EU Commission adopts sustainability reporting standards

The European Commission has approved the European Sustainability Reporting Standards (ESRS), significantly expanding the scope of sustainability reporting.

The new rules will require over 50,000 companies to provide sustainability disclosures, a significant increase from the previous requirement of around 12,000 companies.

The ESRS represents a major update to the 2014 Non-Financial Reporting Directive (NFRD) and introduces more comprehensive reporting requirements on company impacts related to the environment, human rights, social standards, and sustainability-related risks.

The ESRS delegated act will now go through a two-month scrutiny period by the EU Parliament and Council before implementation begins for some companies in the financial year 2024.

However, some sustainability-focused investor groups have expressed concerns about the Commission’s decision to remove the mandatory nature of several sustainability disclosures in the ESRS.

The Commission also emphasised the importance of interoperability between ESRS and other sustainability reporting standards, such as the ISSB and GRI standards.

The development of the ESRS began in June 2020 when the European Financial Reporting Advisory Group (EFRAG) was tasked with creating new sustainability reporting standards. In November 2022, the final draft of the ESRS was submitted, reducing the number of reporting requirements to ease the administrative burden on companies.

In June 2023, the European Commission proposed the final version of the ESRS, allowing companies to focus on sustainability factors they consider material to their business. Additional changes included the phased introduction of certain requirements and the option for some companies to opt out for up to two years.

Aleksandra Palinska, Executive Director of Eurosif, expressed regret that the investors’ calls to retain key ESG indicators as mandatory were not heeded. Investors need specific corporate disclosures to align their capital allocation with EU Climate Law and Green Deal objectives and to prepare their own sustainability-related disclosures.

Mairead McGuinness, Commissioner for Financial Services, Financial Stability, and Capital Markets Union, stated that the adopted standards are ambitious and crucial for the EU’s sustainable finance agenda. They strike a balance between reducing the reporting burden on companies and enabling them to demonstrate their efforts to meet the Green Deal Agenda and access sustainable finance.