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Cross-sector ESRS adoption paves way for CSRD implementation

Author: ICAEW Insights

Published: 27 Oct 2023

Cornerstone package of sustainability reporting standards holds off an 11th-hour parliamentary challenge to pass through its final scrutiny period and take legal effect.

The European Financial Reporting Advisory Group (EFRAG), tasked by the Commission with developing and drafting the standards, warmly welcomed the conclusion of the legislative process for the first set of EU Sustainability Reporting Standards (ESRS). 

The adoption fills a critical missing piece of the Corporate Sustainability Reporting Directive (CSRD), allowing its implementation to continue at pace, says Michael Izza, ICAEW Chief Executive.

“With the first set of companies due to produce their initial reports under the legislation in the financial year 2024, they and the accounting profession have been working hard to ensure successful implementation of the CSRD. Those efforts must now accelerate.”

He added: “We note that a number of important concerns with regard to some of the complexity associated with ESRSs have been raised during the scrutiny process. It is important for the Commission and EFRAG to reflect on them. As we have said repeatedly, we want to see the goal of relevant, consistent and comparable sustainability disclosures achieved. This is a key element of the drive towards a net-zero economy.”

EFRAG welcomed the integration of the ESRSs into the European legal framework. “EFRAG has contributed to the process since September 2020 and regards this as a milestone in the progress of quality sustainability reporting in the EU and globally,” it said in a statement.

Following this “crucial step”, EFRAG confirmed, it is now dedicating its energies to “providing support for a successful implementation of this first set of sector-agnostic ESRSs.”

In the coming weeks, the body announced, it will unveil for public feedback several sets of implementation guidance on key topics – specifically materiality assessment, value chain and data-points overview for gap analysis.

Motion quashed

The first set of ESRSs faced a late challenge on its path to adoption. Towards the end of the scrutiny period, a group of 45 MEPs brought forward a motion to reject the package as it stood, arguing that most of the ESRSs fall short of usable KPIs – and therefore fail to serve the Commission’s goal of creating measurable and comparable standards, especially across companies, that would add value to data providers and users managing the transition.

Furthermore, the motion contended, the standards:

  • introduce a high administrative burden for companies due to their high complexity;
  • require significant resources for companies to manage – a particular burden on smaller undertakings, and
  • jeopardise the Commission’s intention to reduce red tape and reporting obligations by 25% to address intra-EU and extra-EU competitiveness issues.

With that in mind, the motion said, the Commission should submit a new Delegated Act that would “significantly reduce” the complexity and quantity of the standards.

The motion was defeated in a plenary session of the European Parliament vote on 18 October, by 359 to 261: a comfortable enough margin, but nonetheless indicative of divided views in the European Parliament.

Trust in the process

Reacting to the result, Sébastien Godinot, Senior Economist in the European Policy Office of WWF, said: “MEPs have safeguarded the ESRSs, a vital tool for improving transparency on companies’ sustainability performance.

“By standing firm against this attempt to kill the standards, MEPs have pushed back yet another indirect attack on the Green Deal, ensuring that European companies are not penalised in their critical transition towards a greener future.”

For Filip Gregor, Head of the Responsible Companies arm of public-interest law organisation Frank Bold, the cross-party support for ESRSs “confirms how critical a role transparency plays in the EU sustainability framework and in enabling sustainable finance to flow to climate transition.”

He added: “It is encouraging to see that MEPs trust the technical, multistakeholder process to develop the standards in EFRAG.”

With the standards now in effect, EFRAG has opened a Q&A platform to foster relevant dialogue with stakeholders – aimed at supporting them in their implementation processes and their broader understanding of ESRSs.

Looking ahead, EFRAG is also progressing with the development of exposure drafts for SME-focused standards that will be issued for consultation in January next year. In parallel, it will continue to work on sector-specific standards.

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