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The Accounting Directive (2013/34/EU) as amended by the Corporate Sustainability Reporting Directive (CSRD - 2022/24642) requires large companies and listed small and medium-sized companies (SMEs), as well as parent companies of large groups, to include in a dedicated section of their management report the information necessary to understand the company’s impacts on sustainability matters, and the information necessary to understand how sustainability matters affect the company’s development, performance and position.
This information must be reported in accordance with European Sustainability Reporting Standards (ESRS), to be adopted by the Commission by means of delegated acts that must specify the content and, where relevant, the structure to be used to present that information. This information shall include information related to short-, medium- and long-term time horizons, as applicable, and it shall contain:
This delegated act applies from January 2024 to the undertakings that were already subject to the non-financial reporting requirements introduced by the Non-Financial Reporting Directive (NFRD). After recent consultation over the first set of ESRS proposed by the EFRAG, the EU Commission has adopted on July 31, 2023, the final version of European Sustainability Reporting Standards with the following modifications.
The modifications fall into three main categories: (Compare with the First Draft)
Phasing-in certain reporting requirements; On top of certain phase-in provisions already proposed by EFRAG, additional phase-in provisions include certain reporting requirements on biodiversity, and various social issues and mainly apply to companies with fewer than 750 employees. Depending on the topic, the new phase-in provisions postpone the corresponding reporting requirement for 1 or 2 years for the companies concerned.
Giving companies more flexibility to decide exactly what information is relevant (“material”) in their circumstances; This is referred to as making more of the reporting requirements “subject to materiality” (i.e. it allows companies to omit information if it is not relevant in their particular circumstances), as opposed to being mandatory for all companies. but nevertheless proposed that the following be mandatory for all companies: the cross-cutting standard ESRS 2 (“General Disclosures”), which specifies essential information to be disclosed irrespective of which sustainability matter is being considered; the climate standard; some reporting requirements about the company's own workforce; and data points that correspond to information required by financial market participants, benchmark administrators, and financial institutions for their own reporting purposes respectively under the Sustainable Finance Disclosure Regulation (SFDR), the Benchmarks Regulation (BMR) or the “pillar 3” disclosure requirements under the Capital Requirements Regulation (CRR). The Commission decided that all the reporting requirements should be subject to materiality, with the exception of ESRS 2.
Making some of the proposed requirements voluntary. The data points concerned are those currently considered most challenging or costly for companies, such as reporting a biodiversity transition plan and certain indicators about self-employed people and agency workers in the undertaking's own workforce.
If a company concludes that a data point deriving from the SFDR, the BMR, or the CRR is not material, it will have to explicitly state that the data point in question is “not material” rather than just reporting no information. In addition, companies will have to provide a table with all such data points, indicating where they are to be found in their sustainability statement or stating “not material” as appropriate.
ESRS v.s. GRI v.s. ISSB
The Commission has worked to ensure a very high level of alignment between ESRS and the standards of the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI).
From the beginning of the development of the draft ESRS by EFRAG, the GRI served as an important reference point, and many of the reporting requirements in ESRS were inspired by the GRI standards.
Companies that are required to report in accordance with ESRS on climate change will to a very large extent report the same information as companies that will use the ISSB standard on climate-related disclosures. Climate change disclosures under ESRS will provide additional information on impacts relevant for users other than investors such as business partners, trade unions, social partners, and academics.
The very high degree of alignment between ESRS and the two ISSB standards aims to prevent that companies required to report in accordance with ESRS and that wish to also comply with ISSB standards, would have to report separately under ISSB standards.
The Key Differences At The Moment
The ESRS contains topical standards covering the full range of environmental, social, and governance issues, while the ISSB has so far published a detailed topical standard on climate only. In addition, and as required by the CSRD, ESRS explicitly requires reporting on the company's impacts on people and the environment as well as reporting on how social and environmental issues create financial risks and opportunities for the company. The ISSB standards, in contrast, focus more exclusively on how social and environmental issues create financial risks and opportunities for the company.