Why should I read this?
The European Commission has adopted the first set of EU Sustainability Reporting Standards (ESRS). The ESRS are mandatory common standards by which in-scope companies must report comparable, consistent and detailed information across environmental, social and governance (ESG) issues.
All companies falling under the Corporate Sustainability Reporting Directive (CSRD) will have to make significant new sustainability disclosures as part of their management reports. The first reporting obligations begin in 2025 (for financial periods beginning on or after 1 January 2024).
Among the new disclosures prescribed by the ESRS is a step-change in workforce and human rights reporting. HR and People Managers in affected companies need to familiarise themselves with the ESRS, to support decision-making on any mandatory worker-related disclosures, and should anticipate an increased focus on people risks, policies, KPIs and action plans where disclosures are made.
What are sustainability reporting duties under the CSRD/ESRS?
In January this year, the EU's CSRD entered into force. As well as strengthening the rules concerning the ESG information that companies have to report, it extended reporting obligations to include a broader set of large EU companies, as well as listed SMEs and some non-EU companies. For further information on the CSRD and which entities are in scope, read our update.
Through mandatory reporting, the CSRD will ensure that investors, employees and other stakeholders can access information to assess:
- the impact of companies on people and the environment
- financial risks and opportunities for companies arising from sustainability issues
The ESRS prescribe in more detail the information to be reported under the CSRD and the format to be used. In broad terms, the ESRS require disclosure of, firstly, general information by all companies within scope of CSRD (general disclosures) and, secondly, specific additional information under ten ESG topic areas, if they are relevant to the company. Two topics, out of the ten, address reporting on workers. These are on:
- own workforce (which includes the self-employed and agency workers), and
- workers in the value chain
A company may omit certain topic information if it decides it is not relevant. This does not mean that the disclosures are voluntary; determining relevance requires the application of a materiality assessment which is expanded upon in the ESRS. Some disclosures are being phased-in over one to three years to reduce the burden on businesses.
What are the key workforce and human rights reporting duties?
A company must first perform a materiality assessment to determine whether it is required to report on the above two worker-related topics. In so doing, it is required to conduct a detailed assessment across identified workplace sub-topics which include:
- working conditions (including secure employment, adequate wages, working time, worker engagement, collective bargaining, health and safety, work-life balance)
- equality, diversity and inclusion
- other work-related rights (including child and forced labour, privacy, adequate housing)
If the company decides that one or both topics are not material, it may omit specific disclosures in those areas from their sustainability statement. Companies should be prepared for future external assurance (auditing) of such decisions, ensuring a robust audit trail and documentation.
If one or both worker-related topics are material, as a minimum the company should prepare to disclose detailed and prescribed information, in accordance with the ESRS, across a range of workplace issues, including on: due diligence processes; relevant policies and action plans (including the monitoring of their effectiveness); worker engagement processes; worker risks and impacts identified; detailed people data, metrics and targets.
It should also be noted that, in addition to the two worker-related topics above, in-scope companies will be required in all cases (irrespective of materiality) to provide information on other people issues as part of the general disclosures contained in the sustainability statement, such as:
- the integration of sustainability-related performance in incentive schemes
- the diversity of the administrative, management and supervisory bodies (e.g. the board)
- the representation of employees and other workers on such bodies
- how the interests and views of the company's stakeholders, which include workers, are taken into account
- key worker data to contextualise the statement
Even where businesses are outside of the scope of CSRD, or determine that some disclosures are not material in the context of their business, they may need to cooperate with other businesses where they play a party in third parties' value chains. The meaning of value chain here is extensive, involving upstream and downstream relationships.
What should I do?
The ESRS and CSRD are complex, detailed and comprehensive and will require investment in time and resources by those companies affected. Additional standards, including sector specific ESRS, are expected to follow and the EU has promised technical guidance on the application of the standards this year.
The ESRS are not the only reporting standards being published. Globally, the IFRS Sustainability Disclosure Standards have been recently published by the International Sustainability Standards Board and the UK government are creating Sustainability Disclosure Standards. These will be based on the IFRS Standards and will require disclosures on the sustainability risks and opportunities that UK companies face. There is a risk of divergence among proliferating standards and, recognising this risk, the ESRS were amended "to ensure a very high level of alignment" with the IFRS Standards.
In the meantime, companies should act now to understand how the ESRS impacts their individual business.
Originally Published 14 August 2023
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
