August 28, 2023

ESRS vs. ISSB Standards - a Comparative Approach

Tannenbaum Helpern Syracuse & Hirschtritt LLP

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On July 31, 2023, the European Commission adopted the first set of European Sustainability Reporting Standards (“ESRS”), which, as indicated by the name, are common standards that will be mandated for use by in-scope European companies and non-EU companies to report sustainability information. Although ESRS standards focus more on European companies, it is important for non-EU companies that have an EU presence, such as those listed in an EU member state or having an EU parent/branch/subsidiary, and that are in the value chain of an EU reporting company, to familiarize themselves with ESRS reporting requirements. As described in more detail below, for certain reporting entities, ESRS compliant reporting will be required as early as 2025 for financial year 2024.

This article reviews certain aspects of the adopted ESRS through comparison with the global sustainability reporting standards published by the International Sustainability Standards Board on June 26, 2023 (the “ISSB Standards”), compliance with which remains voluntary as of this date.

1. Released Standards

ESRS

Cross-cutting standards:
ESRS 1 General requirements
ESRS 2 General disclosures

Standards on environmental matters:
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

Standards on social matters:
ESRS S1 Own workforce
ESRS S2 Workers in the value chain
ESRS S3 Affected communities
ESRS S4 Consumers and end-users

Standards on governance matters:

ESRS G1 Business conduct

ISSB Standards

General requirements:

IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information

Standards on environmental matters:
IFRS S2 Climate-related Disclosures

2. Covered Reporting Entities

ESRS

Only companies that are obliged by the EU Accounting Directive (Directive 2013/34/EU) to report sustainability information, specifically:

(a) Companies previously subject to the Non-Financial Reporting Directive (NFRD) (namely, large listed companies, large banks and large insurance companies), and (b) listed EU parent of large group companies, each, with more than 500 employees on average during the financial year;
Other large companies^[1], including other listed EU parent of large group companies^[2];
Listed small^[3] and medium^[4]-sized enterprises (“SMEs”), including non-EU listed SMEs; and
Non-EU companies that generate over EUR 150 million per year in the EU and that have in the EU either a branch with a turnover exceeding EUR 40 million or a subsidiary that is a large company or a listed SME.

ISSB Standards

World-wide entities that are required or choose to prepare general purpose financial statements, regardless of their size, location, industry, or listing status

3. Where to Report

ESRS	In a dedicated section of a reporting entity’s management report, which is an integral element of general-purpose financial reporting.
ISSB Standards	As part of a reporting entity’s general-purpose financial reporting. To facilitate application in different jurisdictions, the ISSB Standards do not specify or require where in the financial reports such sustainability-related disclosures may be placed.

4. Targeted Users

ESRS	In addition to users of general-purpose financial reporting, also include other users, such as a reporting entity’s business partners, trade unions and social partners, civil society and non-governmental organizations, governments, analysts and academics.
ISSB Standards	Only users of general-purpose financial reporting, namely a reporting entity’s existing and potential investors, lenders and other creditors.

5. Mandatory or Voluntary

ESRS	Binding and directly applicable in all EU member states.
ISSB Standards	Voluntary, unless any jurisdiction decides to make the ISSB Standards mandatory.

6. Materiality

ESRS	“Double materiality”, i.e., ESRS oblige an in-scope company to report both on its impacts on people and the environment (“Impact Materiality”), and on how social and environmental issues create financial risks and opportunities for the company (“Financial Materiality”).
ISSB Standards	Only Financial Materiality.

7. Reporting Structure (categories of subject matter required to be included in reports)

ESRS

Governance: the governance processes, controls and procedures used to monitor, manage and oversee impacts, risks and opportunities.

Strategy: how the reporting company’s strategy and business model interact with its material impacts, risks and opportunities.

Impact, risk and opportunity management: the process(es) by which the company: (i) identifies impacts, risks and opportunities and assesses their materiality; and (ii) manages material sustainability matters through policies and actions.

Metrics and targets: the company’s performance, including targets it has set and progress towards meeting them.

ISSB Standards

Aligned with Taskforce on Climate-related Financial Disclosures (TCFD) architecture, namely:

Governance
Strategy
Risk management
Metrics and targets

8. Proportionality Considerations

ESRS

Allowing companies to omit information if it is not relevant in their particular circumstances.
Phasing-in certain reporting requirements.
Making a limited number of reporting requirements voluntary instead of mandatory.
Proportionate reporting regime for listed SMEs (for example, streamlined and less demanding standards, and postponed compliance date until financial year 2026, with the possibility of an additional two-year opt-out after that).
Simpler, voluntary standards for use by non-listed SMEs.

ISSB Standards

When identifying sustainability-related risks and opportunities, determining the scope of value chain, and disclosing anticipated financial effects of sustainability-related risks and opportunities, a reporting entity only needs to consider “reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort”.
Certain transition relief in the first year of reporting.

9. Value-Chain Reporting

ESRS	Yes, an entity is required to disclose information about sustainability-related risks, opportunities and impact throughout its upstream and downstream value chain, which means that ESRS reporting entities may require ESG data from non-EU companies in their value chain, even if such companies themselves are not subject to ESRS reporting.
ISSB Standards	Yes, an entity is required to disclose information about sustainability-related risks and opportunities throughout its value chain, which means ISSB reporting entities may require ESG data from companies in their value chain, even if such companies themselves are not subject to ISSB reporting.

10. Assurance

ESRS	Required to be assured by an independent third party.
ISSB Standards	Not required, but open to assurance, because the ISSB Standards consider possible challenges and complexities for assurance process.

11. Interoperability with Other Existing Standards

ESRS

In terms of Financial Materiality, ESRS took the approach of trying to integrate the ISSB Standards into ESRS. However, ESRS also provide additional information on Impact Materiality, which is relevant for users other than investors.
ESRS align with the Sustainability Accounting Standards Board (SASB) Standards through the above interoperability with the ISSB Standards.
TCFD is a useful foundation for ESRS, but ESRS additionally include topical standards other than climate-related information, and, due to the double materiality approach, ESRS additionally require information about impact and opportunity management.
ESRS tried to ensure a high level of alignment with the Global Reporting Initiative (“GRI”), which also adopts a double materiality approach. However, ESRS cover more Financial Materiality topics than GRI.

ISSB Standards

Companies are required to apply SASB Standards in identifying their industry-specific sustainability-related risks and opportunities.
The ISSB Standards adopted the 4-pillar structure of TCFD as core reporting contents. IFRS S2 highly aligns with TCFD recommendations, with certain granular changes.
Jurisdictions applying the ISSB Standards may refer to GRI to add additional Impact Materiality-related building blocks in order to meet broader multi-stakeholders’ needs.

12. Phasing-in Timetable

ESRS

Companies are required to start reporting under ESRS according to the following timetable:

Companies previously subject to NFRD and listed EU parent of large group companies – financial year 2024, with first sustainability statement published in 2025.
Other large companies, including other listed EU parent of large group companies – financial year 2025, with first sustainability statement published in 2026.
Listed SMEs, including non-EU listed SMEs – financial year 2026, with first sustainability statement published in 2027, with the possibility of an additional two-year opt-out thereafter.
In-scope non-EU companies – financial year 2028, with first sustainability statement published in 2029.

ISSB Standards

Entities shall apply the ISSB Standards for annual reporting periods beginning on or after January 1, 2024, but earlier application is permitted.
For the first annual reporting period, non-climate disclosure, Scope 3 emission disclosure, and if conditions met, application of Greenhouse Gas Protocol are not required.

The above recently adopted ESRS are the first set of ESRS common standards. By June 30, 2024, the European Commission is expected to adopt another set of ESRS on sector-specific standards, proportionate standards for listed SMEs, and standards for non-EU companies.

^[1]Defined under Article 3(4) of the Accounting Directive, which are undertakings (other than item (i)(a) above) exceeding at least two of the following three criteria on their balance sheet dates: (x) balance sheet total: EUR 20 million; (y) net turnover: EUR 40 million; and (z) average number of employees during the financial year: 250.

^[2]Parent undertakings (other than item (i)(b) above) of a large group defined under Article 3(7) of the Accounting Directive, which exceed at least two of the following three criteria on the balance sheet date of the parent: (x) balance sheet total: EUR 20 million; (y) net turnover: EUR 40 million; and (z) average number of employees during the financial year: 250.

^[3]Small undertakings defined under Article 3(2) of the Accounting Directive, which on their balance sheet dates do not exceed the limits of at least two of the following three criteria: (x) balance sheet total: EUR 4 million; (y) net turnover: EUR 8 million; and (z) average number of employees during the financial year: 50.

^[4]Medium-sized undertakings defined under Article 3(3) of the Accounting Directive, which are not micro-undertakings or small undertakings and which on their balance sheet dates do not exceed the limits of at least two of the following three criteria: (x) balance sheet total: EUR 20 million; (y) net turnover: EUR 40 million; and (z) average number of employees during the financial year: 250.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.