Why is the Commission adopting European Sustainability Reporting Standards (ESRS)?
EU law requires all large companies and all listed companies (except
listed micro-enterprises) to disclose information on what they see as
the risks and opportunities arising from social and environmental
issues, and on the impact of their activities on people and the
environment. This helps investors, civil society organisations,
consumers and other stakeholders to evaluate the sustainability
performance of companies, as part of the European green deal.
Nonetheless, there is ample evidence that the sustainability
information that companies currently report is not sufficient. They
often omit information that investors and other stakeholders think is
important. Reported information can be hard to compare from company to
company, and users of the information, such as investors, are often
unsure whether they can trust it.
Problems in the quality of sustainability reporting have knock-on
effects. It means that investors lack a reliable overview of
sustainability-related risks to which companies are exposed. Investors
increasingly should be made aware about the impact of companies on
people and the environment and their plans to reduce such impacts in the
future. This knowledge will help them to meet their own disclosure
requirements under the Sustainable Finance Disclosure Regulation (SFDR).
More generally, if the market for green investments is to be credible,
investors need to know about the sustainability impact of the companies
in which they invest. Without such information, money cannot be
channelled towards environmentally friendly activities.
That is why, in line with the Corporate Sustainability Reporting Directive (CSRD),
which outlines the obligation for companies to use standards to fulfil
their legal sustainability reporting obligations, the Commission is
adopting common standards which will help companies to
communicate and manage their sustainability performance more
efficiently and therefore to have better access to sustainable finance.
The European Sustainability Reporting Standards (ESRS) will be
mandatory for use by companies that are obliged by the Accounting
Directive to report certain sustainability information. By requiring the
use of common standards, the Accounting Directive, as amended by the CSRD in 2022, aims to ensure that companies across the EU report comparable and reliable sustainability information.
Common standards are expected to help companies to reduce reporting
costs in the medium and long term, by avoiding the use of multiple
voluntary standards as this is the case today. Currently, problems in
the quality of sustainability reporting create an accountability gap.
High quality and reliable public reporting by companies will help create
a culture of greater public accountability.
How have the ESRS been developed?
In accordance with the provisions of the Accounting Directive, as
amended by the CSRD, the standards adopted by the Commission are based
on technical advice (draft standards)
from EFRAG. EFRAG (previously known as the European Financial Reporting
Advisory Group) is an independent, multistakeholder advisory body,
majority funded by the EU. Its draft standards are developed with the
close involvement of investors, companies, auditors, civil society,
trade unions, academics and national standard-setters.
EFRAG submitted its draft standards to the Commission in November
2022, after having run a public consultation on initial draft standards
earlier last year. Further to that consultation, EFRAG made substantial
modifications to its initial drafts before submission to the Commission
with a particular view on reducing administrative burden for companies,
including reducing the number of reporting requirements by nearly half.
Earlier this year, as required by the Accounting Directive, the
Commission consulted Member States on the draft standards submitted by
EFRAG, along with various EU bodies such as the 3 European Supervisory
Authorities (the European Securities and Markets Authority, the European
Banking Authority and the European Insurance and Occupational Pensions
Authority),the European Environment Agency, the European Union Agency
for Fundamental Rights, the European Central Bank, the Committee of
European Auditing Oversight Bodies and the Platform on Sustainable
Finance.
In accordance with its Better Regulation Guidelines, the Commission
also published the proposed final ESRS on the Have Your Say portal in
early June for a 4-week period of public comment.
What will companies have to report?
As required by the Accounting Directive, as amended by the CSRD, the
ESRS take a “double materiality” perspective – that is to say, they
oblige companies to report both on their impacts on people and the
environment, and on how social and environmental issues create financial
risks and opportunities for the company.
There are 12 ESRS, covering the full range of sustainability issues, in line with EFRAG's proposal:
|
Group
|
Number
|
Subject
|
|
Cross-cutting
|
ESRS 1
|
General Requirements
|
|
Cross-cutting
|
ESRS 2
|
General Disclosures
|
|
Environment
|
ESRS E1
|
Climate
|
|
Environment
|
ESRS E2
|
Pollution
|
|
Environment
|
ESRS E3
|
Water and marine resources
|
|
Environment
|
ESRS E4
|
Biodiversity and ecosystems
|
|
Environment
|
ESRS E5
|
Resource use and circular economy
|
|
Social
|
ESRS S1
|
Own workforce
|
|
Social
|
ESRS S2
|
Workers in the value chain
|
|
Social
|
ESRS S3
|
Affected communities
|
|
Social
|
ESRS S4
|
Consumers and end users
|
|
Governance
|
ESRS G1
|
Business conduct
|
ESRS 1 (“General Requirements”) sets general principles to be applied
when reporting according to ESRS and does not itself set specific
disclosure requirements. ESRS 2 (“General Disclosures”) specifies
essential information to be disclosed irrespective of which
sustainability matter is being considered. ESRS 2 is mandatory for all
companies under the CSRD scope.
All the other standards and the individual disclosure requirements
and datapoints within them are subject to a materiality assessment. This
means that the company will report only relevant information and may
omit the information in question that is not relevant (“material”) for
its business model and activity.
Disclosure requirements subject to materiality are not voluntary. The
information in question must be disclosed if it is material, and the
undertaking's materiality assessment process is subject to external
assurance in accordance with the provisions of the Accounting Directive.
The standards require undertakings to perform a robust materiality
assessment to ensure that all sustainability information necessary to
meet the objectives and requirements of the Accounting Directive will be
disclosed.
If a company concludes that climate change is not a material topic
and therefore does not report in accordance with that standard, it has
to provide a detailed explanation of the conclusions of its materiality
assessment with regard to climate change. This requirement reflects the
fact that climate change has wide-ranging and systemic impacts across
the economy.
What modifications did the Commission make compared to the draft standards developed by EFRAG?
The Commission made a number of modifications to the draft standards
submitted by EFRAG. These modifications ensure that the standards are
proportionate, without undermining the achievement of the policy
objectives. The modifications fall into three main categories:
phasing-in certain reporting requirements; giving companies more
flexibility to decide exactly what information is relevant (“material”)
in their circumstances; and making some of the proposed requirements
voluntary.
Firstly, the Commission has introduced some
additional phase-in provisions for some of the reporting requirements,
on top of certain phase-in provisions already proposed by EFRAG. These
additional phase-ins mainly apply to companies with fewer than 750
employees. The costs of reporting are relatively higher for such
companies compared to larger companies, and they have generally not
previously been subject to sustainability requirements. The additional
phase-in provisions give companies more time to prepare, allow them to
spread the initial costs over a number of years and should result in
higher quality reporting. The additional phase-ins focus on those
reporting requirements considered more challenging for companies. They
include certain reporting requirements on biodiversity and on various
social issues. Depending on the topic, the new phase-in provisions
postpone the corresponding reporting requirement for 1 or 2 years for
the companies concerned.
Secondly, the Commission has given companies more
flexibility to decide exactly what information is relevant in their
particular circumstances. This will avoid the costs associated with
reporting information that may not be relevant. 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.
EFRAG proposed that the majority of the standards would be subject to
materiality assessment, 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 datapoints 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.
Thirdly, the Commission made a limited number of
reporting requirements voluntary instead of mandatory. The draft
standards submitted by EFRAG already included many voluntary datapoints.
The Commission further converted a number of the mandatory datapoints
proposed by EFRAG into voluntary datapoints. The datapoints 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.
What does the approach to materiality mean for coherence with other pieces of EU legislation on sustainable finance?
ESRS contain a series of clearly identified datapoints that
correspond to specific information that financial market participants,
benchmark administrators and financial institutions need for their own
reporting purposes respectively under the Sustainable Finance Disclosure
Regulation (SFDR), the Benchmark Regulation (BMR) or the “pillar 3”
disclosure requirements under the Capital Requirements Regulation (CRR).
If a company concludes that a datapoint deriving from the SFDR, the
BMR or the CRR is not material, it will have to explicitly state that
the datapoint in question is “not material” rather than just reporting
no information. In addition, companies will have to provide a table with
all such datapoints, indicating where they are to be found in its
sustainability statement or stating “not material” as appropriate.
These provisions aim to facilitate the compliance of financial market
participants, benchmarks administrators and financial institutions with
their own disclosure obligations respectively under the SFDR, the BMR
and the CRR.
Further clarifications will be provided under the respective
frameworks or related implementing standards regarding the approach to
be taken when a company has assessed a datapoint derived from the SFDR,
the BMR or the CRR as not material and has therefore stated “not
material” in its reporting. Financial market participants and financial
advisers may assume that any indicator reported as non-material by an
investee company does not contribute to the corresponding indicator of
principal adverse impacts in the context of the SFDR disclosures.
What about SMEs?
The Accounting Directive, as amended by the CSRD, imposes no new reporting requirements on SMEs, except listed SMEs.
For listed SMEs, the Accounting Directive nevertheless provides for a
proportionate reporting regime. Listed SMEs are not required to report
sustainability information until financial year 2026, with the
possibility of an additional two-year opt-out after that. In addition,
listed SMEs may report according to separate, proportionate standards
that will be less demanding than the full set of ESRS that the
Commission has just adopted. EFRAG is currently developing the draft
versions of the proportionate standards for listed SMEs.
Some non-listed SMEs, which are not subject to any sustainability
reporting requirements under the Accounting Directive, may nevertheless
receive requests for sustainability information from customers, banks,
investors or other stakeholders. EFRAG is therefore also developing
simpler, voluntary standards for use by non-listed SMEs. These voluntary
standards should enable non-listed SMEs to respond to request for
sustainability information in an efficient and proportionate manner, and
so facilitate their participation in the transition to a sustainable
economy.
In addition, the Accounting Directive states that the standards for
listed SMEs will legally cap the information which ESRS can require
large undertakings to obtain from SMEs in their value chains. This
provision provides further safeguards against disproportionate
trickle-down effects on reporting requirements on SMEs which are in the
value-chains of larger companies.
Where can companies get further guidance on the application of ESRS?
EFRAG will periodically publish additional non-binding technical
guidance on the application of ESRS. Given its expertise and its role,
set out in the Accounting Directive as amended by the CSRD, as the
Commission's technical advisor on the development of ESRS, EFRAG is very
well placed to provide such guidance.
The Commission has suggested that EFRAG prioritises the development
of guidance on materiality assessment and on reporting with regard to
value chains. EFRAG expects to publish draft guidance on these two
issues for public consultation in the near future.
EFRAG will shortly host a portal for technical questions that
companies, or other stakeholders may have about the application of ESRS.
Where appropriate, the Commission will consider providing guidance on questions concerning legal interpretation of the ESRS.
EFRAG will continue its joint work with the ISSB on optimising the
interoperability of overlapping ESRS and ISSB standards, which is
relevant for companies required to use ESRS and that wish to comply in
addition with ISSB standards.
Are ESRS aligned with global standards?
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 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.
The ESRS and the first two standards of the ISSB, which were
published in June, have been developed in parallel. Intensive and
constructive discussions between the Commission, EFRAG and the ISSB have
ensured a very high degree of alignment where the two sets of standards
overlap.
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 aim 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.
With the adoption of the ESRS, the EU goes further than any other
major jurisdiction to date in terms of integrating the ISSB standards
into its own legal framework. In doing so, the EU makes a major
contribution towards the development of a coherent global framework and
towards the global comparability of reported sustainability information.
The approach of integrating ISSB disclosure requirements into ESRS is
also fully in line with the ambition of the recent IOSCO decision to
endorse ISSB sustainability-related disclosure standards.
At the same time, ESRS are consistent with the EU's own political
ambitions with regard to sustainable finance and the European Green
Deal. 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 require 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.
What happens next and when do companies have to apply European Sustainability Reporting Standards?
The ESRS delegated act adopted by the Commission will be formally
transmitted in the second half of August to the European Parliament and
to the Council for scrutiny. The scrutiny period runs for two months,
extendable by a further two months. The European Parliament or the
Council may reject the delegated act, but they may not amend it.
Companies will have to start reporting under ESRS according to the following timetable:
- Companies previously subject to the Non-Financial Reporting
Directive (NFRD) (large listed companies, large banks and large
insurance undertakings – all if they have more than 500 employees), as
well as large non-EU listed companies with more than 500 employees:
financial year 2024, with first sustainability statement published in
2025.
- Other large companies, including other large non-EU listed
companies: financial year 2025, with first sustainability statement
published in 2026.
- Listed SMEs, including non-EU listed SMEs: financial year 2026, with
first sustainability statements published in 2027. However, listed
SMEs may decide to opt out of the reporting requirements for a further
two years. The last possible date for a listed SME to start reporting is
financial year 2028, with first sustainability statement published in
2029.
In addition, non-EU companies that generate over EUR 150 million per
year in the EU and that have in the EU either a branch with a turnover
exceeding EUR 40 million or a subsidiary that is a large company or a
listed SME will have to report on the sustainability impacts at the
group level of that non-EU company as from financial year 2028, with
first sustainability statement published in 2029. Separate standards
will be adopted specifically for this case.
For more information
Implementing and delegated acts - CSRD
