What’s New in ESRS? A Deep Dive into the Final Release

Since our previous blog post on the European Sustainability Reporting Standard (ESRS), the European Union's ongoing efforts towards a sustainable economy have reached a significant milestone: the final version of the European Sustainability Reporting Standard (ESRS) under the scope of the Corporate Sustainability Reporting Directive (CSRD) was officially adopted on 31st July 2023!

This development holds profound implications for businesses operating within the EU. So, what's changed for the EU reporting requirements, and how will it impact companies?

In this blog post, we’ll be delving into the key differences between the draft ESRS by EFRAG published in June 2023 and the final ESRS version that was adopted by the EU Commission on the 31st July 2023. Be sure to read on to find out what preparations you need to make for this shift!

What’s covered in this blog post:

• Overview of the ESRS & CSRD synergy

• Key Differences Between Draft and Final ESRS

• Getting Assurance Ready

• Synergy between the ESRS and ISSB

• How to get ready for ESRS

Overview of the ESRS & CSRD synergy

The ESRS serve as a comprehensive framework detailing the essential concepts and principles that companies subject to the CSRD need to incorporate into their sustainability statements. These standards, meticulously crafted by the European Financial Reporting Advisory Group (EFRAG), play a pivotal role in advancing the objectives of the European Green Deal. Importantly, they seamlessly integrate with existing sustainability frameworks, standards, and regulations within the EU, such as the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy.

The twelve distinct ESRSs, including two cross-cutting standards, encompass a range of imperative reporting facets, requiring companies to divulge essential insights pertaining to their governance structure, and their strategic approach towards addressing material sustainability matters.

Key Differences Between Draft and Final ESRS

The changes in the final ESRS version adopted by the EU Commission from the draft by EFRAG published in June 2023 can be categorized into three primary areas:

1. Gradual introduction of specific reporting requirements (i.e. Phasing-in reliefs)

2. Increased flexibility in determining materiality

3. Option to adopt certain requirements voluntarily.

1. Gradual introduction of specific reporting requirements: Phasing-in reliefs

The European Commission has come up with some additional strategies to help businesses adapt to the new reporting requirements smoothly by introducing phase-in reliefs. These phase-in provisions are designed with different kinds of companies in mind. Especially those with fewer than 750 employees get some breathing room. Why? Well, it's because these companies might be new to sustainability reporting, and the whole ESRS compliance process might be slightly overwhelming for them.

So, what do these phase-in provisions actually mean? Companies of different sizes have specific allowances:

• For small companies with less than 750 employees, they can skip sharing details about Scope 3 greenhouse gas emissions (ESRS E1) and other specifics about their workforce (ESRS S1) in their first reporting year. In the first two reporting years, they can hold off on reporting about biodiversity (ESRS E4), workers in the value chain (ESRS S2), affected communities (ESRS S3), and even consumers (ESRS S4).

• For all companies, regardless of their size, they have the option to skip revealing the financial impacts they expect from environmental risks in the first year. Instead, they can focus on qualitative disclosures for the next two years. In the initial reporting year, some details can be left out. These include things like aspects related to their workforce (think social protection, work-related health issues, and work-life balance) as well as comparative information.

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Phew, that's a lot of flexibility, right? The aim is to help companies adjust at their own pace.

Now, let's move on to the question: who's got to do all this reporting?

The initial set of companies will need to implement these standards during the financial year 2024, and their reports reflecting these standards will be published in 2025. However, for Small and Medium Enterprises (SMEs) listed on the market, the reporting obligation begins in 2026. There's also an option for SMEs to voluntarily delay their reporting until 2028. Additionally, SMEs will have the opportunity to report using specific standards that will be developed by EFRAG next year.

To sum it up, the CSRD and ESRS will be put into practice in 2025 for companies already following the Non-Financial Reporting Directive (NFRD). Newcomers will adopt these standards one year later, and SMEs, as well as non-EU groups, will have an even later start.

2. Flexibility regarding what is considered material

Now, here's where things get interesting. The European Commission has given companies a bit of a say in what they need to report, and it all revolves around this concept called "materiality."

Materiality assessment is like a filter to decide what's crucial and what's not for your specific situation. This whole assessment process is critical because it ensures that all the information needed to meet the goals and requirements of the Corporate Sustainability Reporting Directive (CSRD) gets disclosed.

Now, this shift towards materiality means that some reporting requirements are no longer set in stone for everyone. When we compare the draft ESRS standards to the final version adopted by the EU Commission, there's a notable shift in how things are structured, particularly in terms of mandatory disclosure requirements:

• In the draft ESRS, only ESRS 2, known as General Disclosures, held mandatory disclosure requirements. In the final version of ESRS, the list of mandatory disclosure requirements has been removed. Specifically, standards related to ESRS E1 (Climate Change) and ESRS S1 (Own Workforce), which used to be in the "mandatory" category, are now subject to a materiality assessment. However, there is a caveat: if a company decides that ESRS E1 Climate Change isn't that relevant to them, they'll need to provide a detailed explanation for why they reached that conclusion.

• For financial companies, there's an extra layer of detail. If they decide that a certain data point from the Sustainable Finance Disclosure Regulation, the Benchmarks Regulation, or the "pillar 3" disclosure requirements under the Capital Requirements Regulation is not material, they have to explicitly declare so. Additionally, they need to provide a handy table that shows where these non-material data points would have been in their sustainability statement or simply state "not material" where needed.

  
  

This shift towards greater materiality gives companies more control over what they report. And for financial materiality, it aligns with the standards set out by the International Sustainability Standards Board (ISSB). EFRAG is even working on extra guidance to help companies nail this double materiality assessment*. So, stay tuned for more insights on that front!

*Double materiality refers to two dimensions of materiality – ‘financial’ and ‘impact’. Companies will need to perform materiality assessments for both dimensions and report matters that are material in either dimension for all sustainability-related topics

3. Certain disclosures to become voluntary

Apart from transitioning some of the mandatory disclosures to material topics, companies are additionally given more flexibility in their reporting from the European Commission’s decision to shift the status of certain requirements from mandatory to voluntary. This means that companies have the choice to report on these specific data points, depending on their circumstances.

The focus here is on data points that are often seen as the most challenging or costly for companies. One example is reporting a biodiversity transition plan. These kinds of requirements can be pretty demanding, so making them voluntary allows companies more breathing room to shape their sustainability plans. Some of these voluntary disclosures include:

• Biodiversity transition plans

• Certain indicators related to 'non-employees' within the company's workforce

• The option to deem a sustainability topic as non-material, supported by an explanation

  
  

Getting Ready for Assurance

Preparing for sustainability assurance has been a concern for some companies, given the evolving assurance standards and frameworks. This made a lot of organizations worry about meeting these requirements in the limited time available. But guess what? Now, companies have the option to tap into resources that already exist. For example:

• The ISSA 5000, which stands for "Standard On Sustainability Assurance 5000, General Requirements For Sustainability Assurance Engagements" proposed by the International Auditing and Assurance Standards Board (IAASB)

• The freshly released guidance on Internal Control over Sustainability Reporting (ICSR) by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Synergy between the ESRS and ISSB

Another thing to keep an eye on is how ESRSs match up with international standards from the ISSB (International Sustainability Standards Board). Some folks have raised concerns about differences in definitions, especially when it comes to financial materiality and other key terms.

While the final text has made some improvements, companies using ESRSs won't automatically meet all the requirements of ISSB Standards. It's important for them to carefully compare the two frameworks to spot any gaps. But don't worry, there's a summary in the works that will help companies see how ESRSs stack up against ISSB Standards. So do keep your eyes peeled for its release in the coming months!

How to get ready for ESRS

Getting ready for ESRS (European Sustainability Reporting Standard) isn't just about ticking boxes — it's a journey. Fortunately, we have some ESRS best practices that make this journey smoother for your organization:

1. You've got the gift of time - use it

Now, you have more room to grow your reporting strategies over several years. Plus, there are fewer mandatory disclosures in some cases. This means one thing: time. Companies focusing on compliance in the first year can use this extra time to not only gain confidence and consistency in their disclosures but also to create a roadmap for evolving their reporting strategy in the future.

Sustainability leaders and companies aiming beyond compliance can also benefit from this extra time. They can focus on refining their corporate sustainability strategy and goals while ensuring top-notch quality across all their disclosures.

2. Understand the Impact

Start by figuring out how the CSRD scoping requirements will affect your company and its broader group. Understand the differences between the ESRS requirements and your current reporting practices.

3. Determine What Really Matters

Get a grip on your value chain — know it inside out. Conduct a double materiality assessment, following the guidelines in the ESRSs, to decide which topics are worth reporting on. Consider both the impact and financial aspects when deciding what topics are truly material.

4. Transform Your Reporting

Think about the future. Design a reporting structure that fits your company’s needs efficiently. This can include utilizing a sustainability software tool to aid in smoother reporting processes. Develop and put into action your target operating model, which includes training and support for managing change effectively.

5. Gear Up for Assurance

Get ready for the assurance process by evaluating your control environment, data quality, and the availability of documentation needed to support assurance. Address any issues before the formal assurance process kicks in.

So, there you have it — your roadmap to ESRS readiness. It's all about taking the time, understanding the impact, focusing on what matters, transforming your reporting, and gearing up for assurance.

The ESRS is very much ingrained in the CSRD and if you’d like support on your journey towards CSRD compliance, SustainLab can help! Be sure to check out our on-demand webinar: 5 things we learned while helping companies get ready for CSRD.

Are you ready for CSRD? Our CSRD Gap Analysis helps you assess your readiness for CSRD compliance and with a tailored action plan for CSRD success. Speak to one of our experts today.

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