Sustainability Blog #12

One of the drawbacks of finishing our blog posts a couple of days before the end of the month is that sometimes it results in omitting the latest news – in this case, the analysis of the newly issued final version of the European Sustainability Reporting Standards (ESRS), which was published on the last day of July. Therefore, the main focus of our August blog will be on the ESRS.

Legislation and regulation

On 31 July, the European Commission published the final text of the Delegated Act containing the first set of European Sustainability Reporting Standards, including cross-cutting and sector agnostic standards covering all ESG matters. Companies within the scope of the Corporate Sustainability Reporting Directive (CSRD) are required to report on sustainability in accordance with the ESRS. The ESRS specify the information, format, and standards for in-scope companies’ disclosures regarding sustainability matters, which cover a wide range of environmental, social, and governance (ESG) matters. Anticipated to take effect on 1 January 2024, this Delegated Act (and consequently the ESRS) aligns with the initial stage of implementing the CSRD for EU-listed businesses that were previously under the scope of the Non-Financial Reporting Directive (NFRD), along with non-EU listed enterprises with over 500 employees. These entities are mandated to release a sustainability report in 2025, covering activities for financial years beginning on or after 1 January 2024. The draft ESRS were published in November 2022, and there have been a lot of negotiations and discussions since then about what the final version of the standards would look like.

What are the main characteristics of the official ESRS?

The ESRS retain the mandatory nature of some sustainability disclosures but introduce a materiality-based reporting approach. While all reporting entities must provide general disclosures under ESRS 2, specific disclosure obligations will only be applicable if they are considered relevant to a company’s business model and operations. The evaluation of materiality must undergo external verification.

There is also a provision in the materiality section that requires a detailed explanation if a reporting entity concludes that climate change is not a material topic. Moreover, in acknowledgement of input from the feedback period back in June, there have been some changes to the terminology around financial materiality to better align with the definition of financial materiality in the IFRS standards. By this and some other adjustments, the ESRS are now much more compatible with other sustainability standards such as GRI and IFRS.

The Commission has also introduced additional phase-ins for certain reporting requirements, particularly for companies with fewer than 750 employees. This approach aims to ease compliance for smaller companies. The phase-ins mainly apply to reporting on biodiversity and social issues.

Here are the 12 final standards:

You can find the full standards here.

Following the adoption of the Delegated Act, there will be a two-month period (potentially extendable by two months) for examination by both the European Parliament and the Council of the European Union. Assuming neither of the co-legislators raises objections after this period, the Delegated Act will come into effect on 1 January 2024. Simultaneously with the legislative process, the European Financial Reporting Advisory Group (EFRAG) is working on developing additional guidance to facilitate the implementation of the ESRS. This forthcoming guidance is expected to address aspects such as the materiality assessment and the inclusion of information related to the value chain. Furthermore, EFRAG has announced its intention to establish a platform for ESRS stakeholders to submit queries regarding the application of the ESRS.

News and publications

On 29 August, the UN Environment Programme and the Net Zero Asset Owner Alliance (NZAOA) opened a public consultation on the fourth edition of their Target Setting Protocol. The Protocol outlines how the Alliance members are to set their science-based intermediate targets. Each new version is intended to make the target-setting framework more robust and sophisticated through the incorporation of new methodologies and approaches.

On the same day, the CDP published an interesting article on the upcoming ESG rating regulation in order to address potential confusion. In the article, the CDP’s Global Director for Policy Engagement and External Affairs, Pietro Bertazzi, welcomes the prospect of heightened attention to ESG ratings and data products, and their ability to leverage data for the benefit of the public. However, he cautions against the potential danger of regulatory fragmentation, which could undermine the intended objectives.