What do the ESRS require?
On 31 July 2023, the European Commission adopted the first set of ESRS. A further 11 ESRS have been drafted by the European Financial Reporting Advisory Group (EFRAG), ready for future adoption at a date to be confirmed. The ESRS cover the full range of environmental, social, and governance issues, including climate change, biodiversity and human rights, and provide information for investors to understand the ESG impact of the companies in which they invest.
The first set of ESRS provide a list of disclosure requirements, some of which are mandatory. The cross-cutting standard ESRS 2 (“General Disclosures”) specifies essential information that must be disclosed irrespective of which sustainability matter is being considered. Reporting on other data points, such as those relating to biodiversity planning and extended workforce, is voluntary. Whilst there is common ground between the ESRS and other global reporting requirements, the ESRS goes further than previous frameworks and subjects companies to more exacting reporting obligations. For example, companies are expected to collect information on both upstream and downstream operations and produce a digitalised and integrated report with specific formatting requirements.
Who do the ESRS apply to?
The first set of ESRS applies to the following entities:
- companies that were previously subject to the Non-Financial Reporting Directive (NFRD);
- large non-EU listed companies with more than 500 employees;
- listed SMEs (including non-EU listed SMEs); and
- non-EU companies that generate more than €150 million of revenue annually in the EU and that have a branch in the EU with revenue over €40 million or a subsidiary that is a large company or a listed SME.
Timetable
Under the original adoption timetable it was planned that companies previously caught under the NFRD and large non-EU listed entities would be required to begin reporting for financial year 2024. The first reports would be issued in 2025, with other large companies following in 2026. The obligation to issue their first ESRS sustainability statements was scheduled to fall upon listed SMEs in 2027, with the option to opt out for up to two years. Reporting for non-EU companies exceeding the specified turnover and subsidiary thresholds was to commence in the financial year 2028, with first reporting in 2029.
Despite efforts to streamline sustainability reporting in order to reduce the administrative burden placed on companies, the obligations introduced by the ESRS represented a notable increase in the detail required and scope of sustainability reporting. The Commission's reasoning for the delay is to allow companies that will be caught under the ESRS regime more time to adapt to these new requirements and to alleviate the administrative burden. The Commission states in the annexes to the 2024 Programme that the delay, which postpones the deadline for the adoption of the ESRS by two years, will result in “an immediate reduction in the reporting burden for in-scope companies, including SMEs.
Related proposals
As well as the delay to the adoption of the ESRS, the Commission has proposed an adjustment to the reporting thresholds under the CSRD, which it estimates will reduce reporting requirements for more than a million companies. The Commission has also stated its intention to facilitate increased data sharing between financial authorities to avoid duplication.
Practical implications
The Commission's proposals will have a direct impact on the implementation of the CSRD by EU member states and the adaptation of reporting rules for in-scope companies in non-EU jurisdictions. Some countries, such as France, have already published draft legislation setting out the transposition of the CSRD into national law. The transposition deadline is currently set at 6 July 2024. Whilst the UK is not obligated to transpose the CSRD into domestic legislation, some large UK-based companies with EU subsidiaries will be within scope. These companies will now have longer to prepare for the implementation of the ESRS but should be aware that the reporting framework in the UK continues to develop, with the Taskforce for Nature-related Financial Disclosures (TNFD) releasing its final recommendations.
The delay may also have wide-ranging indirect consequences. The CSRD is a significant part of a fast-moving global sustainability reporting landscape which is constantly evolving to harmonise the various regimes. On 4 September 2023 EFRAG issued a statement setting out the relationship between the CSRD and the International Sustainability Standards Board (ISSB) standards (IRFS 1 and IRFS 2), which were published in June 2023. Many stakeholders have been working to identify both common disclosures between the ISSB and ESRS and those which are unique to each, to reduce reporting burden on companies.
Whilst the CSRD was introduced to meet the regulatory goals of the EU, and the ISSB standards created for investors to make better informed capital allocation decisions, they exist in tandem with one another and other sustainability reporting regimes. Changes to the implementation of the CSRD, both in scope and timeline, will likely create ripples as other bodies pivot to reflect these shifts and preserve the much-discussed end goal: streamlined sustainability reporting for reduced duplication and uncertainty, and increased impact. The challenge for companies is to keep abreast of this fast-moving sustainability reporting landscape as it evolves. The ESG team at Norton Rose Fulbright are here to help.
With thanks to Dani Bass and Rebecca Bell for their contributions.
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