The ESRS standards play a crucial role in shaping sustainability reporting within the European Union (EU). These standards are an essential component of the Corporate Sustainability Reporting Directive (CSRD), a legislative framework established by the European Parliament and the Council. As a result, compliance with the ESRS reporting standards is obligatory for companies.
The introduction of the initial set of 12 standards by the Commission represents a significant milestone in advancing sustainable practices and enhancing transparency in corporate reporting. This initiative aims to facilitate comparability among companies. It’s worth noting that these new reporting requirements mark a substantial shift in the landscape of sustainability reporting, impacting approximately 50,000 EU-based companies directly. However, the influence of these standards may extend indirectly to subsidiaries, foreign branches, and companies conducting a substantial portion of their business activities within the EU, broadening their reach and impact.
Objective of the ESRS and how is it related to the EU Green Deal?
The primary goal of ESRS is to enhance the breadth and quality of corporate sustainability reporting, fostering sustainable development through increased transparency. This initiative aims to provide stakeholders, particularly investors, other businesses, and society, with more comprehensive insights into companies’ operational practices. ESRS achieves this through a multifaceted approach.
On one hand, ESRS mandates that companies delve deeply into their sustainability performance, extending scrutiny to their supply chains and the entire lifecycle of their products in some cases. The mandatory ESRS data points, encompassing both qualitative and quantitative indicators, as well as reliable information about a company’s sustainability progress, impose a significantly greater responsibility on companies than in the past. This development places heightened demands on data management, existing reporting structures, and processes, especially considering that the CSRD introduces an electronic reporting format for sustainability data.
On the other hand, ESRS does not require companies covered by the CSRD to produce a separate sustainability report. Instead, sustainability information is now integrated into the group’s annual report. Furthermore, this non-financial sustainability information is subject to external auditing, necessitating companies to clarify their methods for collecting ESRS ESG data and generating ESRS KPIs. Sustainability KPIs are thereby elevated to the same level of importance as other reportable financial information. This overall elevates the significance of sustainability disclosures.
In essence, adopting sustainability reporting in line with ESRS enhances the quality and comparability of report contents. Yet, the impact of ESRS extends beyond mere reporting requirements. It also compels companies to disclose their efforts in improving sustainability performance and advancing sustainability management. All of these measures collectively work to expedite the transition toward a sustainable economy. The new CSRD standards are a vital component of the EU’s overarching strategy to achieve climate neutrality by 2050 and establish a sustainable economic framework. In conjunction with ESRS and the EU Taxonomy Regulation, the Corporate Sustainability Due Diligence Directive, and other EU decisions, they form integral elements of the EU Green Deal puzzle.
The correlation between ESRS and CSRD?
The CSRD outlines the applicability of ESRS reporting requirements, specifying which companies are impacted and when. This is contingent on various criteria, as the CSRD introduces a phased implementation of these new reporting standards. The timeline is as follows:
- Starting from the fiscal year 2024, with the annual report published in 2025: Companies already obligated to report under the Non-Financial Reporting Directive (NFRD).
- Beginning from the fiscal year 2025, with the annual report for 2026: All other large corporations meeting at least two out of three of the following criteria: an annual average of 250 employees or more, total assets amounting to 20 million euros, or sales totaling 40 million euros.
- Commencing from the fiscal year 2026, with the annual report for 2027: This phase encompasses listed SMEs, as well as small and uncomplicated credit institutions and captive insurance companies.
- Starting from the fiscal year 2028, with the annual report for 2029: Third-country companies with subsidiaries or branches within the EU fall under these requirements. However, this only applies if these entities exceed a net sales threshold of EUR 150 million within the EU area over two years.
ESRS 1:
ESRS 1 establishes essential guidelines for the formulation and disclosure of sustainability statements under the CSRD, but it doesn’t dictate specific report content. Instead, it serves as the foundational framework for report preparation. This standard encompasses various reporting aspects, including due diligence obligations, the value chain, timeframes, and the methods for collecting and presenting sustainability information. Notably, ESRS 1 mandates a materiality assessment for each standard, with the exception of ESRS 2.
The materiality assessment, as outlined in ESRS 1, is grounded in the principle of double materiality and draws significant inspiration from GRI (Global Reporting Initiative). It holds a pivotal role within the CSRD, aiding in the identification of impacts, risks, and opportunities that warrant reporting in accordance with individual ESRS standards.
In essence, the materiality assessment serves as a crucial tool for determining the content of the report. The selection of which ESRS standards to apply and the specific content to report hinges on what is deemed material. However, it is imperative to provide comprehensive explanations if certain aspects are deemed non-material.
ESRS 2:
ESRS 2 outlines essential elements and information, including policies, measures, and objectives, that must be reported irrespective of the results of the materiality assessment. Additionally, ESRS 2 sets out the format and substance for the ESRS topical standards. It establishes a framework consisting of four disclosure categories:
- Governance
- Strategy
- Management of impacts, risks, and opportunities
- Metrics and targets
These four foundational pillars are aligned with established international sustainability reporting frameworks such as TCFD (Task Force on Climate-related Financial Disclosures) and ISSB (International Sustainability Standards Board).
ESRS E1-E5 – Environmental Information:
These five environmental standards encompass reporting elements related to various environmental aspects, including climate change (ESRS E1), pollution (ESRS E2), water and marine resources (ESRS E3), biodiversity and ecosystems (ESRS E4), and resource utilization and the circular economy (ESRS E5). Some of these standards necessitate companies to disclose their strategies for transitioning to a sustainable business model and their corresponding implementation plans. Moreover, they require companies to detail their contributions to the environmental objectives outlined in the EU Green Deal.
ESRS S1-S4 – Social Information:
These four standards pertain to social dimensions and facilitate organized reporting by companies, encompassing details about their internal workforce (ESRS S1) and extending beyond the company’s immediate boundaries. Specifically, one of these standards is dedicated to employees within the company’s value chain (ESRS S2). Furthermore, these standards encompass information concerning communities impacted by the company’s operations (ESRS S3) and insights into consumers and end users (ESRS S4), with ESRS S2-S4 predominantly offering qualitative rather than quantitative data.
ESRS G1 – Governance Information:
The governance standard offers insight into a company’s strategy, procedures, and achievements, shedding light on the functions of administrative, performance, and oversight bodies. Furthermore, it outlines specific reporting elements concerning the company’s management of impacts, risks, and opportunities. ESRS G1 also mandates the inclusion of fundamental details about corporate policies and the corporate culture. This standard additionally discloses how a company addresses and prevents corruption or bribery, and it addresses the company’s interactions with suppliers and its involvement in political activities.
