First European Sustainability Reporting Standards (ESRS) apply from 1 January 2024
08 January 2024
08 January 2024
On 22 December 2023, Commission Delegated Regulation (EU) 2023/2772 was published in the Official Journal of the European Union. The Delegated Regulation sets out the first set of European Sustainability Reporting Standards (“ESRS”) under the Corporate Sustainability Reporting Directive 2022 ((EU) 2022/2464) ("CSRD"). It came into force on the third day following publication and applies from 1 January 2024 for financial years beginning on or after 1 January 2024.
This development is important because it is the reporting framework that firms will need to comply with where they are in scope of the CSRD. As a reminder we set out the scoping criteria of CSRD below. It is important to recognise the extra territoriality of CSRD which will apply to non-EU firms who have either shares or certain non-equity securities listed in the EU from 1 January 2024.
The ESRS comprise a significant new reporting framework that in-scope companies need to get familiar with. As companies transition to these new requirements, they should:
The ESRS have been developed to support sustainability disclosures required under the CSRD. The CSRD enhances the reporting requirements under the Non-Financial Reporting Directive (2014/95/EU) ("NFRD") and extends non-financial reporting to significantly more organisations.
Changes were made to the CSRD's scope by Commission Delegated Directive ((EU) 2023/2775), which was published in the EU Official Journal on 21 December 2023. This amends the Accounting Directive ((EU 2013/34) to increase the balance sheet and net turnover criteria for micro, SME and large companies by 25 per cent to take account of inflation. According to the EU Commission's Work Plan for 2024, which was published in October 2023, this reduces the scope of CSRD so it will apply to 1 million fewer companies.
Category |
Entities Covered |
From which financial reporting year |
1 |
Entities already covered by the NFRD. Large EU incorporated undertakings and parent undertakings of a large group that:
Large non-EU incorporated undertakings and parent undertakings of a large group that exceed an average of 500 employees during the financial year. |
Financial years beginning on or after 1 January 2024 (first sustainability statement published in 2025) |
2 |
Large EU incorporated undertakings and parent undertakings of a large group, not currently subject to the NFRD that exceed at least two of the following:
Large non-EU incorporated undertakings or parent undertakings of large groups not within Category 1. |
Financial years beginning on or after 1 January 2025 (first sustainability statement published in 2026) |
3 |
EU incorporated small and medium-sized undertakings (SME) listed on EU regulated markets that:
Non-EU listed SMEs that are not micro-undertakings. |
Financial years beginning on or after 1 January 2026 (first sustainability statement published in 2027) subject to decision to opt out for two years. Last possible date to start reporting is from financial year 2028 with the first sustainability report published in 2029 |
4 |
Non-EU companies that generated over €150 million per year in the EU for the last two consecutive financial years and that have either:
|
Report on the sustainability impacts at the group level of that non-EU company from financial year 2028, with first sustainability statement published in 2029 |
The ESRS set out the information that entities must disclose about their material impacts, risks and opportunities (“IRO”s) in relation to environmental, social and governance sustainability matters.
Entities should also provide entity-specific disclosures if they decide that an ESRS does not require disclosures in relation to an IRO (or it does not require disclosures of sufficient granularity) but the IRO is material to their specific facts and circumstances.
The ESRS information assessed to be non-material need not be disclosed.
The aim of the disclosures is to help users understand the entity's material impacts on people and the environment as well as the material impacts of sustainability matters on the entity's development, performance and position. This is known as double materiality.
Annex I contains:
Annex II contains the list of acronyms and definitions to be used for the ESRS.
Entities must report on sustainability matters based on the double materiality principle. Entities must undertake a materiality assessment to identify the IROs to be reported under all the ESRS apart from ESRS 2. An entity will only report IROs that are material for its business model and activity. The materiality assessment process is subject to external assurance in accordance with provisions of the Accounting Directive (2013/34/EU).
Information is material and therefore reportable if it relates to the entity's significant actual or potential impact on people or the environment (“impact materiality”), or if it has or could have a significant financial impact on the company in the short, medium or long term (“financial materiality”).
In a change from the consultation draft issued by the Commission in June 2023, if an entity concludes that climate change is not a material topic and therefore does not report in accordance with ESRS E1, it must provide a detailed explanation of the conclusions of its materiality assessment with regard to climate change and a forward-looking analysis of the conditions that could lead the undertaking to change its conclusion in the future.
The ESRS are targeted at stakeholders, which are defined as including:
This is a wider definition than the definition of primary users in the International Sustainability Standards Board (ISSB) Sustainability Disclosure Standards.
The bullets below highlight how the adopted Regulation differs from the EFRAG (formerly the European Financial Reporting Advisory Group) proposals:
EFRAG had intended that the EU Sustainable Finance Disclosure Regulation ((EU) 2019/2088) ("EU SFDR") disclosures of principal adverse impact ("PAI") indicators (as well as disclosures under the EU Benchmarking Regulation ((EU) 2016/1011) ("EU BMR") or Pillar 3 requirements under the EU Capital Requirements Regulation (575/2013) ("EU CRR") would be always considered material under the ESRS and need to be reported.
The Commission made a significant change to the ESRS from the EFRAG recommendations by moving away from mandatory disclosure requirements in its June 2023 consultation draft. The ESRS now provide that apart from the General Disclosures in ESRS 2, all disclosure requirements shall be subject to a materiality assessment.
Financial market participants expressed concerns that there could be a potential data gap if they need to report PAI information under the EU SFDR but target companies do not have to report the relevant information if they don't assess it as material. To address these concerns, the ESRSs now require entities that decide not to disclose information related to the EU SFDR, the EU BMR or Pillar 3 requirements on the grounds that it is not material, to disclosure that fact rather than just not publishing any information. The entity must also provide a table with all these data points and either indicate where they can be found in the sustainability statement or that they are "not material" (as relevant).
Interoperability has been a key concern during the development of these standards. The EU and the ISSB have been working together to avoid duplicatory requirements between the ESRS and the ISSB's Sustainability Disclosure Standards: IFRS S1 and IFRS S2 (see Disclosures required under the IFRS's Sustainability Disclosure Standards (ISSB S1 and S2).
The Commission considers that entities required to report under the ESRS on climate change will "to a very large extent" report the same information as companies that will use the IFRS S2.
The Commission has further aligned the definition of financial materiality in the ESRS to the ISSB requirements to focus further on primary users of financial reports (i.e. investors).
ESRS 1 allows entities to include additional disclosures that relate to compliance with other standards (e.g. ISSB or GRI standards) provided that those disclosures (i) are clearly identified with a reference to the relevant legislation, standard or framework and (ii) meet the requirements for qualitative characteristics of information specified in ESRS 1, chapter 2 and Appendix B.
The ISSB has:
EFRAG have produced a Mapping Table comparing the ESRS and IFRS S2 to demonstrate how well the standards are aligned.
The CSRD requires further ESRS for non-EU companies and SMEs, and sector specific ESRS to be developed by June 2024. However, the Commission's 2024 Work Programme and related proposal suggest extending the deadline to adopt the sector specific ESRS and ESRS for non-EU companies by two years.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.