The new ESG Reporting Standards

On July 31, 2023, the European Commission adopted the new European Sustainability Reporting Standards (ESRS).

The standards are mandatory for all companies covered by the Corporate Sustainability Reporting Directive (CSRD).

In this newsletter advores Advokater & Rechtsanw?lte will provide you with an overview of the most important changes in the adopted ESG-standards compared to EFRAG′s consultation draft.

What is new?

Compared to EFRAG′s first proposal, the Commission has in the finalized ESRS limited the implementation burden for the companies to ensure a gentler implementation and to limit the administrative costs.

More specifically the Commission has streamlined the reporting obligations compared to EFRAG's draft, by making the following amendments in the adopted standards:

• All standards, information requirements and data points within each standard will be subject to the materiality assessment. The only disclosure requirements exempted from the materiality assessment are those listed in ESRS2.

By giving materiality assessment a more central role, the Commission has provided companies with the opportunity to focus their ESG-reporting on those ESG-topics that are material for the company.

It is worth noting that all the ESRS, including each topic and datapoint in the ESRS, is subject to the materiality assesment principle, and it is mandatory for the company to include all material information in the ESG-report.

On the other hand it is not mandatory for a company to explain in its ESG-report, why the company has concluded that some of the topics, datapoints etc. in the standards are not material, unless:

• a company concludes that climate change is not material. In this case the company must provide a detailed explanation why the company comes to this conclusion.
• a company concludes that a data point from the Sustainable Finance Disclosure Regulation, the Benchmarks Regulation or the 'Pillar 3' disclosure requirements of the Capital Requirements Regulation is not material. In this case the company must also explicitly mention it in the ESG-report.

Moreover, the Commission has implemented further phase-in measures to help all companies, especially smaller companies that are subject to sustainability reporting requirements for the first time, to apply the standards. In particular, the Commission has introduced the following:

• Companies with less than 750 employees can exclude greenhouse gas emissions data under scope 3, as well as information requirements specified in the "Own workforce" standard in the first year of applying the standards. In addition, these companies can exclude data in the standards for biodiversity and for workers in the value chain, affected communities, as well as consumers and end-users for the first two years of applying the standards.
• In the first year of applying the standards, all companies may exclude the following information: expected financial impacts related to non-climate-related environmental issues (pollution, water, biodiversity and resource use) and certain data points related to its own workforce (social protection, persons with disabilities, work-related poor health and work-life balance).

Finally, the Commission has made some more general changes in the adopted standards, for instance: ?

• The following datapoints are now voluntary instead of mandatory: biodiversity transition plans, certain indicators for 'non-employees' in the company's own workforce.
• Additional flexibility in relation to certain information. In particular, there will be additional flexibility in the information requirements on the financial impact of sustainability risks and on stakeholder engagement and in the methodology to be used for the materiality assessment. In addition, the Commission has modified data points on corruption and corruption related to the protection of whistleblowers who may be considered to have violated the right against self-incrimination.
• Ensured consistency with the EU legal framework by making technical modifications to ensure better alignment with other requirements of the Accounting Directive and other relevant legal acts.
• Ensured interoperability with global initiatives by continuing to work closely with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI).

The next step in the implementation of the ESRS

The final ESRS are still subject to a two – four months review by the European Parliament and the European Council.

However, this part of the process is rather a formality and the ESRS are thus to be considered as finalized. This means that companies across the EU now know with certainty which regulations they need to comply with in order to incorporate their sustainability reporting into their financial reports.

In Denmark the standards are expected to be incorporated into the Danish Accounting Act in 2024.

It has come to the attention of advores Advokater & Rechtsanw?lte that, in order to harmonize the reporting practice and to help companies to comply with the new standards, EFRAG expects to issue some more detailed guidelines this autumn on how to apply the double materiality principle and how to deal with reporting in the value chain.

If you have any questions on how to adopt and apply the new standards in your organization, you are welcome to contact one of advores Advokater & Rechtsanw?lte ESG-experts, Cecilia M?rtensson Vesl?v or Thilo Wind.

#esgreporting #ESRS #ESG #newsletter #advores