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