Draft Delegated Act to alleviate CSRD reporting requirements

Saturday 10 June 2023

Draft Delegated Act to alleviate CSRD reporting requirements

On June 9, the European Commission has published the draft Delegated Act with the first set of sector agnostic ESRS for consultation. The documents can be found here: European sustainability reporting standards – first set (europa.eu)

The Corporate Sustainability Reporting Directive requires large companies and listed SME’s, as well as parent companies of large groups, to report in their management report the information necessary to understand the company’s impacts on sustainability matters, and the impact of sustainability matters on the company’s development, performance and position.

This information must be reported in accordance with European Sustainability Reporting Standards (ESRS) that specify both the content and the structure of the required reporting. In November 2022 EFRAG submitted it’s technical advice on the first set of standards. You can read about these here: First set of standards submitted for final approval to the EU comission - News (2impact.nl)

The final ESRS have to be adopted by the European Commission by means of a Delegated Act. The Delegated Act will go into force 4 month after adoption by the European Commission (which is expected beginning of July) and will be directly applicable in all Member States.

Next to the adoption of the sector agnostic ESRS the CSRD requires the European Commission to adopt sector-specific standards, proportionate standards for listes SMEs and standards for non-EU companies. 

Outcomes of the consultation on the first set of ESRS

From the consultation that the European Commission performed on the first set of ESRS it became clear that:

·        The draft standards EFRAG submitted broadly meet the CSRD mandate and would achieve the intended policy goals in the context of the European Green Deal. 

·        The nature of many disclosure requirements is challenging for many undertakings and especially for those that have not been subject to mandatory sustainability reporting in the past. These challenges mainly concern disclosures around biodiversity, own workers, workers in the value chain, affected communities and consumers and en-users.

·        Additional guidance is needed to enable undertakings to apply the standards in an efficient and consistent manner. In particular with regard to materiality assessment and the disclosure of value chain information.

·        Rationalisation of reporting is needed in order to ensure objectives are reached at minimum costs and maintain long-term competitiveness.

Modifications of ESRS by the European Commission

In order to ensure proportionality and facilitatecorrect application of the European Commission has made the following modifications to the draft ESRS: 

       I.          Materiality: Except for the general disclosures in ESRS 2, all standards and all disclosure requirements and data points within each standard will be subject to materiality assessment by the undertaking. This means the ESRS E1 on Climate is not considered mandatory any more. S1 Own workers was partly mandatory for companies with more then 250 employees; this will no longer be the case.

      II.          Phasing-in certain requirements: in the November version EFRAG already proposed some phase-in disclosures. In addition to these the Commission has provided further phase-ins.

These are: 

– Undertakings with less than 750 employees may omit: 

·        Scope 3 GHG emissions data in the first year

·        Disclosure requirements specified in the standard on “own workforce” 

·        Disclosure requirements specified in the standards on biodiversity and on value-chain workers, affected communities, and consumers and end-users in the first two years

– All undertakings may omit in the first year:

·        Anticipated financial effects related to non-climate environmental issues (pollution, water, biodiversity, and resource use);

·        Certain datapoints related to their own workforce (social protection, persons with disabilities, work-related ill-health, and work-life balance) 

    III.          Making certain disclosures voluntary: Next to voluntary datapoints proposed by EFRAG in the November ESRS the Commission has further converted a number of mandatory datapoints into voluntary datapoints. This includes, for example: 

a.      biodiversity transition plans; 

b.      certain indicators about “non-employees” in the undertaking’s own workforce

c.      and an explanation of why the undertaking may consider a particular sustainability topic not to be material. 

    IV.          Further flexibilities in certain disclosures: in addition to making certain datapoints voluntary, the Commission has also introduced certain flexibilities for some of the mandatory datapoints. For example, there are additional flexibilities in the disclosure requirements on:

a.      the financial effects arising from sustainability risks and on engagement with stakeholders, 

b.      in the methodology to use for the materiality assessment process. 

     V.          Coherence with EU legal framework: Technical modifications to ensure better alignment with other provisions in the Accounting Directive and with other relevant pieces of legislation, for example regarding the Pay Transparency Directive and the European Pollutant Release and Transfer Register. 

    VI.          Interoperability with global standard-setting initiatives: Modifications have been made to further align with the International Sustainability Standards Board and the Global Reporting Initiative to ensure a high degree of interoperability with ESRS. E.g. “Non-employees” are self-employed persons or persons who provided by undertakings primarily engaged in “employment activities” 

  VII.          Editorial and presentational modifications: the Commission has made editorial and presentational changes to improve the clarity, usability, and coherence of the standards. This includes, for example, the introduction of a drafting convention to clearly identify all terms for which ESRS has a precise definition. standards. 

Based on the modifications above the European Commissions expects a significant decrease in costs of implementation.

Furthermore, the Commission has asked EFRAG to publish additional guidance and educational material, addressing the materiality assessment process and other issues and is putting in place an interpretation mechanism to provide formal interpretation of the standards.

The above description is based on the proposed delegated act the was published by the European Commission on June 9 2023.

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