Update on the European Sustainability Reporting Standards (ESRS) and Corporate Sustainability Reporting Directive (CSRD)

Contents

• ESRS Update
• How are companies affected?
• What is the Accounting Directive?
• Main Takeaways
• What should companies do now?

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The adoption of the Corporate Sustainability Reporting Directive (CSRD) in 2022, and subsequently the European Sustainability Reporting Standards (ESRS) in 2023, indicated a landmark shift in requirements for companies to report sustainability-related information about their operations. With these legislative instruments, the EU has continued to show its ambition to put sustainability reporting at the same level as financial reporting.

Since the adoption of the ESRS, a proposal was made in the EU legislative and political arena that companies should note, as it may affect their obligations to comply.

How is the ESRS (not) changing?

In the Summer of 2023, the European Commission adopted, via a delegated act, the general ESRS. The Commission was required and mandated to do so by the CSRD.

Since then, several things have occurred that potentially affect the workings of the CSRD and the ESRS:

• An objection was filed by a group of Members of the European Parliament (MEPs) against the general ESRS, as they considered their burden too high for companies.
• The Commission has proposed in its 2024 Work Programme to delay the issuance of the sector-specific European Sustainability Reporting Standards (SS-ESRS) by two years, from June 2024 to June 2026.
• The Commission has proposed a change to the thresholds of the Accounting Directive that categorize small, medium, and large entities, taking effect for fiscal years starting in or after 2024.

What has (not) changed for companies in the scope of CSRD and ESRS?

Objection to the general ESRS

Starting with the objection against the ESRS, the answer is short: nothing will change.

The objection was voted down by a margin (261 MEPs in favor of the objection, 359 against, 11 abstained.) Consequently, the timelines set forth by the CSRD for companies to report per the ESRS remain in place, with the earliest timeline for large companies listed on EU stock exchanges reporting sustainability information in 2025 on fiscal year.

Delay of SS-ESRS

Continuing with the 2024 Work Programme, the Commission proposes 26 rationalisation efforts to reduce administrative burdens without lowering social, safety, consumer protection, environmental, or economic standards.

This program proposes postponing the deadline for adopting the sector-specific European Sustainability Reporting Standards (SS-ESRS) to allow stakeholders time to adapt to new requirements. Per the proposal, the deadline for adopting the SS-ESRS would be delayed by two years (currently: June 2024). The Commission expects this will immediately reduce the reporting burden for in-scope companies, including SMEs.

The Commission is responsible for adopting all European sustainability reporting standards. The requirement to adopt sector-specific standards by June 2024 is legislated in the Corporate Sustainability Reporting Directive (CSRD). The commission does not have the sole legislative power to amend the CSRD, so the approval of the European Parliament and Council of the European Union is required. Hence, the Commission is sending this proposal to the institutions for consideration, and a delay of the SS-ESRS depends on deliberations between the institutions.

Change in qualifying thresholds

Finally, we address the changes to requirements. The Commission has recently concluded a consultation of a draft Delegated Directive—an act that the Commission is pre-emptively mandated to take—to change the thresholds of the Accounting Directive and adopted a final text. With this change, the Commission is adjusting the thresholds for inflation, avoiding companies that weren’t intended to be in scope for specific reporting requirements of the Accounting Directive to become in scope nonetheless due to inflated revenues and balance sheets.

The Commission has the power to change the thresholds based on Art. 3(13) and subject to the conditions set out by Art. 49 of that Directive. In short, this means that now the Commission has adopted a final text, it will notify the EU Parliament and the Council, who may object within two months.

Assuming the Delegated Directive is not objected against by the institutions, the thresholds would change as follows (amounts in EUR):

Undertaking		Balance Sheet	Net Turnover
Micro	Current	350,000	700,000
	Adjusted	437,500	875,000
Small (lower end)	Current	4,000,000	8,000,000
	Adjusted	5,000,000	10,000,000
Small (higher end)	Current	6,000,000	12,000,000
	Adjusted	7,500,000	12,000,000
Medium/Large	Current	20,000,000	40,000,000
	Adjusted	25,000,000	50,000,000

Three key takeaways:

1. Not everything has been delayed

Neither the ESRS adopted this year nor the timelines to report per the ESRS established in the CSRD have been changed. Currently, only the additional SS-ESRS are in scope for delay. However, changing the thresholds may ‘disqualify’ some companies from needing to report at all.

2. The SS-ESRS is still in limbo

While the EU Parliament may agree to the SS-ESRS delay, it is not a given that it will.

• Parliament voted the CSRD proposal into legislation with an overwhelming majority.
• Parties are already preparing for the EU Parliament elections in May ’24, and sustainability is expected to be a significant topic. While some groups may be more supportive of reducing administrative burdens on companies in more challenging times, others may be hard-pressed to ease sustainability ambitions.
• The fact that the Commission included this proposal may signal that their intelligence suggests a political agreement on a delay is feasible.
• Furthermore, institutions are negotiating important nascent legislative proposals, such as the Corporate Sustainability Due Diligence Directive, in which the proposal for delay may play a role in the background.

3. The range of companies in scope for reporting per the CSRD may change

The thresholds of the Accounting Directive have not changed since 2013. Considering the changes proposed by the Commission align with the inflation incurred during the past two years, the proposed change in thresholds seems proportionate and justified.

What should companies do now?

Companies should continue to prepare for reporting per the CSRD and general ESRS, as the proposed delay only affects the sector specific-ESRS and the objection against the general ESRS was voted against. Companies should prepare to meet reporting and other essential requirements, such as performing a double materiality assessment.

If threshold changes are indeed adopted, companies should assess if they are affected by those changes. Should they no longer be in the scope due to the changes, companies can still consider the ESRS their preferred standard to define, understand, and communicate sustainability-related information, especially if that helps them keep up with stakeholder expectations and peers.

Furthermore, companies should monitor the development of the proposal for delay of the SS-ESRS and prepare for potential additional sector-specific reporting requirements against the current or delayed timeline.
We recommend that companies always confirm the specifics of their compliance obligations with a professional legal services provider.