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Sustainability now: Revised ESRS—Simplifications explained · PwC's accounting podcast

• 0:00
  SPEAKER_00: Thought Leadership from PWC's National Office.
• 0:07
  SPEAKER_02: Hello, and welcome to PWC's Accounting Podcast.
• 0:11
  SPEAKER_02: I'm Heather Horn, PWC's U.S.
• 0:13
  SPEAKER_02: Sustainability Technical Leader, and welcome to Sustainability Now.
• 0:18
  SPEAKER_02: Today we're back with another update on sustainability reporting developments in the EU.
• 0:23
  SPEAKER_02: Our last discussion focused on the Omnibus Agreement and the proposed revisions to the European Sustainability Reporting Standards, or ESRS.
• 0:31
  SPEAKER_02: Since then, there's been a lot of activity, including further action by the European Commission on the revised ESRS.
• 0:38
  SPEAKER_02: We'll cover where things stand with the Omnibus, what changed in the ESRS 2026 as we refer to them, and the publication of those standards by the European Commission on July 3rd, 2026.
• 0:51
  SPEAKER_02: In addition, we'll briefly discuss what companies should be doing now to prepare.
• 0:58
  SPEAKER_02: For this discussion, I'm pleased to welcome Katie Woods and Katie DeKaiser, directors and PWC's Global Corporate Reporting Function.
• 1:07
  SPEAKER_02: And I think you'll be able to tell who's who from their voices, but I'll also use their last names occasionally.
• 1:13
  SPEAKER_02: So, Katie, Katie, thank you so much for joining me today.
• 1:16
  SPEAKER_02: It's an exciting topic that we're talking about, these revised simplified ESRSs, or as we refer to them, ESRS 2026.
• 1:24
  SPEAKER_02: But before we get into talking about those, I thought it would be helpful to just give a really super quick level set of what the sequence of events that has led to this.
• 1:34
  SPEAKER_02: And you ladies can correct me if I misstep on any of these key dates.
• 1:39
  SPEAKER_02: So if I take a big step back, when we look back to February 2025, that's when we saw the omnibus proposal that came from the commission that had a number of changes, including changes to scoping, but also proposing changes to ESRS.
• 1:57
  SPEAKER_02: And subsequent to that, I think in March, they actually requested that FRAG prepare technical advice for them, addressing specific areas of the ESRS that they thought needed changing.
• 2:10
  SPEAKER_02: So that went to FRAG.
• 2:12
  SPEAKER_02: In the meantime, the omnibus proposal on the scoping of what entities are subject to reporting under the Corporate Sustainability Reporting Directive went through its entire process to actually be finalized as the Omnibus Directive actually exactly one year later in February of 2026.
• 2:32
  SPEAKER_02: And we talked all about all of that on prior podcasts.
• 2:35
  SPEAKER_02: We talked about what was included in the omnibus directive.
• 2:38
  SPEAKER_02: So we're going to set that aside for now.
• 2:40
  SPEAKER_02: If our listeners are interested, they can listen to one of our other podcasts.
• 2:43
  SPEAKER_02: And today, I think we should pick up with the completion of the technical advice that FRAG handed over to the commission in December.
• 2:53
  SPEAKER_02: But Katie Woods, I'm going to start with you.
• 2:55
  SPEAKER_02: And I think it would be helpful if we just provide a little more context about what FREG did and what it is that they handed and then what happened next.
• 3:03
  SPEAKER_01: Of course.
• 3:04
  SPEAKER_01: And so thank you, Heather.
• 3:05
  SPEAKER_01: Yeah.
• 3:06
  SPEAKER_01: So FREG, as you say, produced the technical advice.
• 3:09
  SPEAKER_01: So they went through a process of consulting on their standards.
• 3:13
  SPEAKER_01: And as you say, in December, that technical advice was handed over to the Commission.
• 3:18
  SPEAKER_01: So at that point, FREG are kind of done with what they're doing.
• 3:22
  SPEAKER_01: The European Commission then take that technical advice and review it in the context of the omnibus that you talked about, where they were talking about simplification, et cetera, and reviewed it, were able, because by that stage it is their standards, they could make proposed changes to that.
• 3:42
  SPEAKER_01: And so they worked through from December through to about May of this year, 2026, and then issued a draft delegated act.
• 3:51
  SPEAKER_01: So that draft delegated act incorporated their changes to the ESRS.
• 3:57
  SPEAKER_01: And what they did was to put that out for public comment.
• 4:00
  SPEAKER_01: So it wasn't necessarily an exposure draft, but it was put out for public comment.
• 4:07
  SPEAKER_01: I should mention that both ESMA and the European Central Bank, so sorry, ESMA is the European Securities and Markets Authority, the ECB, the European Central Bank, were asked for their comment before that draft delegated act was put out.
• 4:22
  SPEAKER_01: So it wasn't just their thoughts, they were taking thoughts from others.
• 4:26
  SPEAKER_01: That period of public comment was just for a month.
• 4:30
  SPEAKER_01: And so it was surprising, I think, to all of us that they got almost 400 comments on that just over that uh one month period.
• 4:38
  SPEAKER_01: And then once that public comment closed, the European Commission took into consideration those comments and then issued the final delegated act on the 3rd of July.
• 4:51
  SPEAKER_01: Now I say final, but there's always other steps.
• 4:54
  SPEAKER_01: And so actually, um, although final, there are processes within European law such that both the European Parliament and the Council of the European Union, the Council of the EU, have a scrutiny period, which is two months, where they can check, and it's it's basically all or nothing.
• 5:13
  SPEAKER_01: They either accept or reject the delegated act.
• 5:17
  SPEAKER_01: But it doesn't stop there.
• 5:19
  SPEAKER_01: They actually can extend for another two months.
• 5:22
  SPEAKER_01: So what does that mean?
• 5:23
  SPEAKER_01: It means that we'll have the final, final ESRS in September 2026 or November 2026.
• 5:31
  SPEAKER_02: Early, early, September November 3rd, I guess.
• 5:34
  SPEAKER_02: Exactly.
• 5:35
  SPEAKER_01: I was counting my months on my fingers.
• 5:37
  SPEAKER_01: Okay.
• 5:38
  SPEAKER_01: But yes, that's that's the process that we've been through.
• 5:41
  SPEAKER_03: And is it maybe worth mentioning?
• 5:43
  SPEAKER_03: I I know we talked a little bit about the omnibus directive earlier.
• 5:46
  SPEAKER_03: The omnibus directive has to go through a process called transposition, where EU member states have to transpose that omnibus directive into local law.
• 5:55
  SPEAKER_03: But the the ESRS 2026, there's no transposition.
• 5:59
  SPEAKER_03: Is that right, Katie?
• 6:00
  SPEAKER_01: That's right.
• 6:00
  SPEAKER_01: Yeah, exactly.
• 6:01
  SPEAKER_01: So there are periods that the omnibus has to be within a year of it being finalized.
• 6:08
  SPEAKER_01: You probably covered that in the previous podcast.
• 6:10
  SPEAKER_01: But no, the the SRS become part of what the the reporting requirements in those different jurisdictions.
• 6:16
  SPEAKER_02: So on that point, they are final in either September or November.
• 6:20
  SPEAKER_02: And we will talk later in the podcast about who can apply them and when they're required to apply them.
• 6:25
  SPEAKER_02: All right, that's super helpful.
• 6:26
  SPEAKER_02: So I think the key point for listeners of the podcast today, we're really going to focus on the changes from the FRAG technical advice to what the EC proposed and then issued.
• 6:40
  SPEAKER_02: Um, I will say at the end, we do do a bit, or I'm planning to do a bit more reflection.
• 6:45
  SPEAKER_02: So start thinking if that's not on your mind.
• 6:48
  SPEAKER_02: But otherwise, why don't we get into then some of what we talked about?
• 6:52
  SPEAKER_02: So I think there was a lot of speculation at the time that FREC handed over its technical advice of whether or not the commission would make a lot of changes.
• 7:01
  SPEAKER_02: I think there were some areas people were hoping the commission would change, others that they were hoping that definitely the commission would not change.
• 7:09
  SPEAKER_02: Um, and there was a lot of different points of view that were put out by various stakeholders in terms of um some saying that FREG had gone too far, others saying FRAC had hadn't gone far enough.
• 7:19
  SPEAKER_02: Katie as you said, then the commission asked for other input.
• 7:24
  SPEAKER_02: And so just a lot for the commission to consider.
• 7:27
  SPEAKER_02: Um, but so Katie DeKaiser, I'm gonna turn to you and just from an overall perspective, from your point of view, where did the commission land compared with the technical advice from the um from FRAG?
• 7:40
  SPEAKER_03: Yeah, so the maybe just a little reminder.
• 7:44
  SPEAKER_03: Uh, I know you and Diana spoke about this a lot back in the the last podcast, but FRAG's technical advice was already a pretty big simplification when we compare it with the original or the current ESRS, so the ESRS that companies would have been using to report last year.
• 8:00
  SPEAKER_03: So FRAG uh talks about the fact that that technical advice was already like a 60% reduction in terms of the number of data points when looking at the old ESRS.
• 8:10
  SPEAKER_03: So we're already looking at like a very simplified version.
• 8:13
  SPEAKER_03: Um, and I guess if our listeners are interested in all of that detail of what's in the technical advice, um, the previous podcast that you did with Diana really went over that um in a lot of detail.
• 8:24
  SPEAKER_03: When uh the commission published the draft delegated act, which contained this final revision of the ESRS, they also published like a memorandum that explained what they changed.
• 8:37
  SPEAKER_03: Um, and in that memorandum, they identify 13 areas where the European Commission made further changes to the technical advice that FRAG had already delivered to them.
• 8:49
  SPEAKER_01: Yeah, but I guess 13 might sound like a mos a lot of modifications, but it's probably worth saying, Katie, that as you said, the main changes happened at the beginning when the um technical advice was pulled together.
• 9:03
  SPEAKER_01: And so actually what we saw was EC or the European Commission, sorry, made a very few change, key big changes that that were made to the standards.
• 9:16
  SPEAKER_01: If we look at it in the round.
• 9:17
  SPEAKER_02: Yeah, I think this is an excellent point.
• 9:20
  SPEAKER_02: And it definitely is interesting.
• 9:22
  SPEAKER_02: And you guys may be planning to talk about this, but what I find really interesting is now when I look at the ESRS, the ESRS one and ESRS two, so those cross-cutting standards, it's like more than half my book.
• 9:35
  SPEAKER_02: And I, you know, before I think we saw a lot more in the topical standards, so it'll be interesting to talk about some of those changes.
• 9:41
  SPEAKER_02: But to the points you guys made, a lot of that happened from Frag and then relatively small number of changes made by the commission, which I think Katie is the point you were making, Katie was.
• 9:52
  SPEAKER_02: Um, so why don't sticking with those 13 areas, why don't we start with some of the more um foundational conceptual areas um made compared to the technical advice?
• 10:04
  SPEAKER_03: Yeah, so if we're looking at some of the more conceptual foundations of the ESRS, so we'd be looking at you mentioned ESRS one and ESRS two.
• 10:13
  SPEAKER_03: So those first two standards that really give us the basis for the reporting.
• 10:17
  SPEAKER_03: Um the European Commission made a couple of changes to those standards that I'd like to highlight.
• 10:22
  SPEAKER_03: Maybe starting with materiality, which is kind of like the basis for everything for all the reporting under ESRS.
• 10:29
  SPEAKER_03: Before we get into what they changed, the Commission sort of kept the main structure of the materiality assessment exactly the same as in the technical advice that was handed over to them.
• 10:39
  SPEAKER_03: So the double materiality assessment, that's still the foundation of all the reporting under ESRS.
• 10:46
  SPEAKER_03: And we still have this concept that was introduced in the technical advice of being able to do your double materiality assessment using a top-down or a bottom-up approach.
• 10:55
  SPEAKER_03: So that is all still there.
• 10:58
  SPEAKER_03: Um, one thing that the European Commission did add in is a statement that when a company is thinking about the information needs of its users.
• 11:10
  SPEAKER_03: So when a company is deciding what information is material, what information to include in the standards or in the reporting, the European Commission added a statement into ESRS 1 that says that assessment of what is material to the users needs to be made looking at what is decision useful for all of an entity's users rather than looking at what maybe a specific individual user might have asked.
• 11:36
  SPEAKER_03: So that's kind of more of like a clarification of how a company is meant to be thinking about its users when it's looking at materiality of information.
• 11:44
  SPEAKER_02: And I guess it's important to note there that that is a that was an ongoing question with um what's called ESRS 2023, original ESRS, uh, in terms of well, what do I do if one stakeholder wants this piece of information?
• 11:59
  SPEAKER_02: Does that mean it is material?
• 12:01
  SPEAKER_02: So I do think from that point of view, Katie, I know you focus quite a lot on materiality.
• 12:06
  SPEAKER_02: I would say you guys would probably view that as an important clarifying point.
• 12:10
  SPEAKER_03: And and it's it's something that kind of we would think about when we're thinking about materiality on a lot of other different reporting frameworks as well.
• 12:18
  SPEAKER_03: We always sort of think about users as a group of users, like decision useful information for a group rather than for an individual person.
• 12:26
  SPEAKER_03: Um so that was that was one of the things that the European Commission added into the standards uh specifically on materiality.
• 12:33
  SPEAKER_03: Maybe another thing that I will mention is I mentioned the top-down approach earlier.
• 12:40
  SPEAKER_03: So the top-down approach being a method that FRAG included in the technical advice, a way that a company could prepare its double materiality assessment.
• 12:49
  SPEAKER_03: Um, and the European Commission kept that concept, but they added a small change into ESRS-1 to sort of reiterate the purpose of the top-down approach.
• 12:58
  SPEAKER_03: So they added a statement in here saying that when you're doing that top-down approach, um, the entity is not required or can avoid assessing the materiality of each individual impact, risk, or opportunity.
• 13:10
  SPEAKER_03: So really just re-emphasizing what that top-down approach is intended to do.
• 13:16
  SPEAKER_03: And maybe the last thing I'll touch on with regards to materiality is a new, a new sort of relief or provision that the commission added into ESRS One, which is very specific to a specific kind of reporting entity.
• 13:32
  SPEAKER_03: So the commission added a statement into ESRS-1 that says that reporting entities that manage investments subject to a fiduciary duty on behalf of their clients, those investments or those entities that are managing those investments, the entities are not expected to assess the impacts, risks, and opportunities related to those specific investments.
• 13:56
  SPEAKER_03: So if those types of entities, entities that are managing investments subject to a fiduciary duty, they can within their double materiality assessment, they don't have to consider those investments.
• 14:07
  SPEAKER_03: So that was a new provision that the commission added in with regards to the materiality assessment.
• 14:14
  SPEAKER_03: Those are probably the main changes on materiality.
• 14:17
  SPEAKER_03: Again, as Katie Woods mentioned, you know, the big structure, the big kind of headlines around materiality all staying the same, but just a couple of kind of key little um little things there that the commission has added.
• 14:29
  SPEAKER_03: Um something else that the commission uh added into the into the revised ESRS that's worth mentioning is around fair presentation.
• 14:38
  SPEAKER_03: So we might remember that when we talk about FRAG's technical advice, we talked about the fact that the technical advice really emphasized this concept of fair presentation.
• 14:47
  SPEAKER_03: So the purpose or the objective of the reporting under ESRS is to fairly present an entity's material impacts, risks, or opportunities.
• 14:57
  SPEAKER_03: And again, the European Commission retained all of that content.
• 15:01
  SPEAKER_03: So we still have this idea of fair presentation.
• 15:04
  SPEAKER_03: What the commission did change was they added in a statement that is really explicit that when a company is thinking about fair presentation and is making that assessment about whether its reporting fairly presents its material impacts, risks, or opportunities, it's doing that assessment sort of as a whole on the overall package of reporting, looking at the whole sustainability statement together.
• 15:28
  SPEAKER_03: They're not looking at each individual data point in isolation.
• 15:31
  SPEAKER_03: So kind of really emphasizing that that sort of fair presentation assessment is almost like a little bit of a standback looking at the reporting as a whole.
• 15:41
  SPEAKER_02: And I think that's another important point of clarification because I do think when Freg clarified that ESRS is a fair presentation framework, then there were a lot of questions of like, well, what does that really mean?
• 15:54
  SPEAKER_02: How is it applied?
• 15:55
  SPEAKER_02: Is it compliance plus?
• 15:57
  SPEAKER_02: And so I do think this is a point that hopefully will be helpful to companies as they're preparing their reporting.
• 16:04
  SPEAKER_03: Yeah.
• 16:04
  SPEAKER_03: Definitely.
• 16:05
  SPEAKER_03: And probably the last change that the European Commission made on these kinds of conceptual foundations that I want to mention is about permissions where uh permissions for an entity to omit information that would otherwise be material from its reporting.
• 16:20
  SPEAKER_03: So FRAG's technical advice already had in it a few different permissions, a few different reliefs that would allow entities to omit information in certain situations.
• 16:30
  SPEAKER_03: And the European Commission added an additional provision that allows an entity to omit certain material information from its report, if that information would be seriously prejudicial to the commercial position of the company.
• 16:46
  SPEAKER_03: So that's the kind of the framework that's being used to decide whether or not certain information can be omitted.
• 16:53
  SPEAKER_03: Um there are like specific criteria that an entity would have to comply with in order to make use of that provision.
• 16:59
  SPEAKER_03: And if they did make use of it, they would have to disclose it.
• 17:02
  SPEAKER_03: Um, but it that's another thing that companies can sort of have a look at when they're thinking about what information is in their reporting.
• 17:09
  SPEAKER_02: All right.
• 17:10
  SPEAKER_02: So then I know one of the areas you didn't touch on that I do think is a critical one that we've gotten so many questions about is anticipated financial effects.
• 17:19
  SPEAKER_02: Um and that's just given the nature of the disclosure.
• 17:23
  SPEAKER_02: And, you know, again, we saw different proposals come from FREG.
• 17:27
  SPEAKER_02: So, what did the European Commission do in the draft standards and then the final standards?
• 17:33
  SPEAKER_03: Yeah.
• 17:33
  SPEAKER_03: So so as you say, anticipated um financial effects, a big area of focus.
• 17:38
  SPEAKER_03: And it, if you look at the explanatory memorandum that the commission published, anticipated financial effects is actually one of these 13 areas that we mentioned earlier that the commission said they made uh changes.
• 17:50
  SPEAKER_03: Um but when I'm looking at those changes that they've made, I would classify those as more like clarifications rather than whole-scale changes to the actual disclosure requirements.
• 18:01
  SPEAKER_03: So we still retain the underlying disclosure requirement to disclose anticipated financial effects about an entity's material sustainability-related risks and opportunities, that is all still there.
• 18:13
  SPEAKER_03: Um, what the commission has added is in the application requirements to that disclosure.
• 18:19
  SPEAKER_03: The standard now talks about the fact that uh when an entity is preparing those disclosures, so preparing the disclosures on anticipated financial effects, it's expected that that will involve the use of estimates.
• 18:31
  SPEAKER_03: Right.
• 18:32
  SPEAKER_03: So kind of clarifying that that disclosure is not looking for like a specific 100% accurate point of a dollar amount, it is going to be uh involving the use of estimates.
• 18:45
  SPEAKER_03: And the commission also added in a sentence that clarifies or emphasizes that if new information becomes available to the company in the future, well then they would revise those estimates, right?
• 18:57
  SPEAKER_03: That that's sort of uh almost like a natural part of these anticipated financial effects disclosures, that there are estimates and that there will be revisions in the future.
• 19:06
  SPEAKER_03: And the other thing that the commission explicitly added into the section on anticipated financial effects, I mentioned earlier we now have this new provision that allows a company to omit information that would be seriously prejudicial to its commercial position.
• 19:21
  SPEAKER_03: That relief also applies to anticipated financial effects disclosures.
• 19:26
  SPEAKER_03: I mean, worth saying that relief applies to all disclosures, but we also have this explicit clarification that it also specifically applies to anticipated financial effects disclosures.
• 19:38
  SPEAKER_03: Um as I said, the kind of core disclosure requirements for anticipated financial effects haven't changed, but we do have these like additional pieces of clarification, which maybe kind of give companies a little bit more of a sense of what is sort of expected to be going into the process for developing these disclosures.
• 19:57
  SPEAKER_02: All right.
• 19:58
  SPEAKER_02: So, Katie, I think that's super helpful to highlight some of the key changes that happened in uh related to the cross-cutting standards.
• 20:05
  SPEAKER_02: Uh, but why don't we jump in then to some of the changes in the topical standards and maybe starting with one that is something I've spent a lot of time on, which is the reporting boundary or the organizational boundaries for reporting GHG emissions.
• 20:19
  SPEAKER_02: And uh companies already applying ESRS or regular listeners companies preparing are probably aware in ESRS 2023, the commission had required the so-called additive approach, which required an entity to add together, first apply the financial control approach and then add the operational control approach.
• 20:40
  SPEAKER_02: So there was a lot of question and you know issues for companies in applying that.
• 20:46
  SPEAKER_02: So F-Reg took one step to change that, which is they said that a company had to apply financial control approach, so full stop.
• 20:55
  SPEAKER_02: However, then if that provided insufficient um information about their material emissions, then they also had to provide information about operational control.
• 21:04
  SPEAKER_02: So not all companies would have to do that, but enough would.
• 21:08
  SPEAKER_02: And there were still a lot of questions about what that really meant.
• 21:10
  SPEAKER_02: I know we raised it on comment letter, a lot of people raised in their comment letters.
• 21:14
  SPEAKER_02: So I think we were quite surprised to see that the commission actually made an entirely different proposal, which I think is quite welcome for companies.
• 21:24
  SPEAKER_01: So, Katie, can you explain what happened?
• 21:25
  SPEAKER_01: Of course, yeah.
• 21:26
  SPEAKER_01: And actually, to your point, there was a lot of judgment again in that point in the technical advice.
• 21:31
  SPEAKER_01: So now the European Commission came back and said, scrap all that.
• 21:35
  SPEAKER_01: What uh preparers can do is look to the GHG protocol and say, which approach am I going to use?
• 21:42
  SPEAKER_01: And the, I mean, you've talked about this in many a podcast, but there's the financial control approach, there's the operational control approach, or um equity share.
• 21:51
  SPEAKER_01: And so that is now a choice on the part of the entity.
• 21:54
  SPEAKER_01: Obviously, need to disclose what they've done, but no more additive and no more additional disclosure.
• 22:00
  SPEAKER_01: Your requirements when it comes to that part of the GHG emission decisions, for want of a better way of explaining it.
• 22:07
  SPEAKER_02: Yeah, and I think again, um, this is now fully interoperable.
• 22:11
  SPEAKER_01: You said with the GHG protocol and then also with I Yeah, sorry, also with ISSB, I interrupted you, but absolutely get very excited about interoperability.
• 22:19
  SPEAKER_01: So yes, absolutely, which is great news for those companies that may have to report under more than one framework.
• 22:25
  SPEAKER_02: Yeah, and I mean there is some context about how companies should think about which approach to apply, but the that's consistent with how companies, for the most part, I think would have already been thinking about their approaches.
• 22:37
  SPEAKER_02: So again, welcome changes.
• 22:39
  SPEAKER_02: I guess, Katie, from your point of view, any other changes in the topical standards that you would highlight?
• 22:44
  SPEAKER_01: Yeah, I guess there are a couple that I'd highlight.
• 22:46
  SPEAKER_01: The first one is in an area which I know we've spent quite a lot of time talking about, which is on microplastics.
• 22:53
  SPEAKER_01: Um, and so we may well have spoken about this before, but you've got primary and secondary microplastics.
• 22:59
  SPEAKER_01: So there is still a requirement under uh the pollution standard, ESRS E2, um, to uh uh disclose information uh on primary microplastics, which are those that are added to shampoos or those sort of washing and cleaning uh fluids, etc.
• 23:17
  SPEAKER_01: But what they've done is to remove any sort of reference to disclosure of secondary microplastics.
• 23:23
  SPEAKER_01: And those would be the ones that are through wear and tear of plastics that come off, which really were incredibly difficult to measure or and therefore to disclose.
• 23:31
  SPEAKER_02: Yeah, I think again, this is one of the areas we probably spent them a lot of time talking about potential issues and what about plastic coming off of tires and all different types of things.
• 23:42
  SPEAKER_02: So again, I think this is a a welcome change.
• 23:45
  SPEAKER_01: Absolutely, and whose responsibility it is as well, which was was always part of the the issue.
• 23:50
  SPEAKER_01: The other one is is an area which we sort of first saw coming through the resource use and circular economy standard.
• 23:56
  SPEAKER_01: So that's ESRS E5, where there's more of a focus on the structured managerial assessment.
• 24:03
  SPEAKER_01: So you're looking at key products and key materials within that assessment.
• 24:08
  SPEAKER_01: But we've also seen managerial assessment coming through in the pollution standard as well.
• 24:13
  SPEAKER_01: And so we're seeing a different approach, perhaps, where again looking at judgment from the part of those preparing as to what the managerial assessment is and the related disclosures to that.
• 24:26
  SPEAKER_01: So that's both in in the pollution standard and in E5 as well.
• 24:31
  SPEAKER_02: So then we didn't have that at all in ESRES 2023.
• 24:36
  SPEAKER_02: So you're saying that FREG introduced it to E5 and now the commission has expanded that to E2?
• 24:44
  SPEAKER_01: Is that absolutely?
• 24:45
  SPEAKER_01: Um, and I think that's welcome as well, don't you?
• 24:48
  SPEAKER_01: That that we're looking at what management are doing.
• 24:50
  SPEAKER_01: So, yes, absolutely taking it further from what FREG had designed.
• 24:54
  SPEAKER_02: And Katie, I know you spent a lot of time on the social standards.
• 24:58
  SPEAKER_02: So I'm sure you were quite focused on changes there.
• 25:00
  SPEAKER_02: So what would you highlight?
• 25:01
  SPEAKER_03: Yeah, so I I'll maybe just highlight one change that the commission made in the social standards, which is in relation to the disclosure requirements around human rights incidents and incidents of discrimination.
• 25:13
  SPEAKER_03: So we now have this concept in ESRS 2026 about um disclosing those incidents that have been substantiated and verified.
• 25:23
  SPEAKER_03: And the commission added some additional guidance to uh help companies understand what would constitute a substantiated and a verified incident.
• 25:33
  SPEAKER_03: So just providing a little bit more guidance about the kinds of things that would be disclosed in those data points.
• 25:37
  SPEAKER_03: And the those changes apply across all of the social standards.
• 25:41
  SPEAKER_02: So another thing that will make the standards easier to apply.
• 25:45
  SPEAKER_02: Yeah.
• 25:45
  SPEAKER_02: All right.
• 25:46
  SPEAKER_02: So then let's turn our attention to the phase and provisions because this is also an area where there's a lot of interest.
• 25:53
  SPEAKER_02: And this is where entities would have extra time to prepare certain of the disclosures.
• 25:58
  SPEAKER_02: And one of the things we had talked about on our last podcast is that the draft ESRS uh from FRAG, the technical advice, only included phase and release for wave one entities.
• 26:08
  SPEAKER_02: And these were substantially consistent with the release we had already seen uh coming from the quick fix uh directive.
• 26:16
  SPEAKER_02: I have to remember between those those two directives that were issued in 2025.
• 26:21
  SPEAKER_02: So, in any event, in uh the technical advice, they actually said they would leave the determination for the other companies, the so-called Wave 2 companies, to the European Commission.
• 26:31
  SPEAKER_02: So there's a huge amount of interest in uh in seeing what the Commission did.
• 26:35
  SPEAKER_02: So, what can you share, Katie?
• 26:37
  SPEAKER_02: Yeah, that's right.
• 26:38
  SPEAKER_01: And um uh so we were pleased that the European Commission did do that, obviously, but it basic answer is that now for all companies uh they have been given access to the same phase-in provisions as those that are for the Wave One entities or companies.
• 26:57
  SPEAKER_01: Um and they've granted those provisions in an area between one and three years, depending on the complexity of that.
• 27:04
  SPEAKER_01: So it's probably worth we've got a summary in our uh in our in-depth, which I'm I'm sure will be included, um, of all what all those different provisions are and how they work.
• 27:13
  SPEAKER_01: So, yes, there are provisions and they are helping those uh that are smaller than wave one.
• 27:19
  SPEAKER_01: I guess there's one new phase in provision which is important for all companies, and that's just for a period of one year for reporting of substances of very high concern and substances of concern uh for undertakings that are users of articles containing those substances, and there's a reduced disclosure requirement in respect of that.
• 27:43
  SPEAKER_03: And I'd maybe just also mention we talked about anticipated financial effects earlier.
• 27:47
  SPEAKER_03: I know it's everybody's favorite area of disclosure, so I'll just talk about it a little bit more.
• 27:52
  SPEAKER_03: Um, so the commission also actually extended the original phase-ins that were in the technical advice related to anticipated financial effects.
• 28:01
  SPEAKER_03: So now wave one companies can omit all information about their anticipated financial effects for financial years 2026 and 2027.
• 28:13
  SPEAKER_03: And those wave one companies can decide to present only qualitative information, so they could still omit quantitative anticipated financial effect information up until 2030.
• 28:25
  SPEAKER_03: And those same phase-in provisions also apply to other non-wave one companies.
• 28:31
  SPEAKER_03: So those other companies can omit all information about anticipated financial effects for their first two years, and they can present only qualitative information for the first four years of reporting.
• 28:43
  SPEAKER_03: So again, just kind of extending that period, allowing companies more time to get ready to prepare those disclosures.
• 28:51
  SPEAKER_02: And then, Katie, one clarifying point that we always get questions so does that mean it's two plus four?
• 28:56
  SPEAKER_02: So nothing for two years, and then qualitative only for four years?
• 29:01
  SPEAKER_02: Or can you explain what's really meant?
• 29:03
  SPEAKER_03: So it's there's four years in total.
• 29:06
  SPEAKER_03: Two of those years you can emit all information, and then the next two years you can present only qualitative information.
• 29:13
  SPEAKER_03: And actually, maybe one thing to mention, I know I've been saying all uh when I've been talking about this, um, but there are actually a couple of very specific data points in ESRS E1.
• 29:25
  SPEAKER_03: So that's the climate standard.
• 29:27
  SPEAKER_03: So there's a couple of very specific data points that are not subject to this phase in provision.
• 29:32
  SPEAKER_03: So definitely take a look at those, make sure that you're comfortable with what those are.
• 29:36
  SPEAKER_02: Yeah, and just to be very clear, so those are data points related to anticipated financial effects.
• 29:42
  SPEAKER_02: And ESRS E1 is now the only topical standard that has specific provisions related to anticipated financial effects.
• 29:49
  SPEAKER_03: Yeah.
• 29:49
  SPEAKER_03: So so the general provision, a company is required to provide anticipated financial effects for about all of its material risks and opportunities.
• 29:57
  SPEAKER_03: And if a company has material climate-related risks and opportunities, then they would also provide some additional data points that are sitting within ESRS E1 about the anticipated financial effects of those climate-related risks and opportunities.
• 30:10
  SPEAKER_02: Of the latter group, there's a few that you don't get these basic informations.
• 30:15
  SPEAKER_02: All right.
• 30:16
  SPEAKER_02: So it's a little complicated, but definitely important for companies to look at this.
• 30:19
  SPEAKER_02: Um but again, I think welcome relief for a lot of companies.
• 30:23
  SPEAKER_02: All right.
• 30:24
  SPEAKER_02: So then uh I think that maybe other key thing I wanted to focus on is just when companies can start applying these revised ESRSs.
• 30:34
  SPEAKER_02: And this is actually also where we saw a bit of a surprise coming from the commission.
• 30:38
  SPEAKER_02: Um, so Katie, can you run through when these are applicable and as well as some new surprising options we have?
• 30:47
  SPEAKER_03: Yeah.
• 30:47
  SPEAKER_03: So actually, as Katie Woods mentioned, right, at the start of the podcast, we are currently going through like the two-month scrutiny period.
• 30:54
  SPEAKER_03: So the delegated act containing the revised ESRS isn't totally final yet.
• 30:59
  SPEAKER_03: It will be final once the scrutiny period ends, but it is applicable for um financial years beginning on or after the first of January 2027.
• 31:10
  SPEAKER_03: But the delegated act contains a provision in it that talks about what companies should do for financial years beginning on or after 1 January 2026.
• 31:19
  SPEAKER_03: So for 2026 financial years, companies actually have three choices.
• 31:24
  SPEAKER_03: They can continue to use the original ESRS, so the old ESRS that came out in 2023, or they could fully early adopt the new ESRS, so ESRS 2026, just early adopt those one year before they're effective.
• 31:40
  SPEAKER_03: Or, and this is the sort of exciting, surprising thing that was in the final version of the delegated act, um, companies can go for a mixed approach.
• 31:50
  SPEAKER_03: So the delegated act sets out this mixed approach as companies for financial years uh in 2026, companies would continue to apply old ESRS.
• 32:00
  SPEAKER_03: So they would continue to apply ESRS 2023, but they could basically early adopt some of the reliefs that are in ESRS 2026.
• 32:10
  SPEAKER_03: And the delegated act has like a long list of the specific reliefs that an entity would be allowed to early adopt.
• 32:16
  SPEAKER_03: Maybe some of the more interesting ones would be the relief around acquisitions and disposals.
• 32:21
  SPEAKER_03: So entities could early adopt that relief and some reliefs around like disclosures of specific metrics and around how a company carries out its materiality assessment.
• 32:32
  SPEAKER_03: So essentially a company could continue to use the reporting standards they have used in the past, but bring in some of these reliefs, um, some of these kinds of early simplifications before they have to fully adopt the new ESRS.
• 32:45
  SPEAKER_02: And I think when we say long list, it's long-ish.
• 32:49
  SPEAKER_02: It's it's around five or six items, I think.
• 32:52
  SPEAKER_02: Yeah, I can't remember off the top of my head.
• 32:54
  SPEAKER_02: It's it's yeah.
• 32:56
  SPEAKER_02: But I don't want companies to be listening and think, oh, there's a hundred things that I would do.
• 33:02
  SPEAKER_03: I'd say it's less than 10.
• 33:04
  SPEAKER_02: Yes, I think that's a very good answer there.
• 33:06
  SPEAKER_02: All right, so I I'm almost ready to wrap things up, but I'm going to give you guys a small quiz that it's really more focused on just your overall points of view.
• 33:16
  SPEAKER_02: I didn't know there was going to be a quiz.
• 33:18
  SPEAKER_02: I know.
• 33:18
  SPEAKER_02: That's why I didn't tell you this.
• 33:20
  SPEAKER_02: So, what I'm really interested in, and what I was reflecting on, is we were talking about these changes from the F-Rec technical advice to then what the commission proposed, and then what we saw in the final was substantially similar.
• 33:32
  SPEAKER_02: I think we highlighted a few things.
• 33:34
  SPEAKER_02: Uh, I think what a lot of companies then are thinking about is if we sit back and reflect on this entire journey from the original ESRS 2023 to where we are now, what are the things that stand out for you the most in terms of what's changed?
• 33:50
  SPEAKER_02: So, irrespective of who changed it, what would be top of mind if you were talking to a company?
• 33:56
  SPEAKER_02: And so I'll give you a moment to reflect, but maybe two or three things, unless, you know, if you want to give a long list of more than 10, you're welcome to.
• 34:04
  SPEAKER_02: So take a moment and then um you can volunteer who wants to go first.
• 34:09
  SPEAKER_01: So I'll take Katie's hot topic of materiality assessment.
• 34:14
  SPEAKER_01: Oh, Katie, I know.
• 34:17
  SPEAKER_01: So I think there are a number of things that can be taken from that.
• 34:21
  SPEAKER_01: But really, if you have previously prepared or looked to prepare a materiality assessment, look at what you can do now as a consequence of ESRS 2026.
• 34:32
  SPEAKER_01: Um, it is there to make things easier.
• 34:35
  SPEAKER_01: I think Katie's highlighted that through her summary.
• 34:37
  SPEAKER_01: But also there are some um some quirks in there that need to be thought about.
• 34:41
  SPEAKER_01: So get to that materiality assessment quickly and think about how you would apply it.
• 34:47
  SPEAKER_01: Because I, yeah, it's it's gonna come around really quickly, this reporting.
• 34:51
  SPEAKER_02: That is true.
• 34:52
  SPEAKER_02: All right, Katie, what would you add?
• 34:54
  SPEAKER_03: Well, Katie stole my my business.
• 34:57
  SPEAKER_03: I gotta go first.
• 34:58
  SPEAKER_03: So I would actually say um the area that I've been hearing a lot of companies getting really kind of interested in actually are some of these new reliefs that have been added into the standards.
• 35:09
  SPEAKER_03: Um, the one that I would maybe pick on is the relief around acquisitions and disposals.
• 35:14
  SPEAKER_03: So we now have this relief that allows a company to essentially defer including information about an acquisition for a year, um, or if it's a disposal, essentially remove the information related to that disposal at the beginning of the year.
• 35:28
  SPEAKER_03: And that I think is a really, really helpful simplification because especially with sort of like acquisitions that maybe happen towards the end of the reporting period, it can be really challenging to collect that information in a timely manner to get the sustainability reporting out.
• 35:42
  SPEAKER_03: So this relief is something that I think is going to be really helpful in these sorts of situations.
• 35:48
  SPEAKER_02: Yeah, and actually, if I was thinking for myself, because I was also thinking and I did not pre-prepare, I also actually would say the reliefs broadly, I think are welcome changes that will simplify.
• 36:01
  SPEAKER_02: And I would actually add in that change to the greenhouse gas organizational boundary as a relief, even though it's not framed as such, because for most companies, then uh if they've previously reported greenhouse gases, hopefully it won't be a major change.
• 36:15
  SPEAKER_02: Um, but I also have to go to the fact that you can apply some of the reliefs in your 20.
• 36:20
  SPEAKER_02: Um, even if you continue to apply 2023, I think that's also a really welcome change and why even those 2023 reporting companies need to focus on what the new reliefs are.
• 36:32
  SPEAKER_02: And we talk about that in our in-depth, which Katie mentioned.
• 36:36
  SPEAKER_02: But then also um Katie DeKeiser right now is is working on more guidance that we'll be issuing um forthcoming, hopefully early fall on that.
• 36:45
  SPEAKER_02: Okay, so that's the only quiz, unless um do you guys want to quiz each other?
• 36:50
  SPEAKER_03: Can I add one more thing to my because of course after the quiz ends, that's when you think of more.
• 36:56
  SPEAKER_03: Um you reminded me when you were talking about the GHG reporting boundary.
• 37:00
  SPEAKER_03: Another area that a lot of companies have been really welcoming is this kind of enhanced interoperability.
• 37:05
  SPEAKER_03: So a lot of the kind of things that we've been talking about, the GHG reporting boundary, the anticipated financial effects disclosures, a lot of these disclosures are now more interoperable with other reporting frameworks like the GHG protocol and the ISSB standards.
• 37:19
  SPEAKER_03: And that's going to be really helpful for companies that have reporting requirements in multiple jurisdictions.
• 37:24
  SPEAKER_02: Agree.
• 37:24
  SPEAKER_02: And actually, that's an interesting, almost segue to what will likely be our next sustainability reporting uh podcast, which will relate to the ESRS for third country undertakings, uh, which we haven't seen yet at the time we're recording this, but expect to see soon.
• 37:40
  SPEAKER_02: All right, Katie, last chance.
• 37:41
  SPEAKER_02: Do you want to add anything?
• 37:42
  SPEAKER_02: Or I have a new question.
• 37:44
  SPEAKER_01: Well, uh, I was going to add something which is less of the positive, but more of thinking from now, which is about the judgments that are being made.
• 37:51
  SPEAKER_01: I think the disclosures about those judgments, we we've got so much more clarity on the areas that we've talked about so far.
• 37:59
  SPEAKER_01: But actually, to your point of how thick the standards are and therefore how thin the standards are around the topical standards, I think there are going to be a lot more judgments.
• 38:08
  SPEAKER_01: And we know that the specific disclosures are requirements.
• 38:11
  SPEAKER_01: So as you're starting to plan, think about what those judgments are now to have that discussion or whatever you need to do rather than leaving it to the last minute.
• 38:21
  SPEAKER_01: So maybe a bit of a down.
• 38:23
  SPEAKER_01: I shouldn't have done that, but it's uh I'm frowning.
• 38:25
  SPEAKER_02: No, I think it's really important.
• 38:26
  SPEAKER_02: And actually, you anticipated my next question because I was going to ask you what companies should be thinking about now.
• 38:33
  SPEAKER_01: Okay.
• 38:33
  SPEAKER_01: Well, I do that.
• 38:34
  SPEAKER_01: And also data collection, because obviously the disclosure requirements are changing.
• 38:38
  SPEAKER_01: Yes.
• 38:38
  SPEAKER_01: Think about what data because the data you have been collecting or you thought you were going to have to collect may not be different.
• 38:45
  SPEAKER_02: All right.
• 38:45
  SPEAKER_02: Thank you.
• 38:46
  SPEAKER_02: And Katie, from your point of view, anything you'd add in terms of what you would tell a company to focus on right now?
• 38:53
  SPEAKER_03: I think probably the one thing I would say is uh the materiality assessment.
• 38:58
  SPEAKER_03: So data collection, absolutely, but also start looking at those new provisions around the materiality assessment because if you're going to make any changes to the way that you're performing that assessment or the kind of information that you need to do that assessment, like now is the time to start thinking about that.
• 39:13
  SPEAKER_02: All right.
• 39:14
  SPEAKER_02: Excellent points.
• 39:15
  SPEAKER_02: As always, such a pleasure to talk to you.
• 39:17
  SPEAKER_02: Thanks so much for joining me today.
• 39:18
  SPEAKER_02: Thanks, thanks very much.
• 39:21
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• 39:23
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• 39:26
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• 39:43
  SPEAKER_02: From thought leadership at PwC, I'm Heather Horn.
• 39:48
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