The European Sustainability Reporting Standards explained (ESRS)
As of August 2023, the European Commission has given the thumbs up to the first batch of European Sustainability Reporting Standards (ESRS). Together with the Corporate Sustainability Reporting Directive (CSRD), we're now stepping into a new era of holding companies accountable for their environmental impact.
What is the ESRS?
The ESRS serves as a fundamental component of the CSRD. That’s a lot of acronyms, but what does it actually mean? The standards help to homogenise reporting across the EU by providing a set of guiding principles that facilitate compliance with the CSRD by mandated companies. The CSRD dictates who must report, and the ESRS tells them exactly how to. The standards will apply to around 50,000 companies within the EU and exerts broader, indirect influences on their subsidiaries, overseas branches, and business operations conducted within the EU.
The ESRS will require companies to comprehensively disclose their year-on-year sustainability performance. In some cases, this extends into the supply chain and the entire lifecycle of their products. This places a greater obligation on companies than before as a result of the mandatory standards for quantitative and qualitative data. The standardisation of reporting will lead to a greater degree of comparability between companies, transparency on progress, and accountability for companies in the pursuit of meaningful change.
How does the ESRS work?
The ESRS requires companies to provide comprehensive reports across various facets of their business operations, encompassing the environmental, social, and governance (ESG) domains.
Currently, there are 12 accepted standards. However, more are expected throughout 2023 and 2024. The current standards include 10 topical standards and 2 cross-cutting standards.
Here’s a summary of what each of these mean ⏬
ESRS E1: Mandates transparency concerning a company's carbon footprint, the use of carbon credits, strategies for adaptation, reduction, and plans for climate resilience.
ESRS E2: Requires in-depth analysis regarding pollutants released throughout their service/product delivery. This includes ozone-depleting substances, inorganic pollutants, and understanding how human activities contribute to pollution
ESRS E3: Calls for the disclosure of nearby water sources that are impacted by pollution or scarcity as well as any economic activities undertaken by a business related to water use.
ESRS E4: Mandates reporting on the organisms across ecosystems that a business may impact during their operations to identify and understand which areas will be the most sensitive to biodiversity change
ESRS E5: This requires companies to disclose the flow of resources within their operations and how they contribute to the circular economy
ESRS S1: Imposes the requirement to provide information about how companies treat their employees in terms of compensation, dispute resolution, accessibility measures, and social dialogue in the workplace.
ESRS S2: Requires transparency about how employees within the value chain are interacted with and impacted, including stakeholders and suppliers
ESRS S3: Calls for clarification on a businesses’ their social impact on local residents and indigenous groups, including areas where they have operations and suppliers
ESRS S4: Mandates the provision of information regarding consumers such as how the product/service of the company is acquired and information about the end-users of the product
ESRS G1: Mandates the disclosure of supervisory bodies and overall management of the company, information regarding the annual salary and bonuses of employees, benefits (transportation, stipends, living allowances, stocks/shares etc), and overtime compensation.
This will all require specification of vulnerable groups (elderly, people with disabilities, minorities, and refugees) in event of consequences to compliance failure
ESRS G2: Obliges the disclosure of any anti-competitive behaviour, lobbying activities, and corruption (such as fraud, money laundering, and bribery)
What is the difference between the CSRD, NFRD, and ESRS?
In the regulation space, there are so many new updates it can be hard to keep up. The ESRS, CSRD, and NFRD all work together in some capacity and are all directly related to sustainability reporting - but what’s the real difference?
In summary, the CSRD was an evolution of the values outlined in the NFRD. Building upon those foundations, the CSRD is now considered the new and improved version of NFRD. This is because the CSRD widens the scope to encompass a broader range of companies and provides a higher level of detail. Between the CSRD and ESRS, the CSRD sets the legal framework for company level compliance and the ESRS details the standards to follow to be qualified for reporting compliance.
Why should I adhere to the ESRS?
While the ESRS is a great step forward in accountability, comparability, and transparency in ESG reporting, adhering to them is a time consuming and resource demanding process.
However, the CSRD/ESRS makes the information available in sustainability reporting both deep and broad. This depth and breadth will enhance the ability for investors, stakeholders, and customers to compare your ESG performance with other business more easily, allowing them to make informed decisions.
While ESRS and CSRD are not currently mandated for all businesses across the EU, more companies will be required to follow the standards on a phased basis. The earlier you voluntarily comply, the easier it will be to enhance in-house expertise, boost internal collaboration, and perform ESRS gap analysis before you are mandated to comply.
When will I need to adhere to the ESRS?
Here is the timeline for the ESRS and updates to the scope:
1st of January 2024: Companies that are currently obliged to report under the EU Non-Financial Reporting Directive (NFRD). Namely, large and listed companies with more than 500 employees will need to start reporting under the ESRSs for the financial year 2024.
1st of January 2025: Large companies covered by the CSRD need to report under the ESRS from the financial year 2025
1st of January 2026: SMEs and other small, non-complex institutions must implement the CSRD and align to the ESRS from the financial year 2026. However, they can opt out until the the 1st of January 2028