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.

*           *           *

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.

Print:
Email this postTweet this postLike this postShare this post on LinkedIn
Photo of Sarah Bishop Sarah Bishop

Sarah Bishop advises companies on compliance best practices and enforcement risks arising under the U.S. Foreign Corrupt Practices Act, the UK Bribery Act, U.S. and UK anti-money laundering laws, and other financial crime laws. Qualified in the United States and as a Solicitor…

Sarah Bishop advises companies on compliance best practices and enforcement risks arising under the U.S. Foreign Corrupt Practices Act, the UK Bribery Act, U.S. and UK anti-money laundering laws, and other financial crime laws. Qualified in the United States and as a Solicitor of England & Wales, she is able to help companies navigate risks arising in both jurisdictions. She also has experience of other anti-corruption laws (e.g., France’s Loi Sapin II) and works with trusted local partners to deliver coordinated advice that takes into account the requirements of multiple legal regimes. Sarah’s compliance advisory practice includes helping multinational corporations develop and test the robustness of compliance programs, conduct risk assessments, conduct transactional and third party due diligence, navigate post-acquisition compliance integration projects, and deliver compliance training.

As a member of Covington’s Business and Human Rights practice group, Sarah advises companies on evolving developments and best practices related to the corporate responsibility to respect human rights, including in relation to supply chain due diligence and responsible sourcing, reporting and transparency obligations, and strategies for integrating human rights elements into existing compliance programs.

Sarah also helps clients navigate internal and government-facing investigations involving allegations of bribery and corruption, money laundering, export control and sanctions violations, fraud, and other forms of misconduct. She has handled matters before major international enforcement authorities, and she has been recognized by the Global Investigations Review as being among the leading women investigations practitioners worldwide. In addition to government enforcement matters, Sarah assists clients in suspension and debarment matters before the World Bank and other international financial institutions.

Photo of Paul Mertenskötter Paul Mertenskötter

Paul Mertenskötter is an associate in the firm’s Brussels office and a member of the Public Policy and International Trade practice groups. He advises multinational companies, governments, and other clients on a range of matters related to public policy, international trade, and new…

Paul Mertenskötter is an associate in the firm’s Brussels office and a member of the Public Policy and International Trade practice groups. He advises multinational companies, governments, and other clients on a range of matters related to public policy, international trade, and new technologies. Mr. Mertenskötter’s practice encompasses advising clients on the European Commission’s Digital Single Market strategy, including on the Payment Services Directive (PSD 2).

Prior to joining the firm, Mr. Mertenskötter clerked at the International Court of Justice in The Hague, and was a Fellow at the Institute for International Law and Justice at NYU Law School. His work has been published with Oxford University Press and the Cornell Law Review.