On 23 November 2022, the European Financial Reporting Advisory Group ("EFRAG") submitted the first set of draft EU Sustainability Reporting Standards ("ESRS") to the European Commission.

As discussed in our previous blog post (which you can read here), the draft ESRS - which in-scope entities will be required to report against under the Corporate Sustainability Reporting Directive ("CSRD") - were released on 29 April 2022 and made available for public consultation until 8 August 2022. Following the end of the public consultation, EFRAG amended the ESRS and approved updated versions on 16 November 2022. EFRAG subsequently submitted the updated draft ESRS to the European Commission.

The CSRD was adopted by the Council of the European Union on 28 November 2022, meaning the requirement to report against the ESRS will apply in stages from 2024, with first submissions due in 2025 (for more information on the CSRD, read our legal update here).

Changes to the ESRS

The draft ESRS were initially released as a series of exposure drafts, which outlined disclosure requirements across a number of key issues categorised into four areas: (1) Environment; (2) Social; (3) Governance; and (4) Cross-cutting standards. For a detailed breakdown of the main disclosure requirements under the ESRS, please read our earlier blog post here.

During the consultation period, EFRAG received feedback from a variety of stakeholders (including NGOs, public authorities, financial institutions, companies and trade associations). Based on the feedback received, EFRAG made a number of changes to the ESRS drafts, which include (but are not limited to):

  • Amending the threshold for impact materiality by removing the term 'significant' as a reference to materiality of risks and opportunities and, instead, linking the threshold to the 'most material' criterion used in the OECD Guidelines, UNGP Guidelines and GRI Standards;
  • Reducing the total number of disclosure requirements;
  • Introducing phase-in periods for disclosure requirements that require the disclosure of quantitative data on the financial effects arising from opportunities;
  • Revising the approach to value chains, with a more specific focus on the materiality of value chain information; and
  • Abandoning the rebuttable presumption of disclosure requirements being material to the reporting entity.

Given the relatively minor nature of the changes, EFRAG concluded there were no elements that rendered the need for re-exposure of the draft ESRS. Despite this, some of the changes are considered to be positive as they will lessen the burden on in-scope entities a little, as exemplified by the removal of the rebuttable presumption. Under the initial draft ESRS, in-scope entities were obliged to disclose against the ESRS on a "comply or explain", i.e. either disclose the required information or explain why the required information was not material to the entity. The removal of this rebuttable presumption in the updated ESRS will leave in-scope entities with more room to conduct their own materiality assessments. Nevertheless, in-scope entities should still be able to explain the result of their materiality assessments and, in particular, the basis on which they conclude that certain disclosure requirements are immaterial.

What next?

The European Commission will consult other EU bodies, including the European Environment Agency and the European Central Bank, as well as the EU member states themselves on the draft ESRS. It is expected that the Commission will subsequently adopt the final ESRS by way of delegated acts in or around June 2023. A second set of sector-specific standards are also expected to be adopted by 31 October 2023, along with additional specific standards for listed SMEs.

To ensure that in-scope companies are prepared to make ESRS-compliant disclosures, their management teams should be thinking about the effects that the ESRS (in their submitted form) may have on the company's processes and systems of internal controls, as well as their ability to gather relevant information.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.