CSRD, EFRAG and sustainability disclosure

Our key takeaway: Companies will no longer be able to rely on their own materiality assessment to select what they can report on. Earlier this November, the European Parliament adopted the EU Commission’s proposal for the EU Corporate Sustainability Reporting Directive (CSRD), broadening and amending the EU Non-Financial Reporting Directive (NFRD). Once adopted by the EU Council, the CSRD will become law. The European Financial Reporting Advisory Group (EFRAG) has issued the first set of draft European Sustainability Reporting Standards. These detail what companies’ sustainability reporting obligations will be as they report according to the CSRD. In short, be prepared to report in line with the UNGPs and the concept of human rights due diligence provided for. 

The European Financial Reporting Advisory Group (EFRAG) has approved the First set of draft European Sustainability Reporting Standards (ESRS) (November 2022):

• Reporting areas covered: The final proposed sustainability reporting standards are organised into four themes. First, the cross-cutting reporting standards (which include general principles; and general, strategy, governance and materiality assessment disclosure requirements). Second, the environmental reporting standards (which cover climate change; pollution; water and marine resources; biodiversity and ecosystems; and resource use and circular economy). Third, the social reporting standards (which cover own workforce; workers in the value chain; affected communities; costumers and end-users). Fourth, the governance reporting standards (which include governance, risk management and internal control; and business conduct).

• UNGPs as a foundation for cross-cutting due diligence and impact materiality assessments and governance: The architecture of ESRS 1 (General Requirements) and 2 (General Disclosures) have been designed to align with the UNGPs, including the UNGPs due diligence concept and the UNGPs’ concept of severity as a method to inform a company’s assessment of material impacts, risks and opportunities. The ESRS reflect engagement with affected stakeholders as a central element of due diligence. It applies other core elements of human rights due diligence according to the UNGPs as general standards for reporting on how companies embed sustainability due diligence in governance, strategy and business models, the involvement of companies’ senior management and boards of directors, integration of sustainability strategies and performance incentive schemes; and the interaction between material impacts (according to severity) risks; as well as opportunities and their interaction with strategy and business model(s). Similarly, the architecture of the social standards is designed to reflect both the UNGPs and the OECD Guidelines for Multinational Enterprises to the greatest extent possible.

• Alignment with other reporting standards and frameworks: The ESRS are aligned or closely aligned with the Global Reporting Initiative (GRI) Standards (which in turn build on e.g., the UNGPs Reporting Framework); and seek to integrate relevant parts of the IFRS to the maximum extent possible. The UN Sustainability Development Goals (SDGs) are reflected in a number of standards, too.