On June 9th, the European Commission launched the four-week period of public feedback on its draft Delegated Act for the first set of the ESRS (European Sustainability Reporting Standards). Following this feedback period, the Delegated Act is expected to be adopted by the Commission in the second to third quarter of 2023.
ESRS is drafted by EFRAG, an association tasked by the European Commission to develop the sustainability standards and related implementation guidelines. In November 2022, EFRAG concluded a public commenting period of four months on its initial draft standards. The public comments were mostly concerned with the cost and implementability of the reporting standards, particularly for small and medium-sized companies, since the original draft requirements were detailed and extensive. After making revisions, EFRAG submitted its draft set of ESRS to the European Commission in accordance with the original regulatory timeline. The following adjustments were made in the submitted standards:
- A significant reduction in the number of disclosures and data points. EFRAG reduced the number of disclosures by 40%, and the number of data points by 50%.
- Importance of inter-operability with other global standards in development, in particular, those developed by ISSB and GRI.
- A more central role for the materiality assessment as a basis for determining the relevant disclosures for the reporting undertaking. Some disclosures and mandatory regardless of the materiality assessment, and these include General Disclosures, climate-related standards, disclosures that are necessary for other parties to satisfy their reporting requirements, and some workforce disclosures.
- A “phasing-in” period for some disclosures of 1 to 3 years on some disclosure, such as the metrics on the value chains, the financial effects arising from climate; breakdown of employees by gender, etc.
A further round of consultations by the European Commission was conducted prior to the drafting of the Delegated Act, and simplifications were made to facilitate adherence to reporting requirements while preserving competitiveness and reducing administrative burden. These modifications include
- Only General Disclosures are not subject to the materiality assessment and mandatory for all reporting undertakings. All other disclosures are subject to the materiality assessment.
- Additional phase-in’s: Companies with less than 750 employees may omit Scope 3 emissions and “own workforce” disclosures in the first year, and on biodiversity, value-chain workers, affected communities, and consumers and end-users in the first two years of reporting; all companies may omit disclosures on anticipated financial effects related to non-climate environmental issues (pollution, water, biodiversity, and resource use); and certain datapoints related to their own workforce (social protection, persons with disabilities, work-related ill-health, and work-life balance) in the first year of reporting.
- Converting additional disclosures from mandatory to voluntary, including biodiversity transition plans, some indicators about “non-employees” in the workforce, and an explanation of why a particular sustainability topic is considered not to be material.
- Further modifications to allow for some flexibility in certain disclosures (e.g., the financial effects arising from sustainability risks, methodology for the materiality assessment process, etc.). Enhanced coherence with EU legal framework, and inter-operability with other global initiatives (ISSB and GRI).
Since the Commission is required to adopt a set of Standards by the end of the second quarter of 2023, this is expected to be very close to the final version. These requirements apply to all large EU and non-EU companies operating in the EU, and they will become active in January 2024.
Update: On July 31, 2023, the EU Commission adopted ESRS for all companies subject to the CSRD.