Enables materiality assessments for sustainability factors, extended phase-in times for small businesses

The European Commission on Friday released a series of proposed changes to the European Sustainability Reporting Standards (ESRS), the rules and requirements for companies to report on sustainability-related impacts, opportunities and risks under the EU’s upcoming Corporate Sustainable Reporting Directive (CSRD).

The Commission’s proposals were released as a draft Delegated Act, along with a consultation requesting feedback on the new rules, which will be open until July 7.

The most significant amendments are proposals to ease the burden on smaller companies and first-time reporters by extending the phase-in times for some key sustainability factors such as Scope 3 value chain emissions, and rules enabling all companies to focus specifically on material sustainability factors.

The CSRD, on track to begin applying from the beginning of 2024, is aimed as a major update to the 2014 Non-Financial Reporting Directive (NFRD), the current EU sustainability reporting framework. The new rules will significantly expand the number of companies required to provide sustainability disclosures to over 50,000 from around 12,000 currently, and introduce more detailed reporting requirements on company impacts on the environment, human rights and social standards and sustainability-related risk.

The EU Commission’s delegated act follows the European Financial Reporting Advisory Group’s (EFRAG) submission of an ESRS draft in November 2022. EFRAG, a private association majority financed by the EU, was mandated by the European Commission in June 2020 to prepare for new EU sustainability reporting standards, as part of the revision of the NFRD. In May 2021, EFRAG was requested to develop reporting standards for the CSRD.

Following EFRAG’s submission, the EU Commission held consultations with regulators and member state sustainable finance groups and held meetings with stakeholders confirming that “the draft standards submitted by EFRAG broadly meet the mandate of the CSRD and would achieve the intended policy goals in the context of the European Green Deal,” but raising some concerns about the “challenging nature” of some of the reporting requirements, particularly for first-time reporters. The Commission’s update takes these factors into account, and also aims to help reduce costs required to comply with the CSRD rules.

In order to ease the reporting burden for smaller companies, the Commission’s proposal allows companies with fewer than 750 employees in the first year that they apply the standards to omit Scope 3 emissions data as well as “own workforce” disclosures, which include topics such as working conditions and equal treatment, and for the first two years to omit disclosures on biodiversity, value chain workers, affected communities and consumers.

For all companies, the draft proposes allowing an extra year to disclose information on anticipated financial effects related to non-climate environmental issues, and on some “own workforce” datapoints.

One of the key changes in the Commission’s draft is a proposal for all disclosure requirements, with the exception of a set of general disclosures, to be subject to materiality assessments, effectively allowing companies to focus reporting on sustainability factors that they consider material to their businesses. In the draft, the Commission said that the “measure is expected to lead to a significant burden reduction for undertakings and helps to ensure that the standards are proportionate.”

Additional proposals in the Commission’s draft include making some disclosures voluntary, including biodiversity transition plans, measures to ensure interoperability with global standard setting initiatives such as the ISSB and GRI, along with other technical modifications.

The Commission said that it anticipates that its proposals will result in cost reductions during the phase-in period of nearly €1.2 billion, and €230 million on an annual basis, compared to EFRAG’s proposals.

Following the release of the Commission’s draft, sustainable finance groups warned that the new proposals would negatively impact the effectiveness of the CSRD. European sustainable and responsible investment association Eurosif released a statement indicating that it was “very concerned” with the changes, which it called “a significant setback in ambition compared to the final recommendations published by EFRAG,” and particularly criticizing the materiality assessments amendment.

Aleksandra Palinska, Eurosif’s Executive Director, said:

“We acknowledge the challenges preparers will face when complying with the ESRS. However, the EU Commission should not prioritise reducing reporting requirements at the expense of the public interest and other stakeholders, including of investors and financial institutions in dire need of sustainability information to comply with their own regulatory requirements. If not amended, this draft Delegated Act will hinder the capacity of investors to make informed sustainable investment decisions and risks jeopardising EU commitments to deliver on the EU’s Green Deal and Climate Law ambitions.”

Click here to access the draft delegated act.