How the European Sustainability Reporting Standards (ESRS) will impact the CSRD

21st July 2023

The European Commission has recently presented 12 ‘near final’ European Sustainability Reporting Standards (ESRS) for public consideration in a critical development for corporate sustainability regulation.

These evolving standards are being established to clarify sustainability reporting requirements defined by the Corporate Sustainability Reporting Directive (CSRD). The scope of these standards is broad, encompassing a variety of sustainability factors from environmental considerations to social and governance issues.

The latest draft of ESRS showcases significant modifications from the previous version shared in November 2022, shaped by the insights of the European Financial Reporting Advisory Group (EFRAG). The suggested changes are primarily designed to ease the reporting burden for SMEs and companies reporting for the first time. 

Stakeholders had a four-week window, which ended on July 7, 2023, to provide their feedback on the proposed modifications and now the aim is to make these standards legally effective by late July 2023 or no later than the end of August 2023. 

Beginning from January 1, 2024, all corporations under the jurisdiction of the CSRD will be required to implement the ESRS in their reporting. This article aims to break down the new standards and the latest modifications and examine how they will impact the CSRD and, therefore, companies’ reporting.

What’s included in the European Sustainability Reporting Standards (ESRS)?

The consultation package presented in June of this year refers to the comprehensive set of requirements outlined by the CSRD, requiring entities to provide specific disclosures on a range of environmental, social, and governance (ESG) issues.

 The European Commission (EC) has structured this package as a set of 12 ESRS standards that delineate the explicit disclosure obligations these reporting entities must fulfill.

To be more specific, the 12 ESRS include:

a. Two general sustainability standards

ESRS 1 – General Requirements

ESRS 2 – General Disclosures

b. Five environmental standards

ESRS E1 – Climate change

ESRS E2 – Pollution

ESRS E3 – Water and marine resources

ESRS E4 – Biodiversity and ecosystems

ESRS E5 – Resource use and circular economy

c. Four social standards

ESRS S1 – Own Workforce

ESRS S2 – Works in the value chain

ESRS S3 – Affected communities

ESRS S4 – Consumers and end-users

d. One governance standard

ESRS G1 – Business Conduct

Which companies will be impacted by the ESRS implementation?

The short answer is that all companies falling under the scope of the EU Corporate Sustainability Reporting Directive (CSRD) will need to comply with the new ESRS. 

In particular:

• All “listed” companies offering securities on an EU index (except for “micro-enterprises”);

• All “large” companies, meaning those that meet at least two of three criteria: (i) a balance sheet of €20 million, (ii) net turnover of €40 million, and (iii) 250 employees or more on average during the year – parent undertakings of “large groups” that meet two of these criteria on a consolidated basis also qualify; and

• Non-EU companies, referred to as “third-country undertakings,” with significant operations in the EU. “Significant operations” means generating a net turnover of at least €150 million in the EU and either having an EU subsidiary that is listed on an EU-regulated index or is considered “large” under the above criteria, or having an EU branch generating an annual net turnover of €40 million in the previous year.

These categories also show that companies based outside the EU with European operations will need to comply with the Corporate Sustainability Reporting Directive.

Subsidiary undertakings will be exempt from the reporting requirements of the CSRD if they are included in the consolidated reporting of a parent undertaking that meets the CSRD’s reporting requirements. This exemption applies to both subsidiaries of EU parent undertakings and subsidiaries included in the consolidated sustainability reporting of a parent undertaking established outside of the EU.

More on this topic in our previous article on the Corporate Sustainability Reporting Directive

What has changed in the revised ESRS draft?

The consultation opened in June 2023 on the European Sustainability Reporting Standards (ESRS) by the European Commission presented multiple changes from the version issued by EFRAG in November 2022. 

These are the most critical modifications that need to be taken into consideration:

Voluntary disclosure: the European Commission has shifted multiple disclosure requirements from mandatory to optional/voluntary. These include the biodiversity transition plans (ESRS E4), and specific indicators concerning “non-employees” within the company’s workforce (ESRS S1).

Expanded flexibility: the disclosure parameters concerning financial repercussions of sustainability risks, stakeholder engagement, and guidance on materiality analysis methodology have been broadened.

Focus on significance: introduced more emphasis on materiality analysis, as now, all standards, except for ESRS 2 “General Disclosure” which remains mandatory to disclose, are contingent upon a materiality evaluation.

Further simplifications: the EC proposes further simplifications for companies’ compliance in their first-time application. The disclosures concerning potential financial impacts from environmental-related risks and opportunities (like pollution, biodiversity, water) and specific employee-related data (E.g., social protection, work-associated illness) can be omitted for all companies in the first year of application. 

Furthermore, for businesses employing fewer than 750 staff, information on scope 3 emissions and internal workforce (ESRS S1) can be waived in the first year of application. 

At the same time, data on biodiversity (ESRS E4), employees in the supply chain (ESRS S2), affected parties (ESRS S3), and end consumers (ESRS S4) can be omitted in the initial two years of application.

What’s next for the ESRS?

The timeline for the progression of the European Sustainability Reporting Standards (ESRS) now looks pretty straightforward:

  1. Adoption of the final ESRS (July 2023/end of August 2023): The finalized ESRS are expected to be passed as EU law by the European Commission before the end of August.
  1. Scrutiny Period (August 2023 – October 2023): After adoption, the ESRS will enter a two-month scrutiny period, which could be extended to four months. The European Parliament and the Council will review the standards during this time.
  1. Implementation (January 1, 2024): If no objections are raised during the scrutiny period, companies within the scope of the CSRD will begin to apply the ESRS for financial years commencing on or after January 1, 2024.

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