Key points

EFRAG has handed over a first set of 12 draft European Sustainability Reporting Standards (ESRS) to the European Commission.
  • The drafts will be followed by final standards after adoption by the European Commission, which is expected in June 2023.
  • Concerns expressed during the public consultation on the Exposure Drafts gave rise to substantial changes.
  • The draft ESRS specify the new sustainability reporting requirements based on the Corporate Sustainability Reporting Directive (CSRD), covering the full range of sustainability matters (environment, social and governance). Further sets of ESRS will be developed in the future.
  • The first companies within the scope of the CSRD will have to apply ESRS starting FY 2024.
  • For further information, see details below.
What is the issue?
According to the draft Corporate Sustainability Reporting Directive (CSRD), adopted by the European Parliament on 10 November 2022, the European Sustainability Reporting Standards (ESRS) specify the content of the corporate sustainability reporting requirements in the EU. The European Financial Reporting Advisory Group (EFRAG) has been mandated to develop draft ESRS to be submitted to the European Commission as Technical Advice. After public consultation on 13 exposure drafts (EDs) of the ESRS over summer 2022, and having received more than 750 comment letters (see PwC’s response here), EFRAG handed over its Technical Advice to the European Commission on 22 November 2022 under the format of draft ESRS. Several changes were made following the consultation period, including a reduction from 13 to 12 standards.
The 12 draft ESRS correspond to the first set of reporting standards to be developed under the CSRD, and they include the following:
  • Two Cross-Cutting Standards (draft ESRS 1 on general requirements and draft ESRS 2 on general disclosures) which apply to all sustainability matters.
  • Topical standards covering:
    • environment (climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy);
    • social (own workforce, workers in the value chain, affected communities, consumers and end-users); and
    • governance (business conduct).
What is the impact?
The aim of the new CSRD and the ESRS disclosure requirements is to bring sustainability reporting on a par with financial reporting. The objective of the ESRS is to provide valuable insights for the benefit of a large panel of stakeholders about a company’s sustainability-related impacts, risks and opportunities. The challenge of reporting in accordance with the ESRS will be a company’s ability to implement the relevant processes to obtain the appropriate data in a timely manner.
How have the standards changed since the release of the ED ESRS for public consultation?
Following the comments received to its EDs, EFRAG made some extensive changes to its initial proposal, including the following:
  • Revised architecture and enhanced international interoperability.
    • 12 standards instead of 13, since ED ESRS G1 was deleted and its major disclosure requirements were incorporated into draft ESRS 2.
    • The former structural approach of the three reporting pillars (Strategy; Implementation; Performance measurement) has been replaced by a four-pillar approach similar to the architecture of the TCFD and ISSB (Governance; Strategy; Impact, risk and opportunity management; Metrics and targets) to enhance international interoperability.
    • In line with the new structural approach, the topical standards now require the disclosure of targets under the ‘Metrics and targets’ pillar.
    • EFRAG highlights that key concepts, definitions and disclosure requirements in the cross-cutting and climate standards, including financial materiality and value chain, are aligned with those as proposed by ISSB, with changes and additions made where this is required by the CSRD or other EU legislation. EFRAG has stated that its objective is that ESRS compliant reports would also meet all the requirements of the ISSB standards. Details on the level of interoperability are presented in Appendix V to the first set of draft ESRS. EFRAG expects to work on a more detailed mapping once the IFRS Sustainability Standards are finalised.
    • The Application Requirements section of each standard now only contains the following elements: illustrations, examples, basis for calculation and methodologies and definitions of concepts.
  • Revised materiality approach.
    • The ‘rebuttable presumption’ whereby all disclosure requirements are presumed material unless the company has reasonable and supportable evidence to rebut this presumption, has been removed.
    • A materiality assessment still has to be made, but with a reduced scope, because mandatory disclosures have been introduced.
    • The mandatory disclosures that are to be reported irrespective of the outcome of the materiality assessment encompass those of entire standards (draft ESRS 2 and draft ESRS E1) as well as an extensive list of disclosures that emanate from relevant EU legislation (namely, the Sustainable Finance Disclosure Regulation (SFDR)) and other specific disclosures.
    • Regarding the remaining disclosure requirements, there are specific provisions to identify the information to be reported in the event that a sustainability matter is material according to the company’s materiality assessment.
    • Appendix F to draft ESRS 1 contains an illustration of the necessary assessment to identify the information to be reported:
  • Simplification of the content
    Disclosure requirements and its data points were streamlined (redundancies removed, finer definitions, and disclosure requirements and sub-topics merged or reorganised within the draft standards). According to EFRAG, the number of disclosure requirements has been reduced by approximately 40% and the number of datapoints by approximately 50%.
  • Metrics
    A few new metrics have been added (such as monetised total GHG emissions, employee turnover, gender distribution at top management, and employees’ age distribution) while other metrics have been deleted or rendered optional (for example, avoided emissions, training costs, gender breakdowns for disabled workers and anti-competitive behaviour).
  • Phase-in provisions
    These have been introduced to various disclosure requirements and datapoints, namely relating to value chain information, potential financial effects from environment-related impacts, risks and opportunities, and selected requirements of draft ESRS S1 such as adequate wages or social protection for non-employee workers (listed in Appendix D to draft ESRS 1).
When does it apply?
The ESRS will apply to companies within the scope of the CSRD. First-time application as defined by the draft CSRD varies, starting from FY 2024 (reporting in 2025).
Where should the information be reported?
The sustainability statement will be part of the management report, in a dedicated section.
Should the information be audited?
Yes, the CSRD introduces an obligation to provide assurance for the sustainability statement. Initially, limited assurance should be provided, with a planned transition to reasonable assurance in the following years.
What are the next steps?
The drafts will now be assessed by the European Commission, which will consult and request the opinion of several EU authorities and expert groups, such as ESMA (European Securities and Markets Authority) and the Member State Expert Group on Sustainable Finance. Another public consultation with a four-week consultation period might also occur in March or April 2023. The adoption of the ESRS in the way of Delegated Acts is expected by 30 June 2023, followed by a scrutiny period by the European Parliament and the Council. If no objections are raised, the ESRS will be directly applicable to all companies within the scope of the CSRD.
It should be noted that the standards provided are sector-agnostic standards. 40 additional sector-specific (that is, industry-focused) standards will be released with the next set of standards, in phases, over the next few years.
In addition, the CSRD envisages the development of further sets of standards:
  • ESRS specific to small and medium-sized undertakings (SMEs); and
  • ESRS specific to non-EU undertakings.
In addition to the above, the EFRAG Sustainability Reporting Board (SRB) identified items needing further research in the upcoming months relating to topics covered by the first set, such as:
  • threshold for impact materiality, including a reference to the ‘most significant’ impacts, which is a threshold used in the OECD Guidelines, the UN Guiding Principles Reporting Framework and the GRI Standards;
  • potential phase-in provision to allow financial market participants to postpone the inclusion of downstream value chain until the effective date of the future ESRS sector-specific standards;
  • addition of a datapoint disclosing the ethnicity of employees; and
  • data availability and data quality for quantitative disclosures on financial effects arising from opportunities.
Where do I get more details?
You can find more information on the recent sustainability reporting initiatives in the EU and globally:
  • in our EU Newsletter Sustainability Reporting #3, including a comprehensive overview of the ED ESRS;
  • in our EU Newsletter Sustainability Reporting #4, with our major comments on the ED ESRS, the ED from the International Sustainability Standards Board (ISSB), and the climate-related disclosures proposed by the Securities and Exchange Commission (SEC) – all released for public consultation in 2022; and
  • in our In depth on CSRD
For more information, contact Peter Flick, Olivier Scherer, Andreas Ohl or Henry Daubeney.
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