knowledge 5 May 2022 |

Progress on European Sustainability Reporting Standards

On 21 April 2021, the European Commission (the “Commission”) adopted its legislative proposal for a Corporate Sustainability Reporting Directive (the “CSRD”). The CSRD aims to improve sustainability reporting to better facilitate Europe’s transition towards a fully sustainable economic and financial system and includes a requirement for in scope companies to comply with EU sustainability reporting standards (“ESRS”). Our earlier briefing here provides further detail on the CSRD.

The CSRD requires the Commission to adopt delegated acts detailing the final ESRS. The European Financial Reporting Advisory Group (“EFRAG”) provides technical advice in the form of draft ESRS to assist the Commission in complying with this requirement.

Consultation on draft ESRS

On 29 April 2022, the EFRAG¹ issued a public consultation (the “Consultation”) containing ESRS exposure drafts (the “Exposure Drafts”) here.

The Exposure Drafts are designed to:

• organise the reporting of disclosures to address the sustainability subject matters set out in the CSRD;

• foster maximum comparability across sectors while allowing for sector agnostic, sector-specific and entity-specific information; and

• facilitate the navigation through the reported information.

The Exposure Drafts cover the environment, social and governance-related matters detailed in the CSRD and are split into three categories:

• Cross-cutting standards 
  
  Cross-cutting standards set out general provisions applying to sustainability reporting and sustainability disclosure requirements that include (a) how an undertaking complies with the ESRS, (b) the way in which sustainability is embedded in an undertaking’s business strategy and business model(s) and (c) how an undertaking identifies and manages its principal sustainability impacts, risks and opportunities.

• Topical standards 
  
  Topical standards set out disclosure requirements relating to sustainability impacts, risks and opportunities that are deemed to be material for all undertakings, regardless of the sectors they operate in.

• Sector-specific standards 
  
  The EFRAG foresees the preparation of sector-specific standards, however this third category of standards is not included in the current consultation. Sector-specific standards will prescribe disclosure requirements relating to sustainability risks, impacts and opportunities that are deemed to be material for all undertakings operating in a given sector.

The EFRAG confirms that the Exposure Drafts take account of other relevant European legislation, including the Sustainable Finance Disclosure Regulation (the “SFDR”), the Taxonomy Regulation and the recently released proposal for a Corporate Sustainability Due Diligence Directive². In particular, Appendix III of the Consultation contains a mapping of where SFDR Principal Adverse Impacts KPIs are covered by the Exposure Drafts.

In addition, the EFRAG has taken note of international developments including two recently issued exposure drafts by the International Sustainability Standards Board (the “ISSB”)³. A mapping of the ISSB exposure drafts against the relevant Exposure Drafts can be found in Appendix V of the Consultation.

Next Steps and Comment

The EFRAG Sustainability Reporting Board (the “EFRAG SRB”) and the EFRAG Sustainability Reporting Technical Expert Group (the “EFRAG SR TEG”) will now consider the Exposure Drafts in parallel with the Consultation which is open for comment until 8 August 2022.

Upon consideration of the results of the Consultation, the EFRAG SRB supported by the EFRAG SR TEG will agree the final first set of draft ESRS which will then be submitted to the European Commission by November 2022.

It should be noted that the Exposure Drafts do not include SME-proportionate standards. The EFRAG states that SME-proportionate and sector-specific standards are being developed and will be submitted to a separate public consultation as soon as possible.