The European Roadmap to Sustainability Reporting: The EFRAG Environmental Standards.

With increasing attention being paid to sustainability issues, along with the adverse effects of recent developments such as the aftermath of the COVID pandemic, geo-political risk and disruptions, and the energy crisis, the European Union (EU) has established a set of reforms with the aim of achieving an economy with net-zero greenhouse gas (GHG) missions by 2050, in line with the European Green Deal and Paris Agreement 2050. The three most important structural measures are the EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), and the Corporate Sustainability Reporting Directive (CSRD). Whilst the EU Taxonomy defines investments supporting the transition to a greener economy through specific KPIs, the SFDR requires financial service providers to disclose information on the sustainability profile of their investments. To establish greater transparency regarding the impact companies have on the planet, in April 2021 the European Commission (EC) introduced the CSRD. This Directive mandates sustainability-related information, replacing the Non-Financial Reporting Directive (NFRD), which has imposed requirements to disclose environmental and social impacts since 2017. Under the CSRD, the European Financial Reporting Advisory Group (EFRAG) was appointed as technical adviser to the EC to develop European Sustainability Reporting Standards (ESRSs). The first ESRS Exposure Drafts (EDs) prepared by the EFRAG Project Task Force on European Sustainability Reporting Standards (EFRAG PTFESRS) were presented for comments from 30 April 2022 to 8 August 2022. The EFRAG SRB, advised by the EFRAG SR TEG, addressed the feedback arising from the consultation and accordingly amended the first set of draft ESRSs that were released in November 2022 and submitted to EC for review. Following further consultation with regulatory authorities’ expert groups, the EC, along with EU member states, released updated draft standards for an additional four-week public feedback period in June 2023. On 31 July 2023, the EC adopted the final Delegated Act of the ESRSs subject to a scrutiny period of two months with a possible two-month extension. On 21 October 2023, the ESRSs became law and will be adopted by companies falling under the scope of the CSRD starting from 2024. The Delegated Act includes the 12 established ESRSs, which comprise two cross-cutting standards which apply to all sustainability matters and 10 topical standards covering a wide range of environmental, social, and governance matters. ESRSs will apply on an individual or consolidated basis from 1 January 2024, and will be subject to a phased introduction that will start with Public Interest Entities (PIEs) and companies already obligated to comply with reporting requirements under the NFRD (i.e. large EU-listed companies with more than 500 employees). ESRSs will expand the scope of NFRD to reach: (i) all EU listed companies, including listed SMEs (except listed micro-enterprises), (ii) large unlisted companies; and (iii) non-EU companies. In subsequent years, the EC is expected to adopt further delegated acts for additional sets of standards, namely, sector-specific standards, proportionate standards for listed SMEs, and standards for non-EU companies.