What to Expect from the ESRS Update in June 2023?

The updated ESRS introduce modifications during a period when sustainability reporting is facing challenges to maintain its role as a solution rather than a burden. The European Green Deal and the Sustainable Finance Agenda hope to become something other than a burden for organisations after a turbulent few quarters with the introduction of the CSRD, the many controversies around the SFDR, numerous amendments and delegated regulations, etc.

The updates come after EFRAG’s Commissioner McGuinness recognised the need for lessening the burden of reporting and after a request from Commission president Von Der Leyen to ease the burden of requirements for businesses by 25%. Thus, the goals of this update were to provide organisations with the necessary flexibilities and the additional time to address their sustainability and their reporting works as intended.

In this article, we will delve into six of the key matters proposed in the revised version of the ESRS cross-cutting and topical standards.

• The CSRD and ESRS: A Brief Overview
• What are the Updates to the ESRS?
• Update #1: Materiality
• Update #2: Phasing-in Certain Requirements
• Update #3: Making some Disclosures Voluntary
• Update #4: Coherence with EU Legal Framework
• Update #5: Interoperability of Global Standards
• Update #6: Editorial and Presentational
• How can Greenomy Help?
  

The CSRD and ESRS: A Brief Overview

The Corporate Sustainability Reporting Directive (CSRD), enacted on January 5th, 2023, broadened previous regulations, compelling companies to disclose their environmental and societal impacts and undergo an assurance process.

In pursuit of standardised ESG reporting, the European Financial Reporting Advisory Group (EFRAG) was tasked by the EU Commission to formulate mandatory European Sustainability Reporting Standards (ESRS). These standards intend to establish uniformity in ESG reporting.

The ESRS entail specific disclosure criteria across 12 ESG topics, categorized into Cross-cutting standards applicable to all CSRD subjects, and ESG standards addressing environmental, social, and governance aspects. They encompasses approximately 1,200 data points for reporting, though an official list remains pending.

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What are the Updates to the ESRS?

A final draft of the sector-agnostic ESRS was published in early June and is currently open for consultation until the 7th of July. While the standards maintain their general structure, the update brought much-needed amendments and some surprising changes.

Update #1: Materiality

Prior to this update, undertakings were required to disclose ESRS 1 & 2 and E1, and if an undertaking had more than 250 employees they also needed to disclose ESRS-S1 DRs 1-9, regardless of the results of their materiality assessment.

In addition, all ESRS had data points that were mandatory to disclose as they were Indicators deriving from EU Laws –such as the EU Taxonomy and the SFDR. Finally, they were required to disclose all ESRS they deemed material to their company, but they were also required to provide explanations as to why the rest of the ESRS were not.

The updated version of the standards presents a significant change. The revised proposal states that everything but the cross-cutting standards (ESRS 1-2) is now subject to the materiality assessment. ESRS 1 and 2 remain mandatory because their contents are foundational and they could not be subject to materiality. The rest of the ESRS including the indicators related to EU laws are now subject to the materiality assessment. 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.

Update #2: Phasing-in Certain Requirements

Before we delve into the changes within the phase-in requirements we should first look at the relevant content within the initial 2022 version. Three things to keep in mind are:

• The previous ESRS had specific phase-ins for disclosure requirements on “potential” financial effects of risks and opportunities found across the environmental ESRS. The phase-ins consisted of a 3-year grace period where they could report only qualitative information.
• In addition, you could find that S1 had phase-ins that allowed for the omission of particular Disclosure requirements for the 1st year of reporting (6-11,13).

The revised version of the ESRS introduces the following changes to the phase-in requirements:

• A division between phase-in requirements that apply to all undertakings and undertakings with fewer than 750 employees.
• 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. However, due to the distinction between what applies to all companies or to those with fewer than 750 employees, some of the social phase-ins have been removed from S1. This signals that the removed phase-ins targeted smaller companies that now benefit from the newer exemptions. Large entities should be able to respond accordingly.

There is also an additional provision on the Use of phase-In provisions in accordance with Appendix C of ESRS 1 to ensure that undertakings cannot take advantage of the phase-ins.

Update #3: Making some Disclosures Voluntary

The revised ESRS incorporates a multitude of modifications that transform previously mandatory disclosure requirements into voluntary ones. If a company deems the ESRS material to their operations, they must disclose all the required information and they may disclose optional information, but there is no obligation to do so. Some examples of these are:

• Within the crosscutting standards, for instance, you will find that the disclosure requirement explaining why a topic is not material has gone from a mandatory explanation to an optional one.
• Within the environmental ESRS, for instance, the biodiversity transition plan described in the previous version of E4-1 turned into a voluntary disclosure and it has been simplified.
• Within the social ESRS, in S1 we can find that some data points with a particular focus on non-employees are now voluntary.
  

Update #4: Coherence with EU Legal Framework

Numerous disclosure requirements have been modified to better address EU legal requirements.

• Within ESRS 2 we can find a Breakdown of revenue by ESRS sector. A new provision that allows a company to omit information if it is based in a Member State that allows for the omission of turnover by categories of activity and by geographical markets under Article 18 of the Accounting Directive.
• Regarding Pollution Metrics in E2, one can now find simplified metrics on pollution to align with requirements on companies under the European Pollutant Release and Transfer Register (E-PRTR). For instance, the case of Disclosure Requirement E2-4 – Pollution of air, water and soil. Here we find that the sub-data points of paragraph 28 have been reduced to 2 and now emphasise the use of pollutants listed in the E-PRTR.
• Within ESRS G1 there is now a policy on protection of whistleblowers. The new provision states that companies subject to EU Whistleblower Directive can comply simply by stating that they are subject to that Directive.
• Finally, within S1’s remuneration metrics data points were modified to align with Pay Transparency Directive and Shareholder Rights. For instance, the male-female pay gap is now referred to as the gender pay gap and compensation is now remuneration, but one can also find alterations within the application requirements.
  

Update #5: Interoperability of Global Standards

Interoperability with global standard-setting initiatives has been a topic of key importance for the ESRS. The updated ISSB standards were published on the 26th of June along with praises and promises of adoption across the globe. The International Financial Reporting Standards (IFRS)  and the EFRAG worked together closely to establish the highest level of interoperability.

Nevertheless, after inspecting the drafts, it is clear a compromise was not reached in full but they made significant alignments.

The major updates are:

• All climate-related definitions are now coherent with IFRS S2 (except for the definition of carbon credits)
• Financial materiality in ESRS E1 and ESRS 2 is now edited to match with IFRS standards.
  

Update #6: Editorial and Presentational

The Commission has made editorial and presentational changes to improve the clarity, usability, and coherence of the standards. While the editorial changes usually mentioned are the introduction of the now-boldened defined terms, the amendment of inconsistencies from the previous version, as well as efforts to avoid the term “shall consider disclosing” which rendered a data point both mandatory and optional.

New inconsistencies have been spotted, especially around the structure of the documents. Some might be more difficult to spot and have possibly larger implications, especially for undertakings new to the regulatory space who seek to comply with the regulation.

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