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EU Commission’s new reporting standards: a bold step towards corporate sustainability

The European Commission took a significant step towards promoting sustainability reporting by adopting the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainable Reporting Directive (CSRD). The adoption of these standards signals a major advancement in the European Union's journey towards a sustainable economy. The ESRS will require companies to disclose their sustainability-related impacts, opportunities, and risks, with reporting scheduled to commence for certain companies as early as the 2024 financial year.

EU Commission adopts new reporting standards for corporate sustainability_view on a tree nursery as a part of the Hongera Reforestation Project_visual 1View of a tree nursery - Hongera Reforestation Project, DGB. 

The CSRD, set to be implemented at the beginning of 2024, is intended as a substantial update to the current EU sustainability reporting framework, the 2014 Non-Financial Reporting Directive (NFRD). The new standards will significantly expand the number of companies required to provide sustainability disclosures, from approximately 12,000 to over 50,000, and introduce more comprehensive reporting requirements on environmental, human rights, social standards, and sustainability-related risks.

The European Financial Reporting Advisory Group (EFRAG) was tasked with developing the ESRS in June 2020. In November 2022, it submitted its final draft after making adjustments to ease the administrative burden on companies and reduce the number of reporting requirements. In June 2023, the European Commission released a proposed version of the final ESRS, incorporating its own changes, most notably suggesting that all disclosure requirements, except general ones, undergo materiality assessments. This move would enable companies to focus their reporting on sustainability factors they consider most relevant to their businesses. Other changes involve new reporting requirements on Scope 3 emissions and biodiversity-related matters.

Read more: Uncovering the impact of Scope 3 emissions

While the adoption of ESRS was welcomed as a milestone, sustainability-focused investor groups expressed concerns about some aspects of the new rules, particularly the removal of mandatory sustainability disclosures from the CSRD, even though these disclosures were retained in the adopted ESRS. They further raised concerns about the impact of the new amendments on their ability to obtain sustainability-related information and report on their own requirements under the Sustainable Finance Disclosure Regulation (SFDR).

In response to concerns raised by investors, the Commission published a Q&A document explaining that disclosure requirements subject to materiality assessments are not voluntary. Information must be disclosed if it is material, and the materiality assessment process is subject to external assurance. The Commission emphasised that if a company determines climate change to be not material and thus chooses not to report on it, the company must provide a detailed explanation of its materiality assessment conclusions regarding climate change.

Read more: EU's Nature Restoration Law: a paradigm shift for biodiversity and climate resilience

After adopting the new rules, the ESRS delegated act will go to the EU Parliament and Council for two months to be reviewed, where each body can reject but not amend the act.

The ESRS have been developed to improve the quality of sustainability reporting and ensure that the information reported by companies is sufficient, comparable, and reliable. Here are some key differences and new aspects introduced by the ESRS compared to the CSRD:

  1. More detailed reporting standards: The ESRS provide a more detailed set of reporting standards compared to the CSRD. There are 12 ESRS, covering a wide range of sustainability issues.

  2. Materiality assessment: The ESRS introduce a ‘double materiality’ perspective, requiring companies to report on their impacts on people and the environment and on how social and environmental issues create financial risks and opportunities for the company. This is a significant shift from the CSRD, which did not have this dual focus.

  3. Phase-in provisions: Additional phase-in provisions have been introduced for some reporting requirements, mainly for companies with fewer than 750 employees. This gives companies more time to prepare and allows them to spread the initial costs over several years.

  4. Flexibility and voluntary reporting: The ESRS give companies more flexibility to decide what information is relevant in their particular circumstances. This will avoid the costs associated with reporting non-relevant information.

  5. Alignment with global standards: The ESRS have been developed to align with the standards of the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI). This alignment aims to prevent companies required to report under ESRS from having to report separately under ISSB standards.

  6. Reporting timetable: The ESRS have a phased implementation timetable, with different companies required to start reporting at different times. It will apply to companies previously subject to the NFRD and large non-EU listed companies with more than 500 employees starting from the 2024 financial year, with their first reports to be issued in 2025. Other large companies will begin reporting a year later. Listed SMEs, including non-EU listed SMEs, will issue their first ESRS sustainability statements in 2027, with the option to opt out for up to two years. The reporting requirements will also extend to non-EU companies generating more than €150 million of revenue annually in the EU, with the first reporting expected in 2029.

Biodiversity will also play a significant role in reporting under the ESRS:

  • Separate standard for biodiversity: Biodiversity and ecosystems have their own dedicated standard, ESRS E4. This means companies must report on their impacts on biodiversity and ecosystems and how these issues create financial risks and opportunities for the company.
  • Materiality assessment: The reporting requirements under ESRS E4 are subject to a materiality assessment. This means companies will only report on biodiversity and ecosystems if these issues are relevant (material) to their business model and activity. If a company determines that biodiversity is not material, it must provide a detailed explanation of its materiality assessment regarding biodiversity.
  • Phase-in provisions: Phase-in provisions for some reporting requirements have been introduced, including certain requirements on biodiversity. This gives companies more time to prepare for these reporting requirements and allows them to spread the initial costs over several years.
  • Voluntary reporting: Some of the proposed requirements, including reporting a biodiversity transition plan, have been made voluntary. This means companies have the option but are not required to report on these aspects.

At DGB Group, we are passionate about promoting sustainability and being nature positive. The success and transparent regulation of the nature market is vital to achieving our business goals and restoring nature at scale. By participating in the nature market via nature-restoration projects, carbon and biodiversity credits, and green bonds, we help companies and investors reduce their carbon footprint and contribute to a greener, more sustainable future. 

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