No Match Found
The European Commission (EC) has issued 12 'near final' European Sustainability Reporting Standards (ESRS) for public feedback beginning of June 2023. The EC has assessed whether the draft ESRS submitted by EFRAG late November 2022 comply with CSRD and deliver on the EU’s policy objectives in the context of the European Green Deal.
This assessment did not result in any changes to the overall structure, with the reporting structure of governance, strategy, impact, risk and opportunity management, and metrics and targets, and the broad scope of the environmental, social and governance topics covered.
However, the EC has made a number of changes with the aim of reducing the reporting burden and easing the first-time application of the standards.
All standards, with the exception of ESRS 2, 'General disclosures', are subject to materiality assessment. Companies must determine which sustainability matters in terms of information (standard, disclosure requirement, or data point) are to be considered material on the basis of their materiality assessment. Previously, the EFRAG drafts had a number of mandatory disclosures such as all climate-related disclosures in ESRS E1. These disclosures are no longer required if not material. Only the 'General disclosures' in ESRS 2 will be mandatory.
The EC has introduced additional phase-in provisions to those proposed by EFRAG, and it has further streamlined the phase-in provisions for reporting on anticipated financial effects;
However, the sustainability matters covered by the ESRS mentioned above are still to be included in the materiality assessment. In addition, a brief description of any time-bound targets, policies and actions, as well as the disclosure of relevant metrics, are still required.
The CSRD and the ESRS disclosure requirements are designed to bring sustainability reporting on par with financial reporting over time. ESRS aim to provide a large panel of stakeholders with relevant, comparable and reliable information about a company’s sustainability-related impacts, risks and opportunities. Due to the tight ESRS adoption timeframe, with the first companies having to report using ESRS over FY 2024, companies need to set out to develop new systems, data-gathering processes, and controls necessary to comply with new reporting requirements.
Some disclosures are now voluntary. Examples include the transition plan for biodiversity and ecosystems (ESRS E4) and information on non-employee workers in ESRS S1 (for example, with respect to adequate wages, social protection, and health and safety). An explanation of why certain sustainability topics have been classified as not material is now also a voluntary disclosure.
One example is that ESRS S1 now allows more flexibility with regards to the disclosure of key characteristics of employees by adjusting the threshold for country-specific disclosures from "countries with 50 or more employees" to "countries with 50 or more employees representing at least 10% of total employees". Furthermore, disclosure requirements on the topics of corruption and bribery, as well as protection of whistleblowers (ESRS G1), have had their wording adjusted in order to avoid a conflict with the protection against self-incrimination.
With respect to interoperability with global standard-setting initiatives, the EC states that it has engaged closely with International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) to ensure a high degree of interoperability with ESRS, and further modifications to the draft ESRS have been made in light of that engagement.
The final ESRS will be passed as EU law through the adoption of a delegated act by the EC, making ESRS directly applicable to all companies that are subject to CSRD. This is expected by the end of July 2023 / beginning of August 2023. According to CSRD, the adoption of the delegated act will need to take place before the end of August 2023 in order for ESRS to be applicable for financial years beginning on or after 1 January 2024. The adoption is followed by a two-month (extendable to four months) scrutiny period by the European Parliament and the Council. If no objections are raised, ESRS will apply from 1 January 2024. If objections are raised, the standards cannot be changed, but the process for the first set of ESRS would need to start from scratch.
The standards provided are sector-agnostic standards. Additional sector-specific (that is, industry-focused) standards, ESRS specific to small and medium-sized enterprises (SMEs) and ESRS specific to non-EU companies will be released in phases over the next few years. In parallel, EFRAG is also working on developing guidance to support the application of sector-agnostic standards; this guidance is expected to cover the materiality assessment and the inclusion of value chain information. EFRAG has stated that its tentative plan is to issue these deliverables in Summer 2023. In addition, the EC has announced that it will put in place an interpretation mechanism to provide formal interpretation of the standards.
PwC helps companies with multiple phases of ESG reporting. Our ESG Reporting & Insights Model helps clients choose the right KPIs and subsequently formulate strategies and ambitions. To analyze a company's strategies and ambitions, in this phase we focus on setting up a robust data architecture for this non-financial information. Based on more data, companies can also communicate more transparently about their goals and the status quo; one of the key components of a good ESG report. Then it's time to implement the ESG strategy. We then help monitor progress, adjust the strategy, deepen data systems and retrain employees as needed.
Kees-Jan de Vries
Partner, PwC Netherlands
Tel: +31 (0)61 069 68 28
Partner, PwC Netherlands
Tel: +31 (0)62 030 39 90