ESRS standards

The European Sustainability Reporting Standards

On 31 July 2023, the European Commission (EC) adopted the final delegated act of the European Sustainability Reporting Standards (ESRS). The delegated act, including its appendices, is available in all EU Member States’ languages. The ESRS are the sustainability reporting standards that underpin the Corporate Sustainability Reporting Directive (CSRD).

The aim of the CSRD, which has been in force since January 2023, is to bring sustainability reporting on a par with financial reporting. To achieve this objective, companies must provide relevant, comparable and reliable information on their sustainability-related impacts, risks and opportunities. The ESRS include detailed and standardized disclosure requirements for companies to report on environmental, social and governance matters.

The ESRS consists of 12 standards of which two cross-cutting standards and ten topical standards. The cross-cutting standards define the general reporting principles and the CSRD fundamental concepts, including double materiality and reporting boundaries, as well as the overarching disclosures that are to be made by all companies within the scope of the CSRD. The 10 topical standards include specific reporting requirements for environmental, social and governance matters:

The final ESRS reflect updates to the 12 previous draft ESRS that were issued by the EC for public feedback on 9 June 2023.

The main changes made after the feedback period in June 2023 include:

The terminology around financial materiality to align further with the definition of financial materiality in the IFRS sustainability disclosure standards.
A provision within the materiality section which requires a detailed explanation where a reporting entity concludes that climate change is not a material topic.
An additional provision to facilitate the compliance of financial market participants, benchmark administrators and financial institutions with their own disclosure obligations from other EU law: if the reporting entity concludes that a data point derived from such EU law is not material, it shall explicitly state that the data point in question is 'not material'.
A requirement to disclose a table with all data points derived from other EU law, indicating where they are to be found in an entity's sustainability statement or stating 'not material' as appropriate.

Materiality assessment

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.

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.

Voluntary disclosures

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.

Flexibility in certain disclosures

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.

International interoperability

The EC has stressed the importance of the alignment of the ESRS with global standards such as the IFRS sustainability disclosure standards and the Global Reporting Initiative (GRI). In its press release about the adoption of the ESRS, the International Sustainability Standards Board (ISSB) confirmed the high degree of alignment between its and the ESRS climate disclosures. Furthermore, interoperability guidance material from the EC, EFRAG and ISSB, which is due out shortly, should assist entities in navigating between the standards and understand where there are incremental or different disclosures required by one of the two sets of standards.

What are the next steps?

After the adoption of the delegated act, a two-month scrutiny period (with a possible two months’ extension) by the European Parliament and the Council of the European Union will begin. Once the scrutiny period is over and assuming that neither of the co-legislators objects, the delegated act will apply from 1 January 2024.

Parallel to the legislative process, EFRAG is working on developing further guidance to support the application of the ESRS. This guidance is expected to cover the materiality assessment and the inclusion of value chain information. In addition, EFRAG has announced that it will put in place an access point for ESRS stakeholders to provide application questions on the ESRS.

How PwC can help with ESG Reporting

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.