EU Commission's Final Rules on Corporate Sustainability Disclosures: A Focus on Materiality and Global Alignment
On Monday, July 31, 2023, the European Union's executive body finalized the rules for corporate sustainability disclosures under the Corporate Sustainability Reporting Directive (CSRD), confirming earlier moves to ease the requirements. This decision aligns with European Commission president Ursula von der Leyen's pledge to cut red tape across the EU executive's work this year, as companies have expressed concerns about the mounting cost of environmental rules.
Materiality in Sustainability Reporting
“The revised approach to materiality and the voluntary nature of certain disclosures will significantly reduce the cost burden for companies. This and alignment with global standards will provide greater assurance and consistency in sustainability reporting across borders.”
The European Sustainability Reporting Standards (ESRS), as mandated by the CSRD and detailed in the official EU document titled "Commission Delegated Act supplementing Directive 2013/34/EU", will be effective for large companies to apply in annual reports for financial years starting on or after January 1, 2024, with smaller peers following two years later. The ESRS requires large companies and listed small and medium-sized companies (SMEs), as well as parent companies of large groups, to include in a dedicated section of their management report the information necessary to understand the company’s impacts on sustainability matters and the information required to understand how sustainability matters affect the company’s development, performance, and position.
All companies will now have more flexibility to decide what information is "material" and should be reported, an approach common in financial reporting. For some data, such as carbon emissions from customers (known as Scope 3), the company would have to state they are not material rather than not reporting anything at all. More disclosures like biodiversity transition plans would now be voluntary instead of mandatory.
Alignment with International Sustainability Standards Board (ISSB)
The commission's decision to rely more broadly on materiality reflects discussions with the International Sustainability Standards Board (ISSB), which has just approved its own "baseline" global norms based on materiality. The commission stated that there is now a "very high level of alignment" with ISSB to prevent unnecessary double reporting by multinational companies.
Key Dates and Next Steps
The final rules are subject to two-month scrutiny from the European Parliament and EU states, which can only reject but not amend them. The first companies within the scope of CSRD will have to apply ESRS for periods beginning on or after January 1, 2024. By June 2024, the Commission must adopt sector-specific standards, proportionate standards for listed SMEs, and standards for non-EU companies.
Adopting these new sustainability reporting standards marks a significant step towards ensuring that companies provide relevant, reliable, and comparable sustainability information. As we move forward, it will be crucial for companies to understand and adapt to these changes, particularly the new approach to materiality, to ensure effective and transparent sustainability reporting.
For more details, you can access the full EU document here.
