In 2022, sustainability reporting truly kicked into high gear!
On the global level, the new International Sustainability Standards Board (ISSB, see our article here) began its work. In the US, the Securities and Exchange Commission (SEC) announced its plans for corporate climate disclosures. And in Europe, the European Financial Reporting Advisory Group (EFRAG) managed to hammer out European Sustainability Reporting Standards (ESRS) basically from scratch in around one year only, submitting the final draft standards to the European Commission on November 22, 2022.
What changes have the final drafts brought about?
We have published explainers and updates on the CSRD already here, here, here and here, but in case you’re completely unfamiliar with the matter, let’s first recount the basics before diving into the updates.
The basics
The EU wants to become climate neutral by 2050. Substantial new legislation has been introduced to achieve this, including the Corporate Sustainability Reporting Directive (CSRD). The CSRD standardizes corporate disclosure on impacts, risks and opportunities related to sustainability matters. Companies must integrate these disclosures into the management report and obtain limited assurance about them.
The CSRD will gradually apply to all listed and ‘large’ EU companies, including non-EU companies that either have subsidiaries in the EU or transferable securities listed on EU-regulated markets. Current estimates put the figure at around 49,000 affected companies. Specifically, a company falls under the CSRD if
- it is listed (except micro-companies), or
- it fulfills two of the following three criteria:
- more than 250 employees
- more than EUR 40 million turnover
- more than EUR 20 million in total assets.
Most important updates
1. Reduction in reporting burden
The CSRD requires companies to report on their impacts regarding environmental, social, and governance (ESG) topics. From the 11 topics which were proposed in the ‘exposure drafts’ (dating April 2022), 1 governance topic was dissolved and integrated into the others. All in all, this means that we now have 10 topical and 2 cross-cutting standards, as shown in the figure below.
Moreover, compared to the exposure drafts, the total number of Disclosure Requirements decreased from 136 to 84, with the number of the corresponding datapoints shrinking from 2,161 to 1,144 – i.e. by almost 50%!
2. Lighter materiality assessment
Previously, the plan was that companies have to report on all ESG topics unless they could show that a certain topic was not material to them, neither financially nor impact-wise. This so-called ‘rebuttable presumption’ proposition has now been dropped.
Instead, companies now only have to additionally report on those ESG topics that they themselves assess to actually be material for them, except for certain datapoints which have now been made mandatory for all companies, no matter what (see below). In consequence, only few company will likely have to report on all topics.
Note that the‘double materiality’ perspective has been upheld in the final drafts: When conducting their materiality assessment, companies will need to examine both the ESG impacts, risks and opportunities affecting them financially (outside-in) as well as their own impact on the ESG topics (inside-out).
3. Certain datapoints mandatory for all
Regardless of the outcomes of the materiality assessment, certain disclosure requirements and their datapoints will be mandatory for all companies:
- All disclosure requirements in ESRS 2 General Disclosures
- All disclosure requirements in ESRS E1 Climate change
- Datapoints mandated by other EU legislation (as listed in ESRS 2 General Disclosures):
- Sustainable Finance Disclosure Regulation (SFDR)
- Pillar 3 framework
- Benchmarks Regulation
- European Climate Law
For companies with more than 250 employees, several disclosure requirements in ESRS S1 Own workers will also be mandatory.
4. Phase-in for value chain information
EFRAG has now proposed a phase-in for value chain information: Reporting that requires obtaining data from value chain partners will not be required for the first 3 years, except for datapoints mandated by other EU legislation, ESRS 2 General Disclosures and ESRS E1 Climate change (for the latter two, companies can use in-house data to provide insights on their value chain).
In general, companies now only need to include value chain information when specific provisions require them to do so, and only for impacts, risk or opportunity that are material (i.e. not for each and every value chain partner).
Furthermore, a phase-in of 1-3 years has been introduced for 12 specific disclosure requirements (mostly focusing on the potential financial effects from impacts, risks and opportunities).
5. Stronger alignment with other frameworks
To increase interoperability between the ESRS and other reporting standards and frameworks, and to avoid unnecessary multiple reporting, the draft ESRS now follow the same structure as the ISSB. Key concepts and definitions have also been aligned with the ISSB and the Global Reporting Initiative (GRI), while several disclosure requirements are now often literally the same as proposed by the ISSB and/or include to the greatest extent possible the content of GRI standards.
Conclusion & Outlook
Altogether, with the final ESRS drafts, EFRAG has delivered an early Christmas gift to companies throughout Europe: The reporting burden has been substantially reduced in size and companies are given extra time to prepare and collect value chain data.
It is now up to the European Commission to make the ESRS reality – the adoption is expected to happen by June 2023. Meanwhile, EFRAG will begin drafting sector-specific standards.
In the meantime, companies are well-advised to get down to work as soon as possible. The ESRS will come into effect gradually but swiftly (see figure below), and EFRAG’s draft ESRS provide a very good indication of what the EU Commission will adopt. Notably, companies will need to obtain limited assurance of the information they report from their accountant. Hence, waiting till June 2023 is only half a year of precious preparation time wasted.
Salacia Solutions helps you get through the muddy waters to full CSRD compliance
The CSRD will change the world of corporate sustainability for good: it will turn sustainability from a marketing exercise to a financial reality for tens of thousands of companies in the EU. The extensive requirements will pose a challenge not only for those that have so far shied away from assessing their sustainability performance but even for companies who already report under the NFRD. Yet with the right preparation and the right partners, these challenges can be overcome and turned into opportunities.
Enter Salacia Solutions. We are a Software-as-a-Service provider that simplifies ESG impact tracking and reporting for businesses and investors. We help you report in a transparent, traceable and consistent manner, fully in line with legislation such as the SFDR, CSRD and the EU Taxonomy as well as underlying methodologies such as the GHG Protocol. Our solution is certified by TÜV Rheinland, sector-agnostic, and ready for scrutiny by your accountant. Get in touch today.
