The EU’s new European Sustainability Reporting Standards, the "ESRS", which were released today, will change the world of corporate reporting as we know it for thousands of companies.
Here’s what you need to know:
Why do the European Sustainability Reporting Standards matter?
With the launch of the Corporate Sustainability Reporting Directive (CSRD) and the publication of the European Sustainability Reporting Standards (ESRS), the EU has launched the most comprehensive expansion and overhaul of sustainability reporting requirements ever. These will not just impact larger listed companies, but also a wide range of other non-listed and smaller companies both inside and outside the EU. The extra-territorial nature of CSRD means that some non-EU companies will be subject to the new reporting obligations by 2028.
The new directive effectively moves the ESG reporting landscape from a voluntary reporting exercise to a mandatory one, requiring the publication of information in a dedicated section of companies' management reports, with equal footing to financial reporting, as well as review by an accredited independent auditor or certifier. Failing to report on the required disclosure items could lead to a qualified audit report and the subsequent potential loss of credibility in the eyes of capital markets and other stakeholders.
What is the EU's Corporate Social Responsibility Directive?
The CSRD is an EU legislative directive that intends to promote greater transparency on companies' sustainability, climate, nature, and human rights-related activities and governance by improving the quality of corporate ESG disclosure.
The CSRD, which was approved in early November, replaces the Non-Financial Reporting Directive (NFRD), and affects approximately 49,000 companies, up from approximately 12,000 under the NFRD. The Directive will first apply to NFRD companies from 1 January 2024 (reporting in 2025 on FY24 data), and then subsequently to more companies (also non-listed) in a rolling sequence of adoption until 2028.
Where do the ESRS fit in?
The CSRD is underpinned by the ESRS which specify how companies report on sustainability matters, and which are designed to reflect sustainability report users' growing needs for comparable, relevant and reliable information. The ESRS includes 2 cross-cutting disclosure requirements (applicable to all sustainability issues) as well as 10 topical standards on a number of ESG issues. Sector specific standards will be published in 2023.
What are the biggest challenges the ESRS creates for business?
The ESRS contains hundreds of pages of disclosure requirements, and potentially more than a thousand qualitative and quantitative data points that businesses will need to provide. Importantly, the CSRD also introduces the obligation to report beyond the boundaries of the business itself, and includes the requirement to report on your value chain.
Finally, many of the disclosure requirements rest on materiality. In the case of CSRD, it requires a double materiality approach, which for many companies will be a new exercise. A suitable (double) materiality assessment can be a complex, time-consuming exercise. Taking it all together, the size and complexity of these standards means that even the most advanced companies with the most comprehensive reporting practices and largest data sets face a lengthy compliance and data collection journey.
How do I get started?
Complying with these reporting requirements will take time and the earlier you start the better. Even those with voluntary ESG reporting experience will find ESRS a challenge. How you get started depends largely on where you are in the ESG reporting adoption curve and the timing of your disclosure obligations. 2023 serves as the year for getting the organisation and processes in place to generate the right quality of data.
We suggest you begin to test your readiness by conducting a gap analysis against the hundreds of individual disclosure requirements inside the 12 standards, and understand the materiality requirements as laid out in the ESRS. This will help you in two ways:
- It will clarify what you currently collect and disclose on the data front and where you need to get started
- It will make clear how to design and execute your materiality assessment
Remember to engage executive management early on to get the buy-in and support you need. These steps should serve as an optimal starting point for creating a successful ESRS reporting compliance roadmap.
How can we help?
We’ve been at the forefront of the evolution of ESG reporting for over 20 years and we are the trusted partners of many leading global companies.
By partnering with us on your ESRS journey we can help you:
- Lay the foundations for long-term ESG reporting success, including by understanding your reporting obligations, assessing your readiness, conducting a materiality assessment, and developing a tailored road map
- Deliver industry-leading disclosures that meet the expectations of regulators, capital markets, customers and other stakeholders
- Tackle key ESRS reporting obligations, including physical and transition climate risk, human rights due diligence and sustainable supply chain management