EU Commission Eases Sustainability Reporting Rules. What does it mean?

10 Aug 2023

On the 12 June 2023 the European Commission 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 proposals seek to reduce the reporting burden on small companies and first-time reporters by extending the phase-in times for some key sustainability factors. Smaller companies, which are classified as entities 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 and rules enabling all companies to focus specifically on material sustainability factors.

So what does this mean for companies?

Ultimately these amendments encompass three main aspects:

1. There is a postponement in the implementation of the ESRS - creating duplication with EFRAG, which already proposed sequencing for the implementation of the different ESRS sub-standards. 
2. The entire ESRS is now subject to corporate-level materiality assessment. This means that all the key performance indicators (KPIs) are non-mandatory and instead fully depend on the quality of the materiality assessment. This approach introduces complexity for companies, leaving them uncertain about the specific reporting requirements they need to follow.
3. Certain standards, particularly those related to biodiversity transition plans, have been made voluntary. This decision directly contradicts the requirements outlined in the Corporate Sustainability Reporting Directive, which mandates disclosure on all material issues. It is worth noting that the EU committed, through the Target 15 of the Global Biodiversity Framework at COP 15, to require biodiversity reporting for large businesses and financial institutions.

So for companies, a key change in the Commission's draft is a proposal for all disclosure requirements to be subject to materiality assessments as just mentioned, effectively allowing companies to focus reporting on sustainability factors that they consider material to their businesses. One thing to call out is that 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." Therefore, 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.

So what's next?

If we come at it from a practical stand point, the most notable change is they would make all data points and indicators voluntary instead of mandatory. Whereas EFRAG had suggested that, as a minimum, all climate indicators should be mandatory under CSRD, the Commission wants to align more closely with the International Sustainability Standards Board (ISSB) by making them voluntary.

This would mean that a firm would make its own assessment of whether a topic materially impacts its business, or its business has a material impact on a topic (a concept known as double materiality), before deciding whether to disclose. That is potentially concerning in terms of how companies will make that judgement and use it as a way to delay reporting.

Now when a topic is considered material, but data is perceived to be less mature – such as waste, water, biodiversity, resource usage and some workforce figures – the proposals give companies permission to omit that information in the first year of reporting. Which we could argue makes sense, so that we get more accurate and relevant information. But it does make it more subjective as to how they drew that conclusion.

In conclusion, it is key for companies to continue striving for the optimum reporting requirements, as ultimately, they will have to do this at some point.  

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