requiring the companies reporting under the Taxonomy Regulation to include an explanation of objectives or plans to align their economic activities with the relevant criteria). The Commission has also clarified that requirements in relation to action plans, targets, policies, scenario analysis and transition plans are contingent on the in-scope undertaking having these in the first place. In line with EFRAG’s suggestion, it clarified that in case the undertaking does not have a transition plan in place, it shall indicate whether (and, if so, when) it will adopt one.

Next steps on the CSRD

The consultation closes on 7 July 2023.

Once the Commission has had a chance to consider the results of the 4-week consultation, it will adopt the DA , which will then be subject to a scrutiny period by the European Parliament and Council for two months (which can be extended by a further two months) before it can be published in Official Journal of the EU and come into force. The Council and Parliament do not have the power to amend the DA during the scrutiny period – the most they could do is veto the DA (if they have the necessary majority).

As mentioned above, standards will apply from 1 January 2024 (for financial years beginning on or after 1 January 2024) to the undertakings that are already subject to the non-financial reporting requirements introduced by the NFRD. Application to other in-scope entities will be phased-in as set out in Article 5 of the CSRD. Listed SMEs will have the option of meeting their CSRD reporting requirements by reporting according to separate standards that the Commission says it will adopt by end June 2024.  

The Commission says in the draft DA that it is putting in place an interpretation mechanism to provide formal interpretation of the standards and has also asked EFRAG to publish additional guidance on the materiality assessment process and other issues. Our understanding is that one of the other issues that will be addressed in forthcoming guidance is the value chain.

Seeing the bigger picture 

There is no doubt that the proposed ESRS in the draft DA would reduce the regulatory reporting burden for corporates - in particular by allowing them to decide whether certain climate/sustainability issues are material to their business.

However, financial market participants (FMPs) are concerned that the changes will make it harder for them to obtain the information they need from investee companies so that they can comply with their own financial reporting requirements under the SFDR, the Taxonomy Regulation, the Benchmark Regulation, and Pillar 3 disclosure requirements.

For investors, this could mean less insight as to where to allocate their capital so that they can deliver on their net zero transition commitments. And for other key stakeholders, including shareholders, this could mean less transparency in terms of how a company is progressing against its climate and other ESG targets.

Although industry organisations such as Eurosif are concerned about a ‘setback in ambition’ and that the revised ESRS risk undermining the effectiveness of the CSRD as well as the implementation and coherence of the EU sustainable finance framework, it is worth putting the Commission’s latest move on the ESRS in wider context.

In March this year, Commission president Ursula von der Leyen gave a speech where she said that: “By the autumn we will put forward concrete proposals to simplify reporting requirements and in fact to reduce them by 25%”. She was talking about all reporting requirements, not just sustainability reporting.

And as luck would have it, the timing of the CSRD made it the ideal first guinea pig for the EU’s regulatory review. The concern (as expressed most forcibly by the French President Emmanuel Macron but which has the support of others across the EU) is that the Commission has been pumping out so much new regulation that businesses need time to catch up and figure out how to implement the tsunami of new legislation.


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