European Commission adopts European Sustainability Reporting Standards (ESRS)

The European Commission on 31 July formally adopted the European Sustainability Reporting Standards (ESRS), marking a final step in the long project of aligning disclosures across regulations as well as setting the stage for increased interoperability of sustainability reporting further afield.

The ESRS were adopted under the Corporate Sustainability Reporting Directive (CSRD) following a brief public consultation period. In order to reflect feedback, largely from corporate entities, on the potential reporting burden of EFRAG’s initial ESRS proposal, the Commission elected to reduce the volume of data such entities are obliged to disclose. Relative to the proposed draft standards, which we previously outlined here, the final standards appear somewhat weaker with regard to the volume and depth of mandatory disclosure, with many fields now only to be disclosed if deemed adequately material by the reporting entity.

As highlighted in the European Commission’s Q&A, the following key changes have been made:

1. The Commission has introduced additional phase-in provisions for certain reporting requirements. Biodiversity and social components saw the bulk of prolonged phase-in periods, which largely apply to companies with fewer than 750 employees.

2. The Commission has provided more “flexibility” to allow entities to define the precise scope of relevant disclosure by labelling some disclosure requirements as “subject to materiality.” In key disclosure areas, including those relating to climate and the company’s own workforce, the reporting company may now omit information it considers not relevant. Counter to the draft ESRS seen by the Commission, only the “General Disclosures” standard (ESRS 2) is now mandatory for all companies.

3. A number of data points proposed to be mandatory, largely relating to biodiversity planning and extended workforce, have been reduced to voluntary disclosures. The Commission justified the step as necessary to lower the reporting burden associated with reporting of data “currently considered most challenging or costly for companies.”

Benefits beyond the scope of EU regulation

While it is disappointing that the mandatory nature of the ESRS has been diluted, particularly as biodiversity frequently appears on the list of disclosures that are now “subject to materiality,” the final adoption of the ESRS represents a significant step forward in corporate sustainability. In addition to the impressive scale of coverage the ESRS will have under the CSRD, we expect additional benefits beyond the scope of EU regulation:

1. The formalisation of the detail in the “double materiality” perspective outlined in the CSRD expands on previous approaches to materiality reporting and provides an avenue to impact reporting that may be adopted elsewhere. The ESRS require companies to report on their impacts on people and the external environment alongside the reporting of financial risks and opportunities impacted by environmental and social issues. This obligation to report on both sides of the impact equation can be used as a blueprint for understanding the importance of full value chain and broader stakeholder impacts.

2. The high level of alignment and “very high degree of interoperability” between the ESRS standards, International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) will accelerate the availability of quality and comparable sustainability information globally. In addition to benefitting financial market participants and other stakeholders through the accelerated availability of such data, global reporting entities stand to benefit through the avoidance of potential double reporting across jurisdictions. Both the GRI and the ISSB have welcomed the formal adoption of the ESRS.

For additional information, see: European Sustainability Reporting Standards: the introduction and formalisation of concepts.