Shraddha Sawant, senior sustainability analyst at TOS, explains how the European Sustainability Reporting Standards (ESRS) fit in the context of global reporting requirements.
- In July 2023, the European Commission adopted the ESRS, a key element of the EU’s new Corporate Sustainability Reporting Directive (CSRD).
- Because the ESRS are aligned with other international frameworks, there will be no need for companies to conduct multiple reports across varied standards.
- We can expect to see more such climate-related, biodiversity-related, natural capital-related and/or sustainability reporting mandates and collaborative standards in the future.
On the 31 July 2023, the European Commission adopted the ESRS. The new mandatory Sustainability Reporting Standards are a key element of the EU’s new CSRD, which has been praised as the changing standard for corporate sustainability reporting. Following the footsteps of financial reporting, the ESRS requires large EU companies to disclose Environmental, Social, and Governance (ESG) data and corporate sustainability in a more standardised and comparable format.
The ESRS is aligned with two main frameworks, the Global Reporting Initiative (GRI) and the International Sustainability Standards Board (ISSB), and its introduction means that, from January 2024, there will be no need for companies to conduct multiple reports across varied frameworks.
The new standards are only applicable to the EU and mandatory for organisations with over €20 million in total assets, a net turnover of €40 million, and/or at least 250 employees. Listed small and medium enterprises (SMEs) are not required to report sustainability information until financial year 2026, with the possibility of an additional two-year opt-out following that. Listed SMEs can also choose to report according to other standards (such as GRI, ISSB, TCFD), which will be less demanding than the full set of ESRS that the Commission has adopted.
Purpose of ESRS
ESRS reporting is a positive step for sustainability reporting overall in that it attempts to overcome data gaps and minimise the misuse of flexibility provided by voluntary global frameworks. ESRS was primarily undertaken to overcome significant, upcoming issues in the current ways of sustainability disclosures such as:
- Insufficient data being disclosed by the companies.
- Omission of information that is considered important by investors and other stakeholders due to the voluntary nature of reporting.
- Difficulty in comparing data from company to company.
- Investors finding the data disclosed to be increasingly unreliable due to the quality of sustainability reporting.
The ESRS take a ‘double materiality’ perspective, i.e. they oblige companies to report both on their impacts on people and the environment, and on how social and environmental issues create financial risks and opportunities for the company. This helps the companies to develop resilient business strategies to satisfy the requirements of all involved stakeholders.
Downfalls of the ESRS
There are 12 standards that fall within the ESRS, covering the full range of sustainability issues. The mandatory disclosure clause, however, is only applicable to one of those 12 standards i.e. ESRS 2 General Disclosures, while the disclosures for the remaining 11 topics are subject to materiality assessment.
Only the data within topics that are material must be disclosed and the materiality assessment process is subject to external assurance. This is similar to voluntary reporting frameworks, where companies can omit disclosing data on topics considered to be not material to the business along with a detailed explanation for omission. There is no way to know how effective this clause would be.
In my opinion, the effectiveness of this clause can only be assessed after comparing the data points gathered from companies for reporting against ESRS in comparison to their previously submitted sustainability reports using voluntary frameworks.
In the second draft, the Commission not only reduced but also converted several of the mandatory data points proposed by EFRAG into voluntary data points. These data points are the ones that are currently considered most challenging or costly for companies, for example reporting a biodiversity transition plan. However, if ESRS intends to improve the overall quality of sustainability reporting and provide reliable data to investors for the long-term sustainability of business and its resources, the organisations must invest in addressing these challenging data points rather than delaying its assessment and disclosures.
The future of reporting trends
We now see a growing trend of collaborations between voluntary reporting organisations, regulatory bodies and governments in order to develop sustainability reporting mandates. In April 2022, the UK government mandated Task Force on Climate-related Financial Disclosures (TCFD) for all large-cap companies and financial institutions.
The development and adoption of ESRS in July 2023 is also an outcome of one such public-private partnership within the discipline of sustainability disclosures to increase data transparency and accountability. We can expect to see more such climate-related, biodiversity-related, natural capital-related and/or sustainability reporting mandates and collaborative standards in the future.
Since GRI has formally supported the technical work to develop the ESRS through a co-creation agreement with EFRAG (the body mandated to deliver the ESRS), it is said that the existing GRI reporters will be well prepared to report under the ESRS. Integrated sustainability tools to quantify, compare, forecast, and report sustainability data will be on the rise to support and fulfil sustainability reporting requirements as per the ESRS standards as many of the ESRS requirements are inspired by GRI standards.
The opinions of guest authors are their own and do not necessarily represent those of SG Voice.
