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The Corporate Sustainability Reporting Directive (CSRD) requires large corporations in the EU as well as publicly traded companies (including third country companies with securities on an EU-regulated market) to implement the European sustainability reporting standards - the European Sustainability Reporting Standards (ESRS) - within a few months.

Companies around the world are preparing for these new requirements and can now move forward with their implementation projects based on the final ESRS.

What is it about?

Article 29b of the Accounting Directive as amended by the CSRD empowers the European Commission to issue Delegated Regulations setting out detailed requirements for the sustainability report - the ESRS. The European Financial Reporting Advisory Group (EFRAG) handed over the first set (Set 1) of ESRS in draft form to the EU Commission in November 2022.

Key EU bodies largely supported the EFRAG draft, but expressed concerns about interoperability with international standards. In addition, insufficient clarity of fundamental concepts was criticised, for example regarding the approach to materiality and reporting on an entity's value chain.

In addition, companies and associations expressed criticism regarding the scope of the originally required disclosures. A KPMG analysis also shows that the majority of companies still have major hurdles to overcome in order to comply with the new reporting requirements.

What are the fundamental changes?

The EU Commission published the final Delegated Regulations on 31 July 2023, partly taking into account the concerns of stakeholders. The following changes were made to the EFRAG draft submitted to the EU Commission in November:

Relief in the first years of reporting (phase-in)

There is some additional relief for all companies in relation to individual disclosures that can be waived in the first reporting year, for example the disclosures on the expected financial impact related to environment-related risks.

In addition, for the first one or two reporting years, there is further relief for companies with fewer than 750 employees, for example with regard to the disclosures required in ESRS E4 (Biodiversity) and in S2 to S4 (Workforce in the value chain, Affected communities, Consumers and end users).

Although the total number of disclosure requirements will not be significantly reduced, this relief will help companies in the first reporting years to prepare as they will be given more time depending on their size.
Increased voluntary disclosures Some data points were marked as voluntary in the draft prepared by EFRAG. The EU Commission has now classified further data as voluntary, for example the transition plans in the area of biodiversity and certain parameters on non-employees in the company's own workforce. The higher number of voluntary disclosures will bring some relief for businesses.
Interoperability and adaptation to other frameworks The CSRD requires the European Commission and EFRAG to "take into account, to the extent possible, the work of global standard-setting initiatives". Both have worked with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) to improve interoperability. One of the main criticisms voiced by many participants in the European Commission's recent consultation is the difference in definitions of financial materiality and other key definitions between the ESRS and the ISSB standards. Although improvements have been made in the final text, entities applying the ESRS will not automatically meet all the requirements of the ISSB standards and will need to carefully consider whether there are gaps between the two frameworks.

What happens next?

Provided the EU Parliament and the European Council do not raise any objections, the new standards will be applicable to the first companies in their reporting on financial years beginning on 1 January 2024.

Chart (in German only)

With the CSRD, many companies will be obliged to prepare a sustainability report for the first time. But even those companies that already submit a non-financial statement or prepare a voluntary sustainability report will now be subject to more and more detailed requirements with the ESRS. These will entail adjustments in the reporting process that should not be underestimated.

Therefore, we recommend,

  • familiarise yourself with the ESRS as soon as possible,
  • find out what you need to report and
  • prepare for the implementation of the standards.

You can find an overview of the 10 most important questions and answers in our ESRS Talkbook.

Further Information