In April 2021, the European Commission adopted a proposal for a Corporate Sustainability Reporting Directive (“CSRD”) which will revise and expand the current reporting regime under the Non-Financial Reporting Directive. Under the CSRD in-scope companies will be required to report in compliance with mandatory European Sustainability Reporting Standards (“ESRS”) to be adopted by the European Commission as delegated acts, on the basis of technical advice provided by the European Financial Reporting Advisory Group (“EFRAG”).

The EFRAG has now published exposure draft ESRS for consultation. The ESRS exposure drafts correspond to the first set of standards required under the proposal for a CSRD and cover environmental, social and governance matters. The reporting standards are organised into three categories:

• Cross-Cutting Standards – intended to be transversal to all sustainability subject matters, including general principles, strategy, governance and materiality assessment of impacts, risks and opportunities.
• Topical Standards – disclosure requirements relating to sustainability impacts, risks and opportunities that are deemed to be material for all undertakings, regardless of the sectors they operate in (“sector agnostic”):
  • Environmental Standards: climate change, pollution, water and marine resources, biodiversity, resource use and circular economy.
  • Social Standards: own workforce, workers in the value chain, affected communities, consumers, and end-users.
  • Governance Standards: governance, risk management, internal control, and business conduct.
• Sector-Specific Standards – the ESRS architecture foresees the preparation of sector-specific standards, however these standards are not included in the consultation.

The ESRS exposure drafts also take account of disclosures required under other EU legislation and proposals, including the Sustainable Finance Disclosure Regulation, Article 8 of the Taxonomy Regulation together with obligations under the proposed Corporate Sustainability Due Diligence Directive. The EFRAG indicates that international sustainability reporting initiatives were also considered, including the recent SEC proposal on climate-related disclosures. The consultation documents include tables mapping the ESRS disclosure requirements against the TCFD recommendations and the ISSB’s proposed standards.

The consultation on the ESRS exposure drafts is open until 8 August 2022. The EFRAG is due to submit the first set of draft ESRS to the Commission by November 2022. Separately, the European Parliament and European Council continue to negotiate the final legislative text of the CSRD which is expected to be adopted by the Commission later this year. The ESRS exposure drafts were prepared on the basis of the April 2021 CSRD proposal, therefore, any changes adopted in the final text of the CSRD will need to be reflected in the final draft ESRS submitted to the Commission. The ESRS exposure drafts submitted to consultation do not include SME-proportionate standards nor sector-specific standards, the EFRAG confirmed that these standards are being developed and will be submitted to a separate public consultation as soon as possible.

The overall architecture of the exposure drafts is designed to ensure that sustainability information is reported in a carefully articulated manner

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