The European Commission adopted the European Sustainability Reporting Standards (ESRS) on 31 July. The standards are mandatory for all companies covered by the Reporting Directive (CSRD).
The ESRS standards are intended to make it easier to report sustainability information and ensure that the information is comparable, for example when companies apply for funding.
The ESRS standards
The ESRS standards include 12 standards and have been prepared by EFRAG (the European Financial Reporting Advisory Group). The standards contain the general reporting requirements that apply to all covered entities. Each of the 12 standards is accompanied by a reporting template.
The 12 general standards include:
- General: Two standards on general conditions and information about the individual company
- Environment: Five standards relating to the environment, including climate change, water resources, circular economy, pollution and biodiversity.
- Social: Four standards on social conditions, including equal opportunities for all (including gender diversity and equal pay for equal work), labour conditions, respect for human rights, etc.
- Governance: One standard on management, including business conduct such as management's duties in relation to the company's sustainability, corporate ethics and culture, and the company's control and risk management in relation to sustainability risks.
The ESRS standards apply a "dual materiality" perspective.This means that companies must report both on their impacts on people and the environment ('inside-out') and on how social and environmental issues create economic risks and opportunities for the company ('outside-in').
In the coming years, EFRAG will also develop sector-specific standards.
The European Commission's changes to EFRAG's draft
The European Commission has made some significant changes to EFRAG's original draft ESRS standards. The purpose of the changes is to ensure that the standards are proportionate for companies without undermining the achievement of climate and environmental policy objectives.
Phasing in of certain reporting requirements
There are phase-in provisions for some of the reporting requirements. These mainly apply to companies with fewer than 750 employees. The phase-in provisions give companies more time to prepare. In addition, companies are given the opportunity to spread the relatively large initial costs over a number of years. The phasing in will include, among other things, reporting on biodiversity and various social issues. Depending on the topic, the new phase-in provisions postpone the corresponding reporting requirement for one or two years. For most companies, this means that reporting will be postponed from the financial year 2025 to 2026 and 2027, respectively.
Finally, in the first year of mandatory reporting, all companies may omit information on the expected financial impact of pollution, water, biodiversity and circular economy. Companies may also omit certain data points about their own workforce relating to social security, employees with disabilities, occupational diseases and work-life balance.
Materiality assessment of the information
The European Commission has given organisations more flexibility to decide which information is relevant to their business. Except for the general business disclosures, which are specified in ESRS 2, all reporting requirements will be subject to a materiality assessment instead of being mandatory for all companies. (ESRS 2 is Standard No. 2, which contains the general business disclosures. Everyone must report these, i.e. they cannot be sorted out in a materiality assessment)
Voluntary requirements
A limited number of reporting requirements have been made voluntary. These are the data points that are considered to be the most challenging or costly for companies. These include, for example, biodiversity transition plans and certain data points about employees in their own workforce who are not employed by the company.
The CSRD Directive taking effect at different speeds
Companies must start reporting under the ESRS standards according to this timetable:
- Large public interest companies (state-owned public limited companies and listed companies) with more than 500 employees are covered by the CSRD Directive from 1 January 2024, with first reporting for the financial year 2024 in 2025.
- Other large companies with more than 250 employees and/or EUR 40 million in net turnover and/or EUR 20 million in balance sheet total are covered by the CSRD Directive from 1 January 2025 with first reporting for the financial year 2025 in 2026.
- Listed SMEs are covered from 1 January 2026. However, they may opt out of reporting for 2026 and 2027. Full reporting must therefore be done at the latest for the financial year 2028 in 2029.
The delegated act is now with the European Parliament. The ESRS-delegated act adopted by the European Commission will be formally submitted to the European Parliament and the Council for scrutiny in the second half of August. The scrutiny period runs for two months, which may be extended for an additional two months. The European Parliament or the Council may reject the delegated act, but they cannot amend it.
Get ready to report on sustainability in time
It may seem like there is still plenty of time for companies to report according to the new EU rules. However, it is a lot of work that all companies face.
Before the reporting obligation comes into force, each company must carry out a dual materiality assessment. Based on this assessment, the company must disclose the status of all relevant data points in the 12 standards. For some, this report must apply as early as the financial year 2024. For those companies that the Danish Financial Statements Act designates as "large C", the report must cover 2025.
Therefore, we recommend that all companies that will be subject to the reporting requirements obtain an overview of the consequences as soon as possible and prepare a plan for how they will approach the task of meeting the reporting requirements.
For more information about the CSRD Directive