The Commission issued its formal consultation on the ESRS with a number of proposed changes.

On 9 June 2023, the European Commission (Commission) issued its formal consultation on the European Sustainability Reporting Standards (ESRS). The ESRS represent the detailed standards which set out the disclosure requirements for companies required to report on sustainability-related impacts, risks, and opportunities under the EU’s Corporate Sustainability Reporting Directive (CSRD).

The revised  ESRS that the Commission is consulting on have been changed in notable ways from the draft set of the ESRS submitted in November 2022 by EFRAG, the technical expert group tasked with helping the Commission develop the ESRS.

Noteworthy Changes

After considering EFRAG’s draft ESRS for several months and undertaking private consultations with Member State governments and EU supervisory agencies, the Commission has made certain key changes to the ESRS to make compliance less demanding for in-scope entities. In particular, the Commission has proposed changes in relation to:

Materiality — All ESRS and disclosure requirements within each ESRS will be subject to a materiality assessment by the reporting entity (based on the CSRD’s “double materiality” standard), with the exception of ESRS 2 regarding “general disclosures”. The Commission expects this change to significantly ease the burden on undertakings and help ensure that the standards are proportionate.

Phasing-in of certain requirements — The Commission has provided for further phase-ins to certain requirements (over and above the existing phase-ins). These additions aim to reduce the reporting burden for undertakings, specifically for smaller companies.

The additional phase-ins that the Commission proposed are the following:

• Entities or reporting groups with fewer than 750 employees may omit disclosures on Scope 3 greenhouse gas emissions data, and disclosure requirements in ESRS S1 on “own workforce” (which covers issues like workforce policies, worker engagement, working conditions, and equal opportunities) in the first year that the standards apply.
• Entities or reporting groups with fewer than 750 employees may omit the disclosure requirements specified in the standards on biodiversity and on value-chain workers, affected communities, and consumers and end-users in the first two years year that  the standards apply.
• All entities may omit the following information in the first year that the standards apply:
  • 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).

Making certain disclosures voluntary — The Commission has converted a number of EFRAG’s proposed mandatory datapoints into voluntary ones. These datapoints include biodiversity transition plans; certain indicators about “non-employees” 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 disclosures — In addition to making certain datapoints voluntary, the Commission has also introduced flexibilities for some of the mandatory datapoints. For example, additional flexibilities would apply in the disclosure requirements on the financial effects arising from sustainability risks, on engagement with stakeholders, and in the methodology to use for the materiality assessment process.

Interoperability with global standard-setting initiatives — TheCommission and EFRAG note that they have continued to engage with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI), and have modified the ESRS to ensure a greater degree of interoperability between the ESRS and these international standards.

The Commission has also identified that it will implement an interpretation mechanism to provide formal interpretation of the standards, and expects EFRAG to provide further guidance for users including in relation to the materiality assessment process.

Next Steps

Stakeholders can submit comments while the consultation remains open for four weeks until 7 July 2023. Once the consultation is closed, we anticipate that the Commission will seek to publish the finalised ESRS over the following weeks, so that they are ready to be applied from the beginning of 2024, when certain companies will need to begin collecting data under the CSRD (particularly given that the ESRS were due to be settled by the end of June 2023). Latham & Watkins will continue to monitor developments in relation to the ESRS and other legal initiatives on corporate sustainability reporting in the EU and globally.