The European Sustainability Reporting Standards Delegated Act – striking a balance between comprehensive reporting and proportionality

By Aishwarya Shukla

The future of sustainability reporting is undergoing significant changes with the release of the draft Delegated Act on the first set of European Sustainability Reporting Standards (ESRS) by the European Commission on Friday 9th June. In the first delegated act, the Commission outlines essential reporting information in relation to cross-cutting standards and EU legal frameworks. Central to the act is the concept of ‘materiality’, requiring companies to determine which aspects of the Corporate Sustainability Reporting Directive (CSRD) are mandatory for them.

Making note of the challenges of first-time reporting, the delegated act[AS1]? introduces certain voluntary disclosures and flexibility to ensure proportionality of reporting burden. The Commission has also proposed enhancements to harmonize the standards with the EU legal framework and align them with global standard-setting initiatives like the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI). Key provisions of the draft include:

1.????????????Materiality assessment: All standards and corresponding disclosure requirements will undergo double materiality assessment, except for those in the ‘General disclosures’ section, allowing companies to focus exclusively on those sustainability-related impacts, risks and opportunities which are most relevant to them.

2.?????????Phase-in approach for smaller companies: Companies with fewer than 750 employees can omit Scope 3 GHG emissions data and workforce-related disclosures that cover topics such as working conditions and equal treatment in the first year of applying the standards. For the first two years that the standards apply, these companies may also exclude disclosures on biodiversity and value-chain workers, affected communities and end-users.

3.?????????Mandatory v. Voluntary data points: A number of mandatory reporting metrics proposed by the European Financial Reporting Advisory Group (EFRAG) will be made voluntary once the draft delegated act is passed. Specifically, the delegated act would allow all companies an extra year for disclosing financial effects related to non-climate environmental issues (pollution, water, biodiversity and resource use) and certain workforce data points (social protection, persons with disabilities, work-related ill-health, and work-life balance).

The European Commission has additionally announced plans to establish an interpretation mechanism that will serve as a valuable resource for providing formal clarifications on the sustainability reporting standards. This mechanism aims to address any potential ambiguities or uncertainties that may arise during the implementation of the standards, ensuring a more consistent and transparent reporting landscape. The Commission has also called upon the European Financial Reporting Advisory Group (EFRAG) to publish educational materials, guidance and other resources that will focus on supporting companies in navigating the materiality assessment process and shed light on other topics of inquiry on sustainability reporting.

Overall, these updates aim to strike a balance between ensuring comprehensive sustainability reporting, while reducing the reporting burden on undertakings, particularly for smaller businesses. The flexibility provided in the initial years of applying the standards and the conversion of certain data points into voluntary ones offer some relief and customization options for organizations.

The draft delegated act is now open for consultation until 7 July, providing a short timeframe for input from stakeholders.

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