Following MEP backing for CSRD, disclosure requirements for the largest companies will go live from 2024.
The European Financial Reporting Advisory Group (EFRAG) has approved the final version of the European sustainability reporting standards (ESRSs) this week. It is expected that they will be adopted by the European Commission by mid-2023, six months before the first round of Corporate Sustainability Reporting Directive (CSRD) reporting commences.
The sector-agnostic standards, which will be mandatory for all companies falling under the scope of the CSRD, apply a double materiality lens, requiring entities to disclose sustainability-related impacts, opportunities and risks. They may be further tweaked by EFRAG up until they are submitted to the Commission next week.
“The feedback to the public consultation run by EFRAG over the summer indicated that the original proposals for the ESRSs were too heavy for the reporting companies, so we understand there has been a lot of streamlining,” Aleksandra Palinska, Executive Director of Eurosif and recently appointed member of EFRAG’s Sustainability Reporting Board, told ESG Investor.
The standards’ overarching themes have been reduced from 13 to 12 (by merging the two previously proposed governance categories into one, titled business conduct), disclosure requirements from 136 to 84, and quantitative and qualitative datapoints from 2,161 to 1,144.
EFRAG has also responded to criticism of its ‘rebuttable presumption’ proposal. The draft standards outlined that all disclosure requirements should be deemed material to all companies concerned. However, in instances a theme or sub-topic is not considered material by the company, it would have to provide evidence – a rebuttal – explaining why it does not need to report against that theme or sub-topic.
The UN-convened Principles for Responsible Investment (PRI) noted that the proposed approach would be impractical for investors, as they would have to compare and verify each investee company’s materiality assessments. Further, the requirement to explicitly rebut materiality with supporting evidence would only add to the reporting burden for corporates, the PRI added.
“The final proposal reflects a higher scope of materiality assessment, eliminating the burden of having to justify and explain the omission of specific information under the rebuttable presumption,” EFRAG has said.
Once the updated standards have been officially submitted, the Commission will cross-check the ESRSs to ensure they are in line with the legal requirements of CSRD and the wider EU regulatory framework.
The Commission will also consult with the European Supervisory Authorities, EU agencies and the Member State Expert Group on Sustainable Finance before it publishes the final draft standards for stakeholder feedback in Spring 2023. Pending that feedback, the ESRSs will be adopted by Summer 2023.
“The ESRS are built from the articulation of mandatory reporting and companies’ materiality assessment of impacts, risks and opportunities, which guarantees the availability and comparability of information while ensuring flexibility for businesses,” said Susanna Arus, EU Public Affairs Manager at law firm Frank Bold.
EFRAG has begun work on more tailored ESRSs for ten ‘high risk’ sectors, which Palinska says will follow a similar timeline to the sector-agnostic standards, just a year later.
Making compromises
EFRAG’s agreement on the ESRSs follows the adoption of the CSRD by the European Parliament last week, which is expected to be formally adopted by the Council later this month and written into law 20 days after that.
“We were very happy to see overwhelming support for the CSRD in Parliament. It’s one of the cornerstones of the EU’s sustainable finance agenda and it’s connected to a number of different files that will impact companies, investors and society at large,” said Arus.
The CSRD will apply to up to 50,000 companies, compared to the roughly 12,000 covered by the Non-Financial Reporting Directive (NFRD).
From 1 January, 2024, large companies with over 500 employees will be required to prepare their CSRD-aligned reports to submit in 2025. The following year, these rules will be extended to cover large companies with more than 250 employees and/or EUR 40 million in turnover and/or EUR 20 million in total assets. The year after that, the CSRD will cover listed SMEs and other undertakings, although they will be allowed to opt-out until 2028, when the reporting requirements will then become mandatory.
However, the delayed timeline from that originally set out has been disappointing for investors who already have to comply with disclosure rules under the Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy Regulation.
“Investors urgently need improved comparable and reliable corporate sustainability-related disclosures. That being said, we recognise that the CSRD implementation timeline is a result of a compromise of different interests and challenges and is already very challenging for the reporting companies, as well as EFRAG and the experts involved in the development of the standards,” said Eurosif’s Palinska.
According to Frank Bold’s Arus, companies already reporting under NFRD could begin reporting under the CSRD rules early.
“We understand that there needs to be more time for SMEs, but for all large companies (listed and unlisted) with more than 250 employees, it is to their advantage to start reporting under the new rules as soon as possible,” she said.
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