The European Sustainability Reporting Standards – which will supplement the CSRD – are slowly, but surely, being finalised. On 9 June 2023, the European Commission published a draft delegated act setting out the standards. Preliminary work was done by the European Financial Reporting Advisory Group – a non-profit association advising the European Commission on reporting standards endorsement. See our December 2022 article for more information about the CRSD and EFRAG's preliminary work.

Draft delegated act with sustainability reporting standards

The new draft delegated act (DDA) has two annexes. Annex I contains the entire first set of European Sustainability Reporting Standards (ESRS), which includes the cross-cutting standards, and standards for disclosing environmental, social and governance information. The ESRS list is the same as the one that was prepared by the European Financial Reporting Advisory Group (EFRAG):

Cross-cutting standards

• ESRS 1 General requirements
• ESRS 2 General disclosures

Standards on Environmental, Social and Governance matters

• ESRS E1 Climate change
• ESRS E2 Pollution
• ESRS E3 Water and marine resources
• ESRS E4 Biodiversity and ecosystems
• ESRS E5 Resource use and circular economy
• ESRS S1 Own workforce
• ESRS S2 Workers in the value chain
• ESRS S3 Affected communities
• ESRS S4 Consumers and end-users
• ESRS G1 Business conduct

Annex II includes a list of acronyms and a glossary to be used when carrying out sustainability reporting in accordance with the ESRS.

Main changes to EFRAG's preliminary work

The European Commission has made several modifications as compared to the draft ESRS that EFRAG submitted in November 2022. This was done to ensure proportionality and to make sure that undertakings correctly apply the ESRS.

The main changes the Commission made to the EFRAG's draft ESRS relate to:

• Limited baseline reporting: The DDA stipulates that all of the disclosure requirements, including the data points, will be subject to the double materiality assessment, except for the requirements included in ESRS 2 on general disclosures. Only ESRS 2 disclosures will be mandatory irrespective of materiality. This deviates from EFRAG's draft ESRS, which provided for a more extensive baseline reporting as, in addition to ESRS 2, (a) all disclosure requirements and data points related to climate change (ESRS E1); (b) information stemming from other EU legislation; and (c), for undertakings with more than 250 employees, specific disclosure requirements regarding their own workforce, would have been mandatory regardless of the outcome of the materiality assessment.
• Phasing-in of certain requirements: EFRAG's draft ESRS contained a list of disclosure requirements which may be phased in. These included: the three-year window to obtain information from the value chain if not all necessary information on the value chain is readily available, and other phase-ins of between one and three years for other requirements that were deemed more challenging for undertakings. The EC included two additional phase-ins in the DDA:
  • in the first year of applying the standards, undertakings with fewer than 750 employees may omit scope 3 GHG emissions data and disregard the disclosure requirements specified in the standard on “own workforce”. In the first two years of applying the standards, these undertakings may disregard other disclosure requirements, including the standards on biodiversity (ESRS E4); workers in the value-chain (ESRS S2); affected communities (ESRS S3); and consumers (ESRS S4); and
    
  • in the first year of applying the standards, all undertakings may disregard requirements about anticipated financial effects related to non-climate environmental issues, and omit certain datapoints related to their own workforce.

• Making certain disclosures voluntary: EFRAG's draft ESRS included several voluntary disclosure requirements, indicated by the words "may disclose". The Commission has now converted certain mandatory data points (as proposed by EFRAG) into voluntary datapoints. The reporting undertaking, for example, has the discretion to decide whether it wants to explain why the undertaking may consider a certain sustainability topic to not be material. This was mandatory under EFRAG's draft.
• More flexibility in certain mandatory disclosure requirements: In addition to the new voluntary disclosures, the Commission allows for some flexibility in certain mandatory disclosure requirements, such as on the financial effects arising from sustainability risks; stakeholder engagement; and the methodology for the materiality assessment process.
• Coherence with EU legal framework: The Commission has made several technical modifications to EFRAG's draft ESRS to ensure better alignment with other provisions in EU law, such as the Accounting Directive and the Pay Transparency Directive (see for more information on the latter initiative this article).
• Interoperability with global standard-setting initiatives: Modifications have been made to ensure a high degree of interoperability between the ESRS and the climate-related disclosures exposure draft and the general sustainability-related disclosures exposure draft as proposed by the International Sustainability Standards Board, and the standards from the Global Reporting Initiative (GRI).
• Editorial and presentational modifications: Last, the EC has made editorial and presentational changes to improve the clarity, usability, and coherence of the standards.
  
  

Additional guidance

The Commission has announced that it will introduce an interpretation mechanism to provide formal interpretation of the ESRS. The EC has also asked EFRAG to draft additional guidance and educational material, including more information about the materiality assessment.

State of play

The deadline for finalising the DDA is June 2023, but as the feedback period runs until 7 July 2023, this deadline is not going to be met. The Commission intends to adopt the DDA in July 2023, after which the scrutiny period for the European Parliament and the Council will start. The Commission hopes to have a final delegated act in place in the autumn of this year.

Implementation in the Netherlands by way of an order in council is expected to be facilitated by legislation implementing the EU directive as regards disclosure of income tax information.

See our flowchart for the phased applicability of the CSRD.