As many companies take the first steps towards understanding the impact of the Corporate Sustainability Reporting Directive ("CSRD") on their organisations, a series of seemingly impactful changes to the regime, and corresponding alarming headlines, have emerged. However, while these changes and headlines might make businesses worry that they will need to pivot their plans and processes as a reaction, in practice, many of those currently preparing for CSRD reporting may find that recent developments do not move the dial significantly and they may well still be on the right path towards CSRD compliance.
1 SME Relief Package
The Commission proposed a relief package for small and medium sized enterprises ("SMEs") in September, in response to a challenging geopolitical environment, resulting in high energy costs, difficulty retaining and hiring staff and rising interest rates. The proposed measures included an adjustment of the balance sheet and turnover thresholds which define SMEs, though in other contexts the Commission has acknowledged that this was simply an inflationary adjustment. On 17 October, the Commission adopted a delegated regulation amending the thresholds in the Accounting Directive, with at least a 25% increase on previous levels. A large undertaking is now one which meets two criteria of (a) 250 employees, (b) EUR50m turnover and/ or (c) EUR25m balance sheet. These thresholds must be applied by Member States from 1 January 2024, and they will have discretion to permit undertakings to use them immediately, for the financial year 2023.
In the context of CSRD, this equates to a change in scope – many entities expect to be caught as "large" undertakings or group, and those who are close to the thresholds may need to re-run their scoping analysis closer to 2025 when data collection is likely to begin in earnest. In any event, confirming scope closer to the time that the rules will apply may for some be a necessary exercise, particularly for organisations regularly acquiring or divesting investment businesses or hovering around the "large undertaking" threshold.
The SME Relief Package also discusses a lighter CSRD reporting burden for SMEs – proportionate standards for listed SMEs, and a limit to the amount of information that can be requested from SMEs by large reporters. However preparatory documents suggest that EFRAG's direction of travel is to adopt the same reporting boundaries (i.e., full value chain) and the same list of sustainability topics for in-scope SMEs, so it will be interesting to see what the final SME reporting standards look like.
It was always envisaged that SMEs would be subject to proportionate standards and that data requests from large undertakings to SMEs should be limited – indeed both principles are enshrined in the directive itself. Given that the large reporter's data request to SMEs in its value chain cannot be more extensive than the information to be disclosed pursuant to the LSME standards, it is clear that the shape of the SME reporting standard will be all important in determining just how limited those data requests will be. When published (drafts expected in January 2024 with final versions by 30 June 2024) these will be of interest not just to the SMEs themselves but to the large reporters designing data collection processes around them.
2 "Reporting Relief Package"
In addition to the SME boundary changes detailed above, what was referenced in some headlines as the "Reporting Relief Package" also included an amendment to CSRD itself (or rather, the CSRD-derived provisions of the Accounting Directive). The draft amending Regulation published on 17 October simply delays the date by which both sector-specific standards and international reporting standards must be adopted from 30 June 2024 to 30 June 2026. This was already expected in the case of sector-specific standards, because earlier this year the Commission requested that EFRAG shift its focus from them to prioritise instead the smooth implementation of the sector-agnostic standards, including setting up a Q&A function (which is expected to go live shortly with the first set of questions due to be answered in January 2024).
There is arguably little by way of "relief" in the delay of the publication of sector-specific standards. Reporting entities are under an obligation to report material impacts, risks and opportunities ("IROs") using the disclosure requirements and data points in the ESRS, but this includes a requirement for the reporting of "material entity-specific disclosures". In practice, this means that any IROs which are not sufficiently disclosed under the ESRS topics must be identified, including via the use of existing sector specific standards and technical materials such as SASB and GRI standards, and included in the sustainability report. EFRAG spelled this out explicitly in its draft materiality assessment guidance:
"Given that sector-specific ESRS have not been finalised yet, sector-specific sustainability matters shall be identified and assessed on an entity specific basis as long as the sector standards are not released."
While on the one hand the publication of the sector-specific standards will increase the sheer number of disclosure requirements entities have to cope with, the sector-specific standards do obviate the need for a potentially arduous process at the materiality assessment stage, and an unhelpful lack of guidance at the reporting stage. Without them, the reporting entity is faced with the task of locating and reviewing multiple existing sector-specific standards and benchmarking competitors' reports to determine what sector-specific matters will need to be reported. The lack of sector-specific ESRS also prolongs the pain for investors and other consumers of the sustainability reports, which will naturally lack true comparability for some time to come.
Similarly, the delay in the international reporting standards, though still ahead of the non-EU reporting deadline in 2029, may cause headaches for businesses looking to implement a lengthy project plan for CSRD compliance. It is not known whether the international standards will be as fulsome as the ESRS, though it is easy to see that the Commission will want broadly equivalent disclosures from non-EU companies (particularly given the high bar for recognising equivalence of other international standards – such as the ISSB, see our recent briefing). Non-EU entities looking to get ahead with reporting may therefore need to prepare on the basis that their own disclosure requirements will closely mirror the full ESRS, until the Commission or EFRAG indicates otherwise – assuming that the international ESRS will be significantly watered down risks leaving businesses under-prepared.
3 European Parliament motion to reject the ESRS
The ESRS, though published as a "final" act by the European Commission in July, are currently undergoing scrutiny in the European Parliament and the Council. A motion was raised in the European Parliament to reject the standards and send the Commission back to the drawing board. This motion was rejected on 18 October, effectively "passing" the ESRS. The Council is expected to approve the act, which then means the delegated act containing the standards can finally be published in the Official Journal, entering into force shortly afterwards.
This at least gives businesses the certainty to push on with their ESRS reporting planning and not have to face a further period of uncertainty while the Commission redrafts the ESRS. It is worth noting the extent of the opposition to the ESRS however, which was more than a small minority of MEPs. This might give some indication that future changes to CSRD or ESRS, and potentially the next wave of reporting standards, could face significant challenges in passing through the legislative system.
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