ESG Update: European Commission proposes further streamlining of ESG reporting obligations

The European Commission proposes further streamlining of ESG reporting obligations 

The European Commission draft act adopting the first set of European Sustainability Reporting Standards (ESRSs) has further streamlined reporting obligations, while not affecting the pursuit of the objective of the Corporate Sustainability Reporting Directive (CSRD). This draft act is open for 4 weeks until 7 July 2023.  

This act supplements the Accounting Directive as amended by the CSRD, which requires large companies and listed companies to publish regular reports on the social and environmental risks they face, and on how their activities impact people and the environment. 

The modifications to the draft first set of ESRSs are: 

Materiality:
All standards and all disclosure requirements and data points within each standard will be subject to materiality assessment by the undertaking, with the exception of the disclosure requirements specified in the “General disclosures” standard. This measure is expected to lead to a significant burden reduction for undertakings and helps to ensure that the standards are proportionate. 

Phasing-in for undertakings with less than 750 employees:
– First year: may omit scope 3 GHG emissions data and “own workforce” disclosure requirements; and
– First two years: may omit disclosure requirements for “biodiversity”, “value chain workers”, “affected communities”, and “consumers and end-users”. 

Phasing-in for all undertakings:
– First year: may omit disclosure requirements for anticipated financial effects related to non-climate environmental issues (pollution, water, biodiversity, and resource use); and certain datapoints related to their own workforce (social protection, persons with disabilities, work-related ill-health, and work-life balance). 

Shift to voluntary for certain disclosures:
Certain disclosures that were mandatory in the draft standards are now voluntary, including: biodiversity transition plans; certain indicators about contract staff in the undertaking’s own workforce; and an explanation of why the undertaking may consider a particular sustainability topic not to be material. 

Further flexibilities in certain mandatory disclosures:
These flexibilities cover such areas as: the methodology to use for the materiality assessment process, the disclosure requirements on the financial effects arising from sustainability risks and on engagement with stakeholders. Further flexibilities are included on areas that might be considered to infringe on the right not to self-incriminate. 

Coherence with EU legal framework:
Some technical modifications to ensure better alignment with the Accounting Directive and other EU legal instruments. 

Interoperability with global standard-setting initiatives:
Further modifications in light of ongoing engagement with the International Sustainability Standards Board and the Global Reporting Initiative. 

Editorial and presentational modifications:
To improve the clarity, usability, and coherence of the standards, including for example a drafting convention to clearly identify all terms for which ESRS has a precise definition. 

Implementation 

The Commission anticipates that the proposed additional phase-in measures and other modifications will reduce the annual costs of compliance by a total of EUR 1,402 million compared to the draft standards proposed by the European Financial Reporting Advisory Group (EFRAG). 

The Commission is putting in place an interpretation mechanism to provide formal interpretation of the standards. The Commission has also asked the EFRAG to publish additional guidance and educational material, addressing the materiality assessment process and other issues. 

This act shall apply for financial years beginning on or after 1 January 2024 in accordance with the phase-in approach set out in Article 5 of the CSRD, and shall be binding in its entirety and directly applicable in all Member States when it enters into force. 

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