New ESRSs published

Sustainability reporting is developing at high speed

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.

1. Revised materiality approach: all standards with the exception of ESRS 2 “General disclosure”", are subject to materiality assessment.
2. Additional phase-in provisions: more phase-in options – especially for companies with less than 750 employees.
3. Voluntary disclosures and more flexibility: some disclosures are now voluntary. Others provide for more flexibility.
4. Enhanced international operability: significant work done with ISSB and GRI to align definitions.

Additional phase-in provisions

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;

• In their first reporting year, companies will be allowed to omit reporting on anticipated financial effects from all climate and other environment-related impacts, risks and opportunities.
• Companies may limit their disclosures on anticipated financial effects to qualitative disclosures for the first three years of reporting (with limited exceptions and, in the case of climate-related financial effects only if it is impracticable to prepare quantitative disclosures).
• Selected disclosure requirements and data points included in ESRS S1, 'Own workforce', related to social protection, employees with disabilities, health and safety, and work-life balance, can be omitted for the first reporting year.
• Special relief has been introduced for companies and groups not exceeding the average number of 750 employees:
  • For the first reporting year, they may omit all of the ESRS S1, 'Own workforce' disclosure requirements and their scope 3 GHG emissions (data point of ESRS E1, 'Climate change'
  • For the first two reporting years, they may omit reporting on biodiversity and ecosystems (ESRS E4), workers in the value chain (ESRS S2), affected communities (ESRS S3), and consumers and end-users (ESRS S4).

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.

Enhanced operability

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.