EUROPEAN COMMISSION'S DRAFT SUSTAINABILITY REPORTING STANDARDS: FEEBLE OR MORE FEASIBLE?

On 9 June 2023, the European Commission (Commission) published a draft delegated act ("Draft Delegated Act") containing the first set of European Sustainability Reporting Standards ("ESRS") under the Corporate Sustainability Reporting Directive ("CSRD").

In a surprise departure from EFRAG's final recommendations to the Commission, the Commission has significantly reduced mandatory disclosure requirements for those in scope of the CSRD. The Draft Delegated Act contains further deviations from EFRAG's widely consulted recommendations, including additional phase-ins for undertakings and the conversion of mandatory to voluntary disclosures of biodiversity transition plans, raising concerns as to data gaps and lack of cohesion with the EU's sustainable finance framework.

The Draft Delegated Act establishes two sets of sector-agnostic standards against which in-scope companies are expected to make disclosures to discharge their obligations under the CSRD. These are:

• Cross-cutting standards, which establish general requirements (ESRS 1) and general disclosure obligations (ESRS 2) for companies across all material sustainability matters; and
• Topical standards, which set out the specific disclosures companies are expected to make in respect of environmental (ESRS E1-E5), social (ESRS S1-S4) and governance (ESRS G1) matters and related sub-topics.

Public consultation on the Draft Delegated Act is open for four weeks, closing on 7 July 2023. The Commission is expected to adopt the act in July 2023, and it will apply for financial years starting on or after 1 January 2024 for companies within the scope of the first phase of reporting under the CSRD (i.e., companies already reporting under the Non-Financial Reporting Directive ("NFRD")).

EFRAG, the Commission's technical advisor, is currently developing recommendations for the second set of ESRS, which will set sector-specific standards, proportionate standards for listed SMEs and standards for non-EU companies.

The CSRD, which entered into force on 5 January 2023 as part of the European Green Deal and replaced the NFRD, requires in-scope companies to disclose information on sustainability matters in accordance with the ESRS.

Our full briefing on the proposed ESRS is available here.