Outlook autumn 2023: What will Europe decide for ESG and sustainability reporting?
The European Sustainability Reporting Standards (ESRS) define how and on what topics companies should report under the Corporate Sustainability Reporting Directive (CSRD). Feedback is still being collected on the final proposals until 7 July. During the summer, the European Commission will publish the delegated acts. If the European Parliament and the European Council have no more comments, the standards will come into force in 2024.
This is what has changed compared to the version presented in November 2022:
Double materiality remains the guiding principle, but, apart from ESRS2 (General disclosures), there are no more mandatory standards. For all topics, disclosures and data points of those topics, you have to determine whether they are material one-by-one.
All material topics and disclosures have to be reported according to the requirements, sometimes with an extension of the deadline (see below). For non-material policies, actions and targets, you should explain on what basis they were considered non-material. Topics and disclosures that are considered non-material do not have to be included in the report. Moreover, an explanation of why you omit them is no longer necessary. However, do not take this lightly: as the reports are all subject to compulsory auditing, you absolutely must be able to present a solid materiality analysis and explain the choices made.
Extensions are provided for certain reporting obligations in the first, second and third reporting years. The matrix below shows the different phases by business type over the next few years.
Depending on the colours used, more or fewer disclosure requirements apply during the first three reporting years. Nevertheless, as a company, you still have to indicate whether the disclosure proved material based on your materiality analysis. The extension is longest for companies with fewer than 750 employees, regardless of whether they currently report according to the NFRD or not.
Note: not all disclosure requirements use the same reporting period. For example, within E1 (the standard on climate change) there are different disclosure requirements for which companies do not yet have to report in the first reporting year, and for which qualitative information suffices for the report in the first three reporting years. Thus, full reporting according to all disclosure requirements becomes mandatory in 2027 at the earliest, as indicated by the dark green cells. From fiscal year 2028 onwards, everyone covered by the CSRD will have to issue a report that is fully compliant with all material disclosure requirements. The complete list of disclosures and their respective timing can be found in Annex C of ESRS 1.
The biodiversity standard has undergone a degree of simplifications due to the complexity of the topic for companies. Also, certain indicators about ‘non-employees’ within the own workforce are no longer necessary.
Some sensitive disclosures concerning corruption and bribery are likewise no longer mandatory. These include the number and nature of related incidents, details of public court cases, and actions taken to support vulnerable suppliers.
As mentioned above, explaining why a non-material topic, disclosure or data point is considered as such is also no longer necessary. However, both during the audit and in stakeholder contacts you should be able to properly substantiate your decisions.
This is the result of a number of technical adjustments and other international reporting standards under development, such as ISSB and GRI.
The content of the general (‘sector-agnostic’) standards is as good as final. However, in addition to those 12 reporting standards, it has been announced that EFRAG will also prepare sector-specific standards. Those standards will apply to all companies within a sector and will outline the reporting of impacts, risks and opportunities not adequately covered by the general standards.
A total of 41 sector-specific standards will be developed over the next few years, starting with high-impact sectors. These include: agriculture, coal and mining, fossil oil and gas, energy production, road transport, automotive, food, and textiles. Initially, we could expect the first publications in November. In the meantime, however, it was decided to prioritize the mandatory and voluntary SME standards, as well as implementation guidance (such as explaining the materiality study).
As a result, the sector-specific standards will be pushed back by about two years. Particularly, EFRAG has put forward the following timing:
It is expected that these sector-specific standards will not add to the reporting burden, but rather make reporting more specific. To take the example of the healthcare sector, the material topic of ‘patient safety’ may become a topic for which the standards can make certain disclosures more specific.
Proportionate standards will be drawn up for SMEs.
Because materiality assessment is becoming so important in European sustainability reporting, specific guidelines are on the way. These are currently being developed by EFRAG, the European Financial Reporting Advisory Group charged with the task of developing European standards. The tools will be crafted this summer, together with guidelines for describing the value chain as well as performing gap analyses.
A new version of the EU Taxonomy for Sustainable Activities has been available since April. In short, that taxonomy defines which business activities are sustainable and which are not. Companies should have those activities mapped out in order to report correctly. In this way, the EU Taxonomy is intrinsically linked to the CSRD.
The EU Taxonomy defines 6 environmental objectives to which a business activity can contribute. Criteria had already been written for two objectives: climate change mitigation and climate change adaptation. The new delegated act makes some changes to the existing regulation, but mainly draws up the long-awaited technical screening criteria for the four remaining objectives (referred to as ‘Taxo4’):
Meanwhile, the consultation for Taxo4 has been completed, and the European Commission has adopted the delegated acts. It’s now up to the European Parliament and the Council: If neither the Parliament nor the Council objects to the delegated acts, they will be published in the European Official Journal this autumn, and companies and financial institutions will have to comply with the regulations from January 2024 onwards.
Increasingly mentioned in the same breath as the CSRD reporting directive: the Corporate Sustainability Due Diligence Directive, or CSDDD. This directive establishes a general duty of care for Europe’s largest companies.
The text was still being tinkered with in early June. This summer, negotiations will start on finalizing the legal text. Directors’ liability, as well as the financial sector in particular, are expected to be major issues in the final negotiations. Some other changes are expected to come through either way:
The CSDDD is expected to come into force in 2025. Like the CSRD, the CSDDD will be a real gamechanger for European companies. Preparing well in advance is key!
Whether the Nature Restoration Law will ever get through is a matter of speculation. On 27 June, the law was rejected by the European Parliament’s environmental committee. EU member states had nevertheless approved a compromise proposal earlier this month. The dossier has now moved on to the plenary session of the European Parliament. There, the decisive vote is scheduled for July. If Parliament does not reach a consensus, the law risks being destined for the bin.
Much ink has flowed over the Nature Restoration Law in recent weeks. According to some voices, it is unrealistic and an obstacle to our agriculture and industry, while according to others it is not yet far-reaching enough to restore biodiversity across our continent. One thing is clear, however: Even if the law is passed, there will still be much debate about what obligations effectively follow for individual countries. The local impact of the law remains to be seen.
Adhering to all the new guidelines and organizing yourself accordingly poses a major challenge for Sustainability Managers, CFOs and CEOs. Can’t see the wood for the trees? The Pantarein experts will be happy to explain to you which obligations apply to your organization, and how to prepare for them step by step. Get in touch via mail@pantarein.be.
