The European Commission adopted the first set of European Sustainability Reporting Standards (ESRS) on July 31, 2023. These standards are part of the Corporate Sustainability Reporting Directive (CSRD), which aims to enhance transparency and comparability in sustainability reporting across the EU.
The ESRS cover a comprehensive range of environmental, social, and governance (ESG) topics. They provide detailed disclosure requirements for companies to report on their material sustainability impacts, risks, and opportunities.
The adoption of the ESRS is indeed a significant step towards improving sustainability reporting in the EU. It's estimated that around 50,000 companies will be covered by the new rules, compared to about 11,700 companies under the previous Non-Financial Reporting Directive (NFRD).
The ESRS are designed to align with international best practices and provide stakeholders with reliable and comparable information on companies' sustainability performance. They aim to promote the integration of sustainability considerations into companies' decision-making processes and demonstrate their commitment to sustainable development.
It's worth noting that the ESRS will be phased in over time, with different categories of companies required to comply at different stages between 2024 and 2028.
Why was the CSRD adopted?
The Corporate Sustainability Reporting Directive (CSRD) emerged from the European Union's need to address sustainability challenges. It replaces the Non-Financial Reporting Directive (NFRD) and aligns with the European Green Deal's goal of creating the first climate-neutral continent by 2050. The CSRD expands non-financial reporting requirements for large companies and listed entities, including SMEs, covering areas such as climate-related risks, social impact, environmental consequences, and corporate governance.
Recognizing the importance of sustainability risks and opportunities in determining a company's long-term success, the CSRD aims to create a standardized framework for sustainability reporting. This framework is designed to facilitate company comparisons, improve financial modeling accuracy, and enhance transparency for investors and stakeholders.
The CSRD represents significant progress in implementing sustainable finance and non-financial reporting practices. It reflects the growing importance of sustainability in economic activities and emphasizes businesses' responsibility to ensure responsible social and environmental impacts.
The European Commission adopted the European Sustainability Reporting Standards (ESRS) on July 31, 2023, which companies subject to the CSRD will use for reporting. These standards cover environmental, social, and governance issues, including climate change, biodiversity, and human rights. The reporting requirements will be phased in over time for different companies.
The application of the CSRD will occur in four stages, starting with companies already subject to the NFRD in 2025 (for the financial year 2024) and extending to third-country undertakings with significant EU presence by 2029 (for the financial year 2028). This phased approach allows companies time to adapt to the new reporting requirements.
When will the new requirement take effect?
Interoperability: convergence with other standards and frameworks
The Corporate Sustainability Reporting Directive (CSRD) aims to enhance convergence in sustainability reporting. It is part of broader global efforts to provide uniformity to the fragmented ESG disclosure landscape. To improve comparability of sustainability information between companies, the European Sustainability Reporting Standards (ESRS) were developed. These standards enhance interoperability with existing standards and frameworks.
During the development of the IFRS Sustainability Disclosure Standards (SDS), EFRAG engaged in regular technical dialogue with the International Sustainability Standards Board (ISSB). This collaboration aimed to ensure alignment between the ESRS and global sustainability reporting standards.
EFRAG and the Global Reporting Initiative (GRI) have also worked together to achieve a high degree of interoperability between their respective standards. In November 2023, they signed a new Memorandum of Understanding (MoU) to further substantiate the benefits of this alignment and continue collaborating on technical support for reporting companies. Their partnership extends to fostering interoperability of digital XBRL taxonomies, including a simplified tagging system and digital correspondence table between both standards.
The increased interoperability between the ESRS and other standards is expected to significantly reduce the reporting burden for many companies. This alignment aims to eliminate the need for companies to report the same sustainability information multiple times through separate, overlapping standards.
To further support this interoperability, the IFRS Foundation and EFRAG published joint guidance material in May 2024 to illustrate the high level of alignment between the ISSB Standards and ESRS. This guidance provides practical support for companies to efficiently comply with both sets of standards, particularly in climate-related disclosures.
European Sustainability Reporting Standards by EFRAG
The Corporate Sustainability Reporting Directive (CSRD) includes the adoption of EU Sustainability Reporting Standards (ESRS).
Conditional on a materiality analysis, the company needs to report on each item: Governance (sustainability governance and organization), Strategy (integrating material sustainability impacts, risks, and opportunities into strategy), Impact, risk, and opportunity management (policies, action plans, resource allocation and risk management), Metrics and targets (current achievements and progress against stated targets).
How to draft an ESRS report according to EU legislation CSRD
The following steps represent key phases within the CSRD compliance process. Nonetheless, the specific phases will vary for each company and must be tailored to meet their individual requirements.
The Key Benefits and Challenges of CSRD for Businesses
While the CSRD marks a considerable advancement, it presents certain challenges. Companies encounter various obstacles in aligning their operations with the stringent requirements of the directive. Nonetheless, those organizations that comply with CSRD standards stand to gain several advantages.
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