On July 31, 2023, the European Commission adopted the regulation supplementing the Accountability Directive 2013/34/EU with the European Sustain ability Reporting Standards (ESRS), i.e., the principles of corporate sustainability reporting in the EU. (1)
1) European Sustainability Reporting Standard, ESRS. The new obligations
The European Commission, as stipulated in the Corporate Sustainability Reporting Directive (EU) No 2022/2464, (2) adopted the first set of European Sustainability Reporting Standards (ESRS). Which are to be followed-for sustainability reporting, in the appropriate section of the financial statements-as of the following dates:
– 1.1.2024 (Budget 2025), for companies already subject to Non-Financial Reporting Directive (NFRD) 2014/95/EU obligations. (3) Large listed companies, banks and insurance companies with more than 500 employees, non-EU listed companies with more than 500 employees and subsidiaries in the EU,
– 1.1.2025 (budget 2026), for other large enterprises,
– 1.1.2026 (Budget 2027), for listed small and medium-sized enterprises. With option to defer reporting to 1.1.2028 (2029 budget),
– 1.1.2028 (budget 2029), for non-EU companies with annual revenue > €150 million and a branch in the EU with turnover > €40 million.
2) Prescribed information
Companies will be required to report information regarding short-, medium- and long-term impacts, risks and opportunities related to environmental, social and governance sustainability issues. And so describe:
– business model and strategy in relation to sustainability issues, including risks and opportunities, financial and investment plans,
– goals related to sustainability issues and the time frame for achieving them,
– The role and responsibilities of administrative, management and supervisory bodies in relation to sustainability issues,
– policies of the enterprise,
– Any incentive systems related to sustainability issues,
– The due diligence procedures applied by the company in relation to sustainability issues,
– the main negative impacts related to the value chain and any actions taken to prevent or mitigate these negative impacts,
– The main risks related to sustainability issues and how to manage these risks,
– The relevant indicators for reporting the required information (CSRD, Article 19.2).
3) Sustainability reporting standards
The new regulation describes in Annex I the European Sustainability Reporting Standards (ESRS), divided into three categories of information:
3.1) Cross-cutting standards
All companies subject to the Corporate Sustainability Reporting Directive (CSRD), regardless of the industry in which they operate, must comply with standards related to:
– ‘general requirements‘ (ESRS 1), with regard to how information should be presented, and
– ‘general information‘ (ESRS 2). Information should come articulated in Governance (GOV), Strategy (SBM), Impact, risk and opportunity management (IRO), Metrics and targets (MT).
3.2) Thematic Standards (ESG)
The three ESG (environmental, social, governance) criteria-whose reporting is mandatory for all companies in every sector-are the subject of as many thematic standards, which in turn are articulated as follows.
Environmental
. Five environmental standards are provided:
– climate change (ESRS E1),
– pollution (ESRS E2),
– water and marine resources (ESRS E3),
– biodiversity and ecosystems (ESRS E4),
– resource use and circular economy (ESRS E5).
Social
. The four social standards cover:
– own labor force (ESRS S1),
– workers in the value chain (ESRS S2),
– affected communities (ESRS S3),
– consumers and end users (ESRS S4).
Governance
. Information on a single standard is currently planned:
– conduct of enterprises (ESRS G1).
3.3) Sectoral standards
Industry standards are also provided to consider substantial impacts, risks and opportunities in their respective areas that are not covered by the thematic standards.
4) Reporting criteria
Reporting and communication of sustainability standards must adhere to some basic quality characteristics. Relevance of information, faithful representation of reality and ‘exalted’ quality characteristics, with attention to their verifiability, comprehensibility, comparability (Annex I, Appendix B).
Where a company considers that a substantial impact, risk or opportunity for its organization does not fit into the three categories of standards (cross-cutting, thematic and industry), it provides additional specific information to enable stakeholders to understand those impacts, risks or opportunities. (4)
5) Definitions
All sustainability standards are based on the concepts of impact, risk and opportunity, defined as follows:
– ‘Impacts‘ refers to sustainability-related impacts-positive and negative, actual and potential-that are related to the company’s activities, to be identified and assessed in terms of significance,
– ‘Risks and opportunities‘ refers to the enterprise’s financial risks and opportunities related to sustainability, including those arising from dependence on natural, human and social resources. To be identified through a financial significance assessment process. (5)
6) ‘Double relevance’
The concepts listed above are crucial when a company must assess the relevance of information and thus decide whether that information should be disclosed. In fact, with a view to reducing the burden on operators (see section 7 below), the Commission decided to leave it up to the companies themselves to choose what information to disclose, in addition to the ‘general information’ that is always required.
Therefore, the information to be reported is that which satisfies the ‘double relevance,’ of impact and financial. A non-binding flow chart, in Appendix E to Annex 1, can help companies assess the relevance of the information to be published. Where a company omits disclosure requirements, in whole or in part, it must provide an explanation of the conclusions that led it to consider the matter immaterial.
7) Simplifications
The European Commission was advised by EFRAG(European Financial Reporting Advisory Group) to define the content of the standards. Following stakeholder consultation, EFRAG introduced a number of simplifications, which were then further expanded by the Commission.
In addition to transferring the assessment of ‘double relevance’ to the enterprise (see supra, para. 6), further simplifications pertain to:
– Reduction in disclosure requirements (-40%),
– Reduction of mandatory data points (-50%) and extension of voluntary ones,
– Phased introduction of certain obligations. Companies with fewer than 750 employees can omit data on GHG emissions and information on the ‘own workforce’ standard for the first year, additional standards (e.g., biodiversity, affected communities, consumers) until the second year. All enterprises may omit in the first year information on active financial effects related to non-climate environmental issues and some information items on their own workforce.
8) Political Scrutiny
TheEuropean Sustainability Reporting Standard (ESRS) delegated regulation adopted by the European Commission on July 31, 2023 will be formally transmitted to the European Parliament and the Council in the second half of August for political scrutiny. Within a period of two months, extendable by two more, the European Parliament or the Council may veto the delegated act, but may not amend it. (6)
Dario Dongo and Alessandra Mei
Notes
(1) Commission Delegated Regulation of 31.7.23supplementing Directive 2013/34/EU of the European Parliament and of the Council with regard to sustainability reporting principles https://eur-lex.europa.eu/legal-content/IT/TXT/HTML/?uri=PI_COM:C(2023)5303
(2) Directive (EU) 2022/2464 of the European Parliament and of the Council. Amending Regulation (EU) No. 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU regarding corporate sustainability reporting https://eur-lex.europa.eu/legal-content/IT/TXT/?uri=CELEX%3A32022L2464
(3) Directive 2014/95/EU, amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups https://tinyurl.com/pa64v2x2
(4) Dario Dongo, Alessandra Mei. CSR, European Sustainability Reporting Standard. The new obligations for businesses. GIFT (Great Italian Food Trade). 3.7.23
(5) ESRS 1, Annex 1, Chapters 1,3
(6) European Commission. Questions and Answers on the Adoption of European Sustainability Reporting Standards. https://tinyurl.com/2s386awk 31.7.23
Dario Dongo, lawyer and journalist, PhD in international food law, founder of WIISE (FARE - GIFT - Food Times) and Égalité.
Graduated in Law from the University of Bologna, she attended the Master in Food Law at the same University. You participate in the WIISE srl benefit team by dedicating yourself to European and international research and innovation projects.
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