European regulations on non-financial reporting have taken some big steps forward in recent times. In addition to the Corporate Sustainability Reporting Directive (CSRD), the new European Sustainability Reporting Standards (ESRS) have also been introduced.
Do you want to know how they affect companies and how you can adapt yours to these regulatory changes?
Read on to find out more about the latest updates and how they may impact your organisation’s non-financial reporting obligations.
What are the ESRS?
The ESRS are a set of new standards and indicators that aim to put an end to reporting practices that follow a plethora of different national framework references or other standards, such as GRI, SDGs and the UN Global Compact, by standardising the way in which companies report on non-financial aspects.
The ESRS are split up into 12 documents that cover different aspects:
- ESRS 1 General requirements
- ESRS 2 General disclosures
- ESRS E1 Climate change
- ESRS E2 Pollution
- ESRS E3 Water and marine resources
- ESRS E4 Biodiversity and ecosystems
- ESRS E5 Resource use and circular economy
- ESRS G1 Business conduct
- ESRS S1 Own workforce
- ESRS S2 Workers in the value chain
- ESRS S3 Affected communities
- ESRS S4 Consumer and end-users.
What’s more, it is expected that specific ESRS indicators for 40 different sectors will soon be published. If you want to find out more about these standards and how they may affect your business, keep reading.
Benefits of the ESRS
These standards are designed to be much more than mere regulations, instead aiming to improve the current sustainability reporting situation. How?
- Global standards: The ESRS have been devised to provide a global framework for reporting on a company’s sustainability performance. This means that companies can report in a consistent and comparable way wherever they are in the world.
- Transparency and trust: The objective of the ESRS is to improve transparency and boost confidence in sustainability reports. By providing a clear structure to follow when reporting on sustainability, they help create clearer information while developing trust amongst investors, clients and other stakeholders.
- Focus on materiality: These standards take a keen interest in materiality, a matter which is of particular importance to businesses, so that they can enhance the relevance of the information and aid businesses in taking informed decisions.
- Continuous improvement: Another goal of the ESRS is to enable companies to improve their sustainability performance. The clear reporting structure they provide allows companies to identify areas for improvement and work towards making positive changes.
- Greater understanding and informed decision-making: Thanks to these standards, companies will gain a better understanding of their sustainability performance, which in turn helps them make informed decisions. This may include investment, product and service purchase and employment decisions.
As you can see, there are plenty of benefits to a company adhering to the European Sustainability Reporting Standards, which is why fully understanding them and knowing how to apply them can provide a competitive edge.
Which companies are impacted by the ESRS?
Companies that fall under the scope of the CSRD will also be affected by the ESRS.
The provisions of the CSRD apply to all large companies, whether or not they are listed on the stock exchange (except for micro-entities), which meet at least two of the following criteria:
- Balance sheet total assets greater than €20 million.
- Net turnover of more than €40 million.
- Average of more than 250 employees during the fiscal year.
It is expected that SMEs will be given a further three years to comply with the CSRD.
This also includes companies based outside of the EU that undertake significant business activity in the EU (with a turnover of more than €150 million in the EU) and that have at least one subsidiary (large or listed) or branch (with a net turnover of more than €40 million) in the EU.
According to estimates, more than 50,000 EU companies will be required to publish sustainability information under the ESRS.
When must companies disclose sustainability information, according to the ESRS?
These sustainability reporting standards will be applied gradually. They will enter into force between 2024 and 2028 in accordance with the following schedule:
- From 1 January 2024 for companies already subject to the Non-Financial Reporting Directive (reporting 2024 data in 2025).
- From 1 January 2025 for large companies that are currently not subject to the Non-Financial Reporting Directive (reporting 2025 data in 2026).
- From 1 January 2026 for listed SMEs and other companies (reporting 2026 data in 2027), however SMEs can choose to not participate until 2028.
- From 1 January 2028 for non-EU-based companies with significant business activity in the EU (reporting 2028 data in 2029).
What changes will the ESRS bring?
Some changes must be taken into account when reporting sustainability information in accordance with these standards:
- The sustainability information provided in the management report must be verified by a third party, in other words, by an external auditor.
- Some of the new aspects covered by the CSRD and the ESRS include double materiality, the inclusion of prospective information, information about the upstream and downstream value chain and the concept of sustainability due diligence. The latter is closely related to the upcoming Corporate Sustainability Due Diligence Directive (CS3D) that aims to foster sustainable and responsible corporate behaviour throughout global value chains.
- Two main groups of stakeholders are considered in the ESRS: affected stakeholders and users of sustainability reporting.
The EFRAG has designed the ESRS in such a way that the sustainability information must be reported in an articulated manner, based on the following 3×3 structure: three reporting areas, three disclosure layers and three topics (covering the 11 standard ESG topics).
The three disclosure layers are:
- Sector-agnostic information.
- Sector-specific information.
- Entity-specific information.
And the three reporting areas are:
- Strategy, governance and materiality assessment.
- Implementation measures, covering policies, targets, actions and action plans, and allocation of resources.
- Performance metrics (specific sets of metrics for all material topics).
And finally, the three topics are, of course, environmental, social and governance (ESG).
How can I prepare myself for the ESRS?
If you’re wondering what steps you should take next to get ready for the ESRS, we definitely recommend familiarising yourself more with the requirements of the ESRS, identifying what it is you need to report and preparing this information.
This shouldn’t be a one-off task for the sustainability team alone; educating your organisation and gaining the commitment of process managers throughout the organisation is the only way to gain a better understanding of the reporting requirements and improve the necessary data collection processes.
Remember that if you need to report your 2024 data, you’ll need to start gathering data in 2024, and that means you need to decide which type of data you are going to collect and how.
With APLANET’s software you’ll be able to collect and manage these data while our team of experts will advise you every step of the way: request more information here.
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