Standards, Guidances, Size Criteria & Co.: The latest developments in sustainability reporting

Since the publication of the Delegated Act on the European Sustainability Reporting Standards (ESRS) on July 31, 2023, it has been widely known that companies within the scope of the Corporate Sustainability Reporting Directive (CSRD) are obligated to report according to the new standards upon the regulation's enforcement. Therefore, it is crucial for decision-makers and individuals responsible within the company to stay up to date on official guidelines, ongoing discussions, or upcoming changes in regula­tory matters. In this article, we provide a concise summary of the latest developments in sustainability reporting. 

Following the adoption of the first set of European Sustainability Reporting Standards (ESRS) on July 31, 2023, by the EU Commission and the subsequent publication of the associated Delegated Act, a two-month scrutiny period commenced on August 21, 2023, during which the European Parliament and the Council had the oppor­tunity to raise objections to the adoption of the ESRS. Although a group of Members of Parliament submitted such an objection in the form of a motion for a resolution to reject the ESRS shortly before the deadline, it failed to gain a majority in the parliamentary vote on October 18, 2023 (359 votes against, 261 in favor, 11 ab­sten­tions). Since the option to extend the scrutiny period for an additional two months was not exercised, the only remaining step is the official publication of the Delegated Act in the Official Journal of the EU. The new reporting standards will be applicable as planned from January 1, 2024. 

For some time now, the European Financial Reporting Advisory Group (EFRAG), an independent expert group commissioned by the EU Commission for various tasks, including the development of ESRS, has been working on two implementation guidances for materiality assessment according to the ESRS. The primary document, the Materiality Assessment Implementation Guidance (MAIG), includes an overview of the understanding of materiality underlying ESRS, a step-by-step guide for conducting materiality assessment, recommendations for involving stakeholders and defining thresholds, as well as numerous FAQs on specific issues related to mate­riality assessment. These explanations are complemented by the second guidance, the Value Chain Implemen­tation Guidance (VCIG), which provides methods and practical advice for incorporating the value chain into the materiality assessment. Both documents are currently in draft versions but are expected to be approved by EFRAG and released for a 30-day public feedback period shortly. The publication of the final implementation guidances is scheduled for Q1/2024 according to the EFRAG Work Programme for 2024. 

The numerous new requirements stemming from the ESRS pose significant challenges for most companies. For this reason, on October 24, 2023, EFRAG launched an online Q&A platform for ESRS, where companies can directly submit questions about the implementation of the standards to EFRAG expert groups. The platform is intended to serve as a central point of contact to systematically and purposefully provide answers to questions that are not currently adequately addressed by the ESRS themselves. Through this process and the planned release of additional clarifications and, if necessary, specific adjustments to the ESRS by the EU Commission, the quality of reporting is expected to improve, ultimately advancing the achievement of the overarching goals of the CSRD. EFRAG plans to release a series of clarifications each quarter in 2024. 

According to the CSRD timetable, which provides for a staggered commencement of new reporting obligations based on the size and capital market orientation of the company, as of January 1, 2026 (or from January 1, 2028, if the voluntary extension option is used), listed SMEs will come under the scope of the CSRD. Given the exten­sive and complex nature of the already published first set of ESRS, the EU Commission has tasked EFRAG with developing proportionate ESRS specifically for listed SMEs. The first set of ESRS serves as the foundation for the SME-specific ESRS, but the number of disclosure requirements and associated data points will be signifi­cantly reduced to streamline reporting. Feedback on the draft ESRS for listed SMEs is expected to be solicited starting in January 2024 through a four-month public consultation process. 

 

In addition to the sector-agnostic ESRS applicable from January 1, 2024, companies will be required to disclose industry-specific information on ESG aspects based on sector-specific ESRS. The CSRD initially stipulated that the adoption of this second set of ESRS should occur by June 30, 2024, enabling reporting on sector-specific topics to align with the relevant standards starting in the financial year 2025. However, to allow companies to initially focus on implementing the first set of ESRS, the EU Commission officially decided on October 17, 2023, to delay the adoption of sector-specific ESRS by two years, extending the deadline to June 30, 2026. Currently, EFRAG is planning to finalize around 40 industry-specific standards, including standards for the oil and gas industry and mining and coal mining with drafts expected to be published in the first half of 2024. All sector-specific standards are set to be released as draft versions by early 2025 and subsequently subjected to a public consultation. 

In addition to the development of ESRS, EFRAG is currently working on the creation of a digital taxonomy for ESRS (XBRL Taxonomy). This taxonomy is necessary to digitally tag the information included in sustainability reports, as mandated by the CSRD. EFRAG plans to release the XBRL Taxonomy for the first set of ESRS for a 60-day consultation in the first quarter of 2024. Following a subsequent revision phase, it is set to be sub­mit­ted to the EU Commission in the second half of 2024. The XBRL Taxonomy will contribute to the establishment of a unified European Single Access Point. 

The criteria used to classify the size of a company are crucial in determining the reporting obligations for individual businesses. Due to inflation developments and the need for periodic review, the EU is obligated to conduct a regular review of the size criteria defined in Directive 2013/34/EU. As part of this review, the EU Commission adopted a Delegated Act on October 17, 2023, to increase the thresholds at which a company is considered “large”. While the employee threshold remains unchanged (at least 250 employees), the thresholds for the balance sheet total (at least €25 million, up from the previous €20 million) and net turnover (at least €50 million, up from the previous €40 million) have each been raised by 25%. Since the CSRD references the Directive 2013/34/EU when defining its scope, these changes have direct implications for the obligation to prepare a sustainability report. The new thresholds, for example, mean that some (non-capital market-oriented) companies that would have originally been required to publish a sustainability report as “large” companies starting from the financial year 2025 may now fall outside the scope of the CSRD due to the adjusted size criteria and therefore do not have to prepare a sustainability report.