On 31 July 2023, the European Commission published the final versions of the European Sustainability Reporting Standards (ESRS). The ESRS specify the sustainability information that companies will need to report on in accordance with the Corporate Sustainability Reporting Directive (CSRD).
The first draft ESRS were prepared by EFRAG in November 2022 (see our previous blog post). The Commission made significant changes in preparing its own version of the ESRS, published for consultation on 9 June 2023 (see our previous blog post). The consultation, which closed on 7 July 2023, saw the Commission version receive heavy criticism from all sides. Corporates voiced concerns that the reporting requirements were still too burdensome and financial market participants (FMPs) argued the move away from mandatory disclosure requirements hindered their ability to meet their other sustainability reporting obligations. Despite this criticism, the final version of the ESRS remain largely unchanged.
Key points made by the Commission include:
- Materiality assessment: The Commission draft provided that all disclosure requirements, with the exception of the General Disclosures in ESRS 2, shall be subject to a materiality assessment. This remains the case - however, the Commission now requires any reporting entity which determines climate change (ESRS E1) not material to provide “a detailed explanation” of the conclusions of their materiality assessment, including forward-looking analysis of conditions that could change the conclusion in future.
- Interaction with other financial reporting requirements: To address the feedback received during the public consultation, the Commission highlighted in its Q&A that “disclosure requirements subject to materiality are not voluntary” and that information should be disclosed if it is material with such materiality assessment being subject to external assurance in accordance with the CSRD. Moreover, if a company concludes that a datapoint derived from the Sustainable Finance Disclosure Regulation (SFDR), the Benchmark Regulation or Pillar 3 is not material, it must explicitly state that the datapoint in question is “not material” rather than just reporting no information. In addition, companies will have to provide a table with all such datapoints, indicating where they are to be found in their sustainability statement or stating “not material” as appropriate. The Commission stated in its Q&A that “further clarifications will be provided regarding the approach to be taken when a company has assessed a datapoint derived from the relevant financial reporting requirements as not material” and that “FMPs may assume that any indicator reported as non-material by an investee company does not contribute to the corresponding indicator of principal adverse impacts in the context of the SFDR disclosures”.
- Alignment with global standards: To address concerns raised during the public consultation, the definition of financial materiality has been further aligned between the ESRS and ISSB (to focus on primary users of financial reports). The final ESRS were published alongside an EFRAG paper commending the “very high degree of interoperability” between the ESRS (ESRS 2 and E1) and the ISSB standards. The EFRAG paper includes an ESRS-ISSB mapping table.
The Commission noted that the DA will be formally transmitted to the European Parliament and to the Council in the second half of August. This will start the two-month scrutiny period (extendable by a further two months). Neither the Parliament nor the Council can amend the DA – they only have the power to veto it. Unless objected on, the DA will be published in the Official Journal of the EU (OJEU) and enter into force on the third day following its publication.
The ESRS will apply from 1 January 2024 (for financial years beginning on or after 1 January 2024), in time to catch those undertakings required to report first under the CSRD and other in-scope entities later on as part of the CSRD’s phased-in approach. The Q&A indicates however that for non-EU companies (reporting in 2029 in respect of FY2028) separate standards will be adopted.
EFRAG welcomed the adoption of the ESRS. Before 16 August 2023, EFRAG will publish the first draft EFRAG Implementation Guidance and FAQ regarding materiality assessments and value chain. EFRAG is also continuing its work to develop specific standards for SMEs (both listed SMEs and voluntary standards for non-listed SMEs). Work on sector-specific standards also continues, and the Commission is expected to give further guidance on the revised timeline for these later this autumn.