ESRS: Acting on the basis of the European Sustainability Reporting Standards

The European Corporate Sustainability Reporting Directive (CSRD) requires companies to consider ESRS. These are prepared by the European Financial Reporting Advisory Group (EFRAG) and forwarded to the European Commission. The ESRS regulate both the content and the format of information on sustainability topics. The aim is to meet the need for high quality, comparable and relevant information.

The ESRS put the disclosure of sustainability information on the same level as financial information and define which qualitative and quantitative information must be recorded by companies - both retrospectively and forward-looking.

What are the biggest challenges for companies?

The ESRS represent a significant change because they introduce demanding transparency obligations regarding the sustainability of corporate actions. In addition, sustainability statements must be audited. Initially, a limited level of assurance regarding compliance with the ESRS is required, which can later be expanded to an appropriate level of assurance.

As a first step, companies should check whether they fall within the scope of the CSRD and when they have to publish sustainability statements according to the ESRS for the first time.

The implementation of the ESRS poses challenges for companies depending on their compliance with the Non-Financial Reporting Directive (NFRD) and the location of the company in the Member State, as the NFRD provides considerable leeway to Member States when transposing it into national law. In any case, the initial implementation of Set 1 requires a revision of the materiality analysis for the entire value chain. This will require careful analysis of the ESRS disclosure requirements and data points to identify material information that covers the sustainability impacts, risks and opportunities that the company has identified.

What are the main features of the ESRS?

Under ESRS, sustainability-related information takes a dual materiality approach to the full range of environmental, social and governance (ESG) issues. Companies must report both on the impact of their operations on people and the environment and on the impact of sustainability factors on themselves. While this first set of ESRS covers all non-sector information, sector-specific standards will later complement these non-sector standards. This is another important step, as most sustainability-related topics are only relevant with regard to specific sectors. In addition, company-specific information may also need to be presented.

The reporting structure of the ESRS is based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Thus, the ESRS cover governance, strategy, management of impacts, risks and opportunities, and metrics and targets.

Set 1 includes 12 draft non-sector standards, two cross-sector standards, and ten thematic standards, including five on environmental issues, four on social issues, and one on governance.

When the European Financial Reporting Advisory Group (EFRAG) drafted the ESRS, it ensured that its proposals were consistent with other EU legislation, for example, the Sustainable Finance Disclosure Regulation (SFDR) in relation to the indicators for key adverse impacts, or with the information required in the regulatory technical standards for sector-independent disclosures by the European Banking Authority (EBA) under Pillar 3.

The sustainability statements must be presented in a clearly identifiable section of the management report - in digital form using the European Single Electronic Format (ESEF) based on an XBRL taxonomy yet to follow.

What has changed compared to previous drafts?

EFRAG has simplified its proposals and disclosure requirements based on stakeholder feedback received during briefings and the public consultation earlier this year. In doing so, unnecessary complexity has been eliminated and disclosure requirements have been reduced to non-sector specific information necessary to meet the CSRD requirements. The number of disclosure requirements and data points was significantly reduced to avoid more detailed information. In addition, cost-benefit analyses were performed.

In addition, the materiality approach was clarified and simplified. Most importantly, the much criticized "rebuttable presumption" has been abolished, with some specific information being mandatory in all cases and not subject to the materiality approach. This mainly affects ESRS 2 on general requirements, ESRS E1 on climate change, and sustainability information required by other EU legislation such as the SFDR or by Pillar 3.

Set 1 proposes a closer alignment with international guidance on due diligence, but without prejudging the content of the future Corporate Sustainability Due Diligence Directive (CSDDD), the draft text of which was published in February 2022.

Last but not least, as required by the CSRD, Set 1 has been further aligned with international initiatives to promote interaction with global standard-setting initiatives as much as possible, especially with the International Sustainability Standards Board (ISSB). IFRS S1 on general requirements and IFRS S2 on climate-related disclosures are expected to be published as early as possible in 2023. The ESRS drafts also adopt the content of the Global Reporting Initiative (GRI) standards as far as possible.

What comes next?

Set 1 will be adopted by the European Commission by June 30, 2023, through delegated acts that do not require transposition into national law. After that, the European Parliament and Council will launch a review phase. Meanwhile, the European Commission will consult various groups, committees and agencies, including the European Securities and Markets Authority (ESMA), to ensure that the ESRS take into account the views of Member States and are consistent with relevant EU policies and legislation. Therefore, there is a possibility of further amendments to the standards.

By June 30, 2023, the European Sustainability Reporting Framework will be complemented by sector-specific standards that will be mandatory for all large companies and initially cover ten sectors. In addition, standards for listed small and medium-sized enterprises (SMEs), standards for non-EU companies and voluntary guidelines for unlisted SMEs will be issued. In the following two years, 31 more sector standards will follow.

With regard to the transitional provisions, there is the option for companies applying the ESRS for the first time to defer the disclosure of comparative information by one year. In addition, it was decided to introduce a phased approach for less mature topics, in particular by giving a three-year deferral to information on the value chain and potential financial impacts of material environment-related risks and opportunities.

Looking ahead, the ESRS provide a solid foundation for reporting sustainability information. In the meantime, companies should prepare as soon as possible to comply with the new requirements and make them a strategic lever for their sustainability and business performance.

For detailed information on the ESRS and its implications, see our compact ESRS guide.