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EFRAG Approves European Standards for Sustainability Reporting

The European Financial Reporting Advisory Group (EFRAG) approved the final version of the European Sustainability Reporting Standards (ESRS). The ESRS set the rules and requirements for companies to report on sustainability-related impacts, opportunities, and risks under the EU's upcoming Corporate Sustainable Reporting Directive (CSRD).

Following the acceptance of the CSRD by the European Parliament last week and the anticipated adoption by the EU Council later this month, the approval represents an important step in establishing a new sustainability reporting system in Europe. Companies subject to the guidelines would be required to report on their strategies and business models, governance and organisation, materiality evaluations of sustainability impacts, opportunities, and risks, as well as policies, targets, action plans, and performance.

The CSRD is intended as a substantial update to the 2014 Non-Financial Reporting Directive (NFRD), the existing EU sustainability reporting system. The CSRD is expected to be implemented beginning in 2024, commencing with large corporations. The new laws would dramatically increase the number of enterprises obliged to give sustainability disclosures from the present 12,000 to over 50,000, and establish more detailed reporting requirements on environmental consequences, human rights and social standards, and sustainability-related risk.

As part of the revision of the NFRD, the European Commission charged EFRAG, an EU-funded private group, in June 2020 to prepare for new EU sustainability reporting standards. EFRAG was asked to produce reporting criteria for the CSRD in May 2021.

In May 2022, EFRAG issued its early versions of the standards and established a 100-day consultation process to collect feedback. One of the most significant modifications to the approved ESRS is the elimination of the "rebuttable presumption," which the majority of respondents viewed as undermining materiality judgments and resulting in excessive costs. According to an examination of replies published on the EFRAG website, respondents suggested that the ESRS include more application guidance on how to make materiality determinations.

The accepted standards also involve a small reorganization of the issues covered by the standards, including the consolidation of the Governance categories into a single topic, Business Conduct (from two). Included among environmental topics are Climate Change, Pollution, Water and marine resources, Biodiversity and ecosystems, and Circular economy. Included among the social subjects are Own workforce, Workers in the value chain, Affected communities, and Consumers and end-users.

The CSRD is on track to begin applying to major public-interest enterprises with over 500 employees at the beginning of 2024, followed by companies with over 250 employees or €40 million in revenue in 2025, and listed SMEs in 2026.

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