On November 16, 2022, the European Financial Reporting Advisory Group (EFRAG) approved the updated versions of the European Sustainability Reporting Standards (ESRS). The standards outline requirements for detailed corporate reporting on a broad range of environmental, social, and governance (ESG) issues. The new standards are part of Europe’s Corporate Sustainability Reporting Directive (CSRD) which was approved on November 28. The CSRD is expected to enter into force for reporting year 2024, with first submissions due in 2025. It aims to strengthen sustainability reporting requirements under the existing Non-Financial Reporting Directive (NFRD) to improve corporate accountability, as well as the quality, consistency, and comparability of information disclosed.
"For the first time…we are putting sustainability reporting on equal footing with financial reporting. And this is hugely significant. We need accurate and reliable information to ensure investments are being made towards a more sustainable future. Companies need the information to plan their transition plans. And investors need the information to have clarity about what they’re investing in and to combat greenwashing."
– European Commission
What’s EFRAG?
EFRAG was established in 2001 by the European Union (EU) and the private sector to provide technical advice to the European Commission on accounting matters. It was also charged with providing input into the development of IFRS sustainability standards. Its mission is to serve the European public interest by developing and promoting European views in financial and sustainability reporting. On April 21, 2021, as part of the European Green Deal, the EU adopted the initial CSRD proposal, which would amend the existing reporting requirements under the NFRD. The proposal appointed EFRAG as the technical advisor to the Commission responsible for developing the European Sustainability Reporting Standards (ESRS).
“High quality and reliable public reporting by companies will help create a culture of greater public accountability.”
– European Commission
What are the European sustainability reporting standards?
On April 29, 2022, EFRAG released initial exposure drafts of the ESRS and opened a 100-day public consultation period that closed on August 8, 2022. The initial exposure drafts outlined reporting requirements across 13 ESG issues. The 13 ESG issues were categorized into four areas as follows:
Key things that were considered during initial development of the ESRS include:
What were the findings from the ESRS consultation period?
During the 100-day consultation period, EFRAG received feedback from a broad variety of stakeholders, primarily through a two-part online survey. Stakeholders could also submit position papers with or separately from survey responses. According to the consultant who analyzed the feedback, there were 702 responses to the surveys and 298 unique position papers submitted.
Common themes from the survey responses included:
Have the ESRS been updated to reflect the feedback?
Based on the feedback received during the consultation period, some of the changes made to the ESRS include:
EFRAG’s cover note for the ESRS approval outlines specific changes that were made to each ESRS.
What will the EFRAG sustainability reporting standards mean for businesses?
Companies covered by the new rules will have to use the ESRS to disclose how sustainability is embedded across the business and how material ESG impacts, risks, and opportunities are identified and managed. This includes policies, targets, action plans, and performance measurement metrics. More details on what will be required are available in the updated versions of the ESRS across the four areas:
ESRS sector-specific standards are also under development and expected to be adopted by 2024.
Which companies will the EU sustainability reporting standards apply to?
Under the new CSRD rules, approximately 50,000 EU businesses will be required to provide ESG disclosures using the ESRS. This includes all large companies and all listed companies (except listed micro-enterprises). This is more than 4x the number of companies (approximately 11,700 organizations) currently required to provide non-financial reporting under NFRD. According to the European Commission, the reason for the expansion is to ensure “that all large companies are publicly accountable for their impact on people and the environment. It also responds to demands from investors for sustainability information from such companies.”
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