The adoption of the standards marks a key milestone for reporting under the CSRD.

On 31 July 2023, the European Commission (Commission) adopted the European Sustainability Reporting Standards (ESRS),[1] following a four week-long public consultation period.

Background to the CSRD and ESRS

The ESRS represent the standards which set out the specific disclosure requirements for companies that will be required to report on sustainability-related impacts, risks, and opportunities under the EU’s Corporate Sustainability Reporting Directive (CSRD).

The CSRD was announced in 2021 as part of the European Green Deal. The CSRD will amend existing reporting requirements under the Non-Financial Reporting Directive (NFRD) and the EU hopes that CSRD will enhance the comparability and consistency of reported sustainability information from companies in the EU (and beyond). The CSRD will considerably increase the scope of companies required to report, as well as the level of detail required within disclosures.

For further background to the CSRD and ESRS, refer to the developments timeline below with links to relevant thought leadership at key stages of the process.

Developments Timeline

The CSRD includes a phase-in approach for companies required to report, with requirements beginning in 2025 in relation to the 2024 financial year. See the below table for further details.

Future Reporting Requirements

Q&A on Adopted ESRS

The Commission also released a Q&A document on the adoption of the ESRS. Key points include:

Materiality assessment process — As per the Commission’s consultation in June 2023, all disclosure requirements, with the exception of those under ESRS 2, are subject to a materiality assessment.

In the Q&A, the Commission stresses that these disclosure requirements are not voluntary, and there must be disclosure if information is material.

The standards require a robust materiality assessment to ensure the disclosure of all sustainability information necessary to meet the objectives and requirements of the amended Accounting Directive.

In particular, the Commission notes that if climate change is not considered a material topic, and therefore no disclosures are made under the climate standard ESRS E1, the undertaking is required to provide a “detailed explanation” of the materiality assessment and conclusions that led to the determination that climate change was not a material topic. This obligation reflects the Commission’s view of the “wide-ranging and systemic impacts” of climate change across the economy.

Some commentators have expressed disappointment that the Commission has opted to move away from the mandatory core sustainability disclosures, as proposed in the original drafts from EFRAG in which key climate disclosures such as Scope 1, 2, and 3 emissions were mandatory. The groups highlight the importance of assurance work to ensure that all material topics are included in the sustainability statements for increased reliability and comparability.

Guidance on the application of the ESRS — EFRAG will periodically publish additional non-binding technical guidance on the application of the ESRS.

The Commission has suggested that EFRAG should prioritise guidance on the topics of materiality assessment and value-chains reporting. EFRAG expect to publish draft guidance on these issues for public consultation.

EFRAG will soon launch a portal for technical questions that companies or other stakeholders may have on the application of the ESRS.

The Q&A document contains further information on the ESRS, timeline of application, and alignment with global standards including ISSB.

Latham & Watkins will continue to monitor relevant sustainability reporting developments globally.

Endnotes

[1] The 12 ESRS that have been published include two cross-cutting ESRS (ESRS 1 General Requirements and ESRS 2 General Disclosures), and 10 topical ESRS (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 Consumer and End-Users, and ESRS G1 Business Conduct).