1st set of European Sustainability Reporting Standards is out Now

Sustainability

dr. Gábor Czike, FRICS - Partner, Head of Real Estate and Consruction & ESG, CMS (left) and dr. László Jókay, Senior associate, Real Estate and Construction & Environmental law, CMS

On July 31, the European Commission adopted the first set of European Sustainability Reporting Standards (ESRS). These will play a crucial role for companies subject to the reporting obligations under the Corporate Sustainability Reporting Directive (CSRD). The ESRS are still subject to approval by the Council and the European Parliament.

The CSRD entered into force in January 2023, setting out sustainability reporting obligations for large companies and small- and medium-sized listed undertakings (other than micro undertakings). Certain companies already subject to the Non-Financial Reporting Directive will be required to report under the CSRD for the financial year 2024 in 2025, while large undertakings will have to file for the first time in 2026 for the year 2025.

Under the CSRD, companies will have to comply with extensive ESG reporting requirements, according to ESRS. The first set of the ESRS applies to all companies regardless of business sector. Additional sets of standards are expected to be adopted during the summer of 2024 that will outline sector-specific reporting standards as well as particular standards for SMEs and third-country companies. 

This adopted ESRS consists of 12 separate standards, which can be divided into two categories:

(i) two cross-cutting standards that set forth the general requirements (ESRS 1) and general disclosures (ESRS 2); and

(ii) 10 topical Environmental, Social and Governance standards (ESRS E1-5, ESRS S1-4 and ESRS G1), which include specific reporting requirements supplementing the cross-cutting standards (i.e., standards related to climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy, workforce, workers in the value chain, affected communities, consumers and end-users, and business conduct).

To comply with the reporting obligations under the ESRS, companies must first assess their operation to identify all material impacts, risks and opportunities affecting the company from a sustainability perspective. Reporting will be based on the “double materiality” principle, meaning that the company must not only consider the actual and potential impact of the company on people and the environment (including upstream and downstream value chains) but also all sustainability matters that could be considered material if they have, or could reasonably have, a material financial impact on the company itself. The company’s materiality assessment should identify all such material impacts, risks and opportunities.

Although the materiality assessment is necessary to comply with the reporting obligations, companies applying the ESRS will also have to disclose the information required by the cross-cutting standards, irrespective of its materiality. However, regarding the second category of measures (dealing with ESG), companies will only have to disclose information under the given ESG standards if such sustainability matter is material based on the materiality assessment to the company. If the company concludes that any sustainability matter or topic under the ESRS (for example, water and marine resources) is not material to it, then it must disclose a detailed explanation of the result of the materiality assessment regarding that issue.

To summarize, compliance with the sustainability reporting requirements is a time-consuming exercise, and companies should as initial steps: (i) determine when the reporting obligations under CSRD will apply to them; (ii) perform a double materiality assessment to identify relevant impacts, risks and opportunities from an ESRS perspective; and (iii) perform a gap assessment regarding the ESRS requirements and the information available to the company and its existing reporting procedures. Companies subject to reporting under the CSRD need to commence preparation of the above to ensure compliance in due time.

This article was first published in the Budapest Business Journal print issue of September 8, 2023.

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