The European Financial Reporting Advisory Group (EFRAG) on Tuesday (16/11/2022) approved the final version of the European Sustainability Reporting Standards (ESRS), which set out the rules and requirements for companies to report on sustainability-related impacts, opportunities and risks under the EU’s upcoming Corporate Sustainable Reporting Directive (CSRD).
The approval marks another major step in the move to establish a new sustainability reporting system in Europe, following the adoption of the CSRD last week by the European Parliament, and the anticipated adoption by the EU Council later this month. Companies covered by the rules would be required to provide sustainability reporting on their strategies and business models, governance and organization, materiality assessments of sustainability impacts, opportunities and risks, as well as policies, targets, action plans and performance.
The CSRD, on track to begin applying from the beginning of 2024 starting with large companies, is aimed as a major update to the 2014 Non-Financial Reporting Directive (NFRD), the current EU sustainability reporting framework. The new rules will significantly expand the number of companies required to provide sustainability disclosures to over 50,000 from around 12,000 currently, and introduce more detailed reporting requirements on company impacts on the environment, human rights and social standards and sustainability-related risk.
EFRAG, a private association majority financed by the EU, was mandated by the European Commission in June 2020 to prepare for new EU sustainability reporting standards, as part of the revision of the NFRD. In May 2021, EFRAG was requested to develop reporting standards for the CSRD.
In May 2022, EFRAG released its initial drafts of the standards, and announced the launch of a 100-day consultation period to receive feedback. One of the key changes to the approved ESRS reflects feedback received about the assessment of materiality, removing the “rebuttable presumption,” which was seen by most respondents as undermining materiality judgements and resulting in unnecessary costs. Respondents requested that the ESRS instead include more application guidance on how to execute materiality judgements, according to an analysis of responses posted on the EFRAG website.
The approved standards also slightly reorganize the topics covered by the standards, including narrowing the Governance categories into one topic (from two), namely Business Conduct. Environmental topics include Climate Change, Pollution, Water and marine resources, Biodiversity and ecosystems, and Circular economy. Social topics include Own workforce, Workers in the value chain, Affected communities, and Consumers and end-users.
The CSRD is on track to begin applying from the beginning of 2024 for large public-interest companies with over 500 employees, followed by companies with more than 250 employees or €40 million in revenue in 2025, and listed SMEs in 2026.
Click here to access the approved ESRS.