On March 3 and 14, 2022, the European Financial Reporting Advisory Group (“EFRAG”) published its most recent set of Working Papers on the future of the EU’s European Sustainability Reporting Standards (“ESRS”). The ESRS will establish dozens of sustainability-related disclosure requirements that will be mandatory for thousands of EU companies under the Corporate Sustainability Reporting Directive (“CSRD”) (see our blog on the CSRD as background). Companies subject to the CSRD will be required to include these disclosures in their annual reports, and these disclosures will need to be audited. Importantly, this is the first time EFRAG has provided significant detail regarding reporting standards for topics that fall under the “S” pillar of the ESG (environmental, social, and governance) framework. The European Commission is currently aiming to have the CSRD and ESRS apply from January 2023, with initial reports due in 2024, and EFRAG will hold public consultations on its draft reporting standards in the coming months.
The Working Papers on social aspects (S1, S2, S3, S4, S5, S6, and S7) cover a broad range of social responsibility and human rights issues including equality and non-discrimination, forced and child labor, collective bargaining and freedom of association, grievance mechanisms for workers throughout corporate value chains, human rights risks associated with the end uses of products and services, as well as engagement with indigenous communities.
The Working Papers include the draft text of the ESRS, guidance, and EFRAG’s rationale for the proposed disclosure requirements. The ESRS draw and build on international and European human rights conventions and guidelines for businesses, such as the UN Guiding Principles on Business and Human Rights and the OECD’s Guidelines for Multinational Enterprises. The ESRS will also serve as one model for the newly-formed International Sustainability Standards Board (“ISSB”) as it moves toward establishing a global approach to companies’ ESG disclosures (more on this in our alert on the interaction between the ISSB’s and EFRAG’s climate prototypes).
The ESRS will be structured in line with the three pillars of the CSRD’s ESG framework, with several reporting standards under each heading. Each reporting standard will in turn be sub-divided into various disclosure requirements.
In this linked chart we include a full list of the reporting standards and disclosure requirements developed by EFRAG to date, to give a holistic overview of the emerging sustainability reporting framework in the EU.
Companies subject to the CSRD should prepare for broad and detailed disclosures under the S pillar. For example, the Working Papers suggest that the ESRS will require companies to report on social issues such as the equal pay gap and incidents of discrimination across a broad range of protected groups (e.g., racial or ethnic origin, disability, age, or sexual orientation). The level of detail required in reporting will be granular, and would, for example, include sexual harassment incidents, even if they are no longer subject to action. Additionally, mandatory disclosures would extend to information about companies’ collective bargaining agreements (on a country-by-country basis), and incidents of forced labor, human rights or child labor. Companies would be expected to report all incidents, and provide explicatory summaries demonstrating their remedial actions.
It is likely that many companies will have to establish new internal data collection and verification processes, and work closely with social audit firms, to ensure complete and accurate reporting on these issues. While companies may currently have processes to collect information about their own workforce, the ESRS disclosures would also cover non-employees, workers in the value chain, consumers and end-users on a granular level. The relevant facts for these disclosures may often lie outside of the EU and across companies’ global operations.
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If you have any questions concerning the material discussed in this blog post, please contact any of the following members of our ESG, Capital Markets and Securities, and Business and Human Rights teams: Sarah Bishop, Mellissa Campbell Duru, Sinéad Oryszczuk, Paul Mertenskötter, and Ivy-Victoria Otradovec.