The final and official version of the ESRS bring forth changes at a time when the landscape of sustainability reporting is grappling with the need to retain its status as an enabler rather than a hindrance. Against the backdrop of the European Green Deal and the Sustainable Finance Agenda, efforts are underway to transform these challenges into opportunities for organisations. Following a period marked by volatility due to the emergence of the CSRD and the sudden increase in the burden of reporting requirements for businesses, the ESRS underwent numerous changes across each draft.
The draft ESRS published in June contained substantial changes to the content and structure of the ESRS. The goal of the most recent and official ESRS was to address the concerns that arose after the June draft was released, to ensure organisations had the necessary flexibilities and the additional tools to address their sustainability and their reporting works as intended.
In this article, we will delve into the key matters proposed in the official ESRS across its cross-cutting and topical standards.
- A Quick Recap on the CSRD and ESRS
- What are the Main Changes to the ESRS?
Implementing Materiality
Refining Phase-in Requirements
Making some Disclosures Voluntary - How can Greenomy Help?
A Quick Recap on the CSRD and ESRS
The Corporate Sustainability Reporting Directive (CSRD) came into effect on January 5th, 2023, expanding the reach of previous regulations. Under the CSRD, companies are obligated to reveal their operations' environmental and societal effects publicly and undergo an assurance process for the disclosed information.
In an attempt to standardise ESG reporting, the EU Commission mandated the European Financial Reporting Advisory Group (EFRAG) to develop a comprehensive and mandatory set of disclosure standards known as the European Sustainability Reporting Standards (ESRS). These standards aim to establish consistency in ESG (Environmental, Social, and Governance) reporting.
The ESRS define a set of specific disclosure requirements across 12 ESG matters, organised into four categories. Firstly, there are the Cross-cutting standards, which establish general requirements applicable to all subjects covered by the Corporate Sustainability Reporting Directive (CSRD).
Additionally, there are the ESG standards, also known as sector-agnostic or topical standards, which pertain to environmental, social, and governance matters. Collectively, these standards contain approximately 1200 data points for reporting, although an official list is yet to be released.
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What are the Main Changes to the ESRS?
The official version of the sector-agnostic ESRS was published on the 31st of July, 2023. While the standards maintain their general structure, the update brought much-needed amendments and some surprising updates.
Similarly to the updates in June, the official ESRS introduced changes across 7 subjects. However, the topics of materiality, phase-ins, and voluntary disclosures saw the most relevant and altering updates. The official ESRS followed this trend.
Implementing Materiality
The draft published in June brought significant changes. The most significant happened in the field of materiality.
As of June, all ESRS with the exception of the cross-cutting standards– ESRS 1 and ESRS 2– were now subject to the materiality assessment, including the indicators related to other EU legislation. ESRS 1 and 2 remained mandatory because their contents are foundational and they could not be subject to materiality. Finally, the undertaking does not need to justify the reason why a particular ESRS was deemed not material, but it may choose to explain why.
The final version of the ESRS also saw changes in this area.
First, all ESRS with the exception of the cross-cutting standards– ESRS 1 and ESRS 2– remain subject to the materiality assessment, including the indicators related to other EU legislation. Once we have established that an ESRS is not material there are three possible scenarios:
- If Climate is deemed not material, the company shall provide a detailed explanation of how it reached that conclusion in its materiality assessment.
- If an indicator of other EU legislation is deemed not material to the company, it has to explicitly state that the data point is “not material” and present a table with all not material EU legislation indicators, indicating where they are to be found in its sustainability statement or stating “not material” as appropriate.
- The rest of the topical ESRS maintain the same requirements as they did in the June draft, explaining why an issue was deemed not material is not obligatory but, a company may choose to explain why.
Refining Phase-in Requirements
The June draft of the ESRS introduced changes to the phase-in requirements, mainly the division between phase-ins that would apply to all companies and companies with fewer than 750 employees. The differences in the division were the following:
- All undertakings can omit the environmental requirements on “anticipated” financial effects for the 1st year of reporting. The clarification of the term helps narrow the scope of these financial effects and it also aligns with the ISSB standards. In addition to this, the 3-year phase-in for reporting qualitative information remains in place.
- Undertakings with fewer than 750 employees can omit all requirements related to E4, S2, S3, and S4 for the first 2 years of reporting and S1 can be omitted for the first year of reporting.
- Additional phase-ins were added to the S1 disclosure requirements 12,14, and 15.
In addition to the split, an additional provision was added to ESRS2 on the Use of phase-in provisions in accordance with Appendix C of ESRS 1, to ensure that undertakings making use of the phase-ins still report some necessary information if any of the particular Disclosure Requirements or datapoints omitted was material.
In the final version of the ESRS, this division between what applies to all companies and those with fewer than 750 employees remains in place, as do most of the phase-ins introduced in June.
SBM-3 Paragraph 48 (e) was added to the list of phase-ins for all companies for the first year. And for an additional 3 years, it may comply by reporting only qualitative disclosures. Without this addition, the phase-ins related to anticipated financial effects that are in place for all environmental ESRS would have been rendered useless, as companies would have had to report the same information when reporting SBM-3.
A phase-in for S1-13 was deleted in June and re-added with a 1-year phase-in for disclosing information related to training and skills development.
The additional provision added in June remains in place. Thus, if an omitted Disclosure Requirement or Datapoint is material, the ESRS still requires a description of matters, policies, targets (time and progress), actions, and metrics related to the ESRS in question.
Making some Disclosures Voluntary
In an effort to reduce the burden of reporting, the final ESRS have even more voluntary data points, nowhere near the number we saw across the draft released in June. ESRS incorporates numerous changes that transform previously mandatory disclosure requirements into voluntary ones.
An example of the newly voluntary disclosures can be found within the environmental ESRS. If we look at E4-3 on disclosing biodiversity and ecosystems-related actions and the resources allocated to their implementation paragraph 28 has been modified so that the use of the mitigation hierarchy in regards to its actions can be disclosed but it is not required, while the rest of the disclosure remains mandatory.
How can Greenomy Help?
Greenomy is your AI-driven sustainability reporting platform for CSRD, EU Taxonomy, and all future emerging ESG Standards. Greenomy empowers corporates to measure, disclose and improve their sustainability.
From data collection, thanks to ESG data libraries that seamlessly integrate diverse data sources, to your dedicated AI Sustainability Advisor, Artemis, to navigate best practices from your industry peers and much more, we help you easily achieve ESG compliance.
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