On 23 November 2022, the European Financial Reporting Advisory Group (“EFRAG”) announced the submission of the first set of draft European Sustainability Reporting Standards (“ESRS”) to the European Commission (here).
The ESRS are a key pillar of the new sustainability reporting regime being introduced by the Corporate Sustainability Reporting Directive (the “CSRD”) which is ultimately aimed at elevating the status of sustainability reporting to that of financial reporting.
On 10 November 2022, the European Parliament adopted its legislative resolution adopting CSRD. The Council of the EU is expected to adopt the CSRD on 28 November 2022 with CSRD entering into force 20 days after publication in the Official Journal of the EU. Reporting requirements will be phased in over time for different kinds of companies with the first reports due in 2025 for the financial year 2024. Further detail on these timelines is available in our briefing on CSRD (here).
The CSRD aims to improve sustainability reporting to better facilitate Europe’s transition towards a fully sustainable economic and financial system and includes a requirement for in scope companies to report using a double materiality perspective in compliance with ESRS. A double materiality perspective requires in scope companies to report on how sustainability matters affect their business and report on the impact their business has on people and the environment.
EFRAG was appointed as technical adviser to the European Commission to assist it in developing the ESRS. On 29 April 2022, EFRAG issued a public consultation on ESRS exposure drafts. Our earlier briefing (here) provides detail on this public consultation and the exposure drafts.
Approval of the draft ESRS
EFRAG has now taken into consideration the input received from the public consultation and approved a set of twelve draft ESRS which has been delivered to the European Commission for adoption.
Significant changes when compared to the exposure drafts include:
a. greater account being taken of international reporting standards and other international instruments including the proposed standards by the International Sustainability Reporting Standards Board ("ISSB"), the Global Reporting Initiative ("GRI") standards and the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. Ultimately, with respect to the ISSB, EFRAG notes in its letter to the European Commission that its goal is that the companies which comply with ESRS should also be considered as complying with the ISSB standards to avoid unnecessary multiple reporting;
b. a simpler approach to materiality assessment which has resulted in the ‘rebuttable presumption’ concept included in the exposure drafts being abandoned; and
c. a significant reduction in the number of disclosure requirements and, significantly in terms of value chain reporting, the obligation to obtain data from value chain partners will not be required for the first 3 years (during which time undertakings use in-house data to provide insights on their value chain), except when value chain data is needed to enable users to comply with the requirements of other pieces of EU legislation.
According to EFRAG, the centrality of the materiality assessment process will mean that, with very rare exceptions, no company will be required to report on all of the datapoints (and will not be required to disclose why certain disclosures are not relevant as ‘rebuttable assumption’ approach is no longer included in ESRS), and most companies will only be reporting on a subset of the ESRS, because only a subset of sustainability matters will be material for them.
Comment and next steps
The European Commission will now consult EU bodies and Member States on the draft ESRS which will then be scrutinised by the European Parliament and Council of the EU. The ESRS are expected to be adopted by way of delegated act in June 2023.
It should be noted that EFRAG has indicated that listed SMEs will be able to report according to separate, proportionate standards that EFRAG will develop next year.