In January 2023, the European Union adopted the Corporate Sustainability Reporting Directive (CSRD), which requires EU and non-EU companies with activities in Europe to file annual sustainability reports. These reports need to be prepared in accordance with European Sustainability Reporting Standards (ESRS).
On June 9, 2023, the European Commission published a draft of the first set of ESRS. The draft runs 247 pages long and includes 12 standards in total: 10 topical standards (summarised below) and two cross-cutting standards that provide more detail on how to prepare the sustainability report.
The draft standards
The table below summarises the 10 topical environmental, social and governance (ESG) standards, each of which sets out the data points to be reported and explains when reporting is mandatory and when it is voluntary.
Value chain reporting
The CSRD and reporting standards require EU reporting entities to consider and – where necessary – report on the impacts of their business, and their upstream and downstream value chain, on each of these topics. This is broader than other reporting frameworks.
Materiality
The materiality assessment is the starting point for reporting under the ESRS. Companies are required to assess and report on “material” sustainability-related impacts, risks and opportunities (IROs) in their value chain under each of the 10 topical standards outlined above. If, following the materiality assessment, a given sustainability matter is assessed to be material, the company must disclose against the relevant topical ESRS.
The CSRD follows the “double materiality” principle, meaning that businesses need to consider what is material from both:
- The investor perspective, which means reporting on ESG matters material to the company’s value creation.
- The wider stakeholder perspective, which means reporting on ESG matters material to the company’s impact on the economy, environment, nature and people.
A sustainability matter is “material” for CSRD reporting if either of the two is satisfied. Compared to previous drafts of the ESRS, there is a move away from mandatory disclosures and more of a focus on materiality (e.g., it is only mandatory to disclose climate IROs if material for the business or its value chain). The European Financial Reporting Advisory Group is currently working on guidance to provide more explanations on how companies should conduct their materiality assessments.
Reporting risks
Outside of the mandatory disclosures, the draft ESRS do not require businesses to disclose any information that is nonmaterial to the business. The draft ESRS explain that nonmaterial information is only permitted in narrow circumstances to avoid obscuring material information with puffery. Businesses should be aware of this when drafting their sustainability reports to avoid risks of greenwashing allegations.
Mandatory disclosures
Irrespective of a company’s materiality assessment, the company will always be required to report in full against the disclosure requirements and data points, which are set out in the ESRS on ‘general disclosures’. Mandatory disclosures include the role of management on sustainability matters, the integration of sustainability-related performance incentive schemes and an explanation of the processes used to identify the company’s IROs, how materiality was assessed, and how those IROs deemed material interact with the company’s strategy and business model.
Permitted exclusions
Companies are not required to disclose specific information on intellectual property, know-how or results of innovation, even if such information is material. In addition, certain EU member states may, at national law, also permit companies to omit information on impending developments or matters under negotiation. In each case where a company relies on an exemption, it must disclose this to be the case.
Next steps
Following the public consultation, which closes on July 7, 2023, the European Commission may amend the draft ESRS. The updated draft will then be formally approved and adopted into EU law, which we anticipate before the end of 2023. The law will take the form of an EU regulation that will apply directly in all 27 EU member states. Other sets of standards will be adopted in the coming years for businesses operating in high-risk sectors, small- and medium-sized enterprises, and non-EU parent companies.
This is the last time the standards will be open for comment, so stakeholders are encouraged to provide input. If you have any questions or would like support with submitting comments, please contact a member of Cooley’s international ESG team.
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