European Commission Adopt European Sustainability Reporting Standards

PUBLISHED: 28th August 2023

European Sustainability Reporting Standards Adopted by European Commission.

These common standards clarify impending obligations under the Corporate Sustainability Reporting Directive (CSRD).

The European Commission has adopted a delegated regulation setting out the first set of common sustainability reporting standards, known as the European Sustainability Reporting Standards (ESRS). The adoption of these standards signals a significant development in a new age of environmental responsibility in business and has provided much needed clarity on the extent of impending obligations faced by in-scope companies under the Corporate Sustainability Reporting Directive (CSRD).

Increased Demand for Sustainability Reporting

Sustainability reporting requires the disclosure of a company’s environmental, social, governance (ESG) and human rights data.  Significant evidence suggests a positive correlation between these disclosures and a company’s competitive advantage in the market.  Therefore, the demand for sustainability reporting has shifted from being viewed as important to an imperative, particularly from a stakeholder, investor and consumer perspective.

The increased demand for sustainability reporting has resulted in the development of numerous ESG reporting frameworks, the objective of which is to collect measurable data to ascertain whether a company is sustainable in respect of each ESG metric relevant to its business.

Directive (EU) 2022/2464 on Corporate Sustainability Reporting

The CSRD, which entered into force on the 5 January 2023, emerged from the European Green Deal’s climate change initiative to further enhance corporate entity disclosure of environmental and climate data.  The CSRD replaces the current Non-Financial Reporting Directive (NFRD) and requires in-scope companies to report on a double materiality basis, considering the relevance of specific sustainability issues from two perspectives.

1. Financial materiality:  in-scope companies are required to disclose risks which they themselves face from a changing climate and other ESG matters.
2. Impact materiality:  in-scope companies are required to disclose the impacts which they have on the climate and wider society.

Application of the CSRD

Companies meeting two of the following three conditions are in-scope under the CSRD:

• €40 million in net turnover
• €20 million in assets
• 250+ employees

With these conditions, it is estimated that around 50,000 EU undertakings will be subject to the CSRD obligations.  These obligations will take effect between 2024 and 2028 as follows:

• 1 January 2024: companies currently subjected to the NFRD

• 1 January 2025: large companies not currently subjected to the NFRD
• 1 January 2026: listed SMEs (note that SMEs may opt out until 2028)
• 1 January 2028: non-EU companies with significant undertakings in the EU.

Adoption of the ESRS

The CSRD fuelled the development and adoption of the ESRS, as disclosure under the CSRD needs to be made in accordance with EU sustainability reporting standards.  The ESRS specify the sustainability reporting requirements for in-scope companies under the CSRD and are comprised of the following:

• two sets of cross-cutting standards (ESRS 1 and ESRS 2)
• ten ESRS on specific ESG matters

ESRS 1 prescribes how in-scope companies prepare and present sustainability information in a manner compliant with the CSRD obligations (General Requirements).  ESRS 2 prescribes general disclosures in respect of an in-scope company’s sustainability statements including governance, impact, strategy and risk and opportunity management (General Disclosures).

The ten ESRS on specific ESG matters include the following: climate change, pollution, water and marine resources, biodiversity of ecosystems, resource use and circular economy (Environmental); workforce, workers in the value chain, affected communities, consumers and end-users (Social); and business conduct (Governance).

Scrutiny

The adoption of the ESRS on 31 July 2023 is to be welcomed.  A new age of disclosure and transparency in relation to the environmental and social impact of certain businesses may be upon us.  The ESRS provides a clear path for in-scope companies that are transitioning to the new corporate sustainability reporting regime under the CSRD and are preparing to satisfy its obligations post January 2024.

The next step is for the European Parliament and Council to scrutinise the ESRS over a two-month period (extendable by a further two months if so required).  During this scrutiny period, it may prove prudent for in-scope companies to familiarise themselves with the new reporting standards, consider setting up a double materiality assessment process and commence the collection of in-depth ESG data which can be utilised in sustainability reports once obligations arise.

For more information, please contact Clara Eccles or any member of our Corporate and Commercial team.