On April 29, 2022, the European Financial Reporting Advisory Group (EFRAG) issued the first draft of the proposed European Sustainability Reporting Standards (ESRS) for public feedback. These reporting standards are part of the European Union’s proposed Corporate Sustainability Reporting Directive (CSRD), which will expand on the existing reporting requirements of the Non-Financial Reporting Directive (NFRD), which currently requires certain large companies to disclose information on the way they operate and manage ESG-related challenges.
Still following with all those acronyms? With this latest move, the EU aims to increase corporate transparency in terms of sustainability by introducing more detailed reporting requirements and making it mandatory for large companies to report according to a specific standard, the proposed ESRS. This will provide investors with the information they need to better evaluate risk and bring a level of rigor to sustainability reporting on par with financial reporting.
What are the European Sustainability Reporting Standards (ESRS)?
The European Sustainability Reporting Standards are a proposed set of reporting requirements for large companies operating in the EU. The ESRS will extend current sustainability reporting requirements to include more detailed information on a broad range of environmental, social, and governance (ESG) issues.
The ESRS will require organizations to include the following areas in their sustainability reporting:
- Strategy and business model in relation to sustainability
- Governance and organization in relation to sustainability
- Materiality assessment of its sustainability-related impacts, risks, and opportunities
- Implementation measures, covering policies, targets, actions, and action plans
- Allocation of resources
- Performance metrics
The ESRS outlines reporting requirements in four categories covering 13 ESG issues as follows:
- Cross-cutting:
- General principles
- General, strategy, governance, and materiality assessment on disclosure requirements
- Environment:
- Climate change
- Pollution
- Water and marine resources
- Biodiversity and ecosystems
- Resource use and circular economy
- Social:
- Own workforce
- Workers in the value chain
- Affected communities
- Consumers, and end-users
- Governance:
- Governance, risk management and internal control
- Business conduct
Ted Dhillon, FigBytes CEO & Co-Founder, expressed enthusiastic optimism about the ESRS draft. “I’m thrilled to see this move to standardize ESG reporting by the EU, and in such a comprehensive way. EFRAG is thinking beyond just the E of ESG, with the inclusion of multiple reporting requirements on Social and Governance issues. More governments need to follow the EU’s lead and start implementing mandatory reporting for all aspects of ESG, so we have the necessary data and insights to build a more sustainable future for humanity and our planet.”
Who does the ESRS apply to?
The European Sustainability Reporting Standards (ESRS) will expand current reporting requirements to include all large companies and all companies listed on regulated markets (except listed micro-enterprises). This included all large companies that are governed by the EU law, established in an EU member state, listed on the European stock exchange, and global businesses that have operations and/or securities in Europe. This would increase the number of companies required to report compared to the NFRD.
EFRAG stated, “This change would mean that all large companies are publicly accountable for their impact on people and the environment. It also responds to demands from investors for sustainability information from such companies.”
A ‘large company’ is when, on its balance sheet date, a company has more than 250 employees on average during the financial year and a balance sheet total of more than 20 million euros or a net turnover of more than 40 million euros. The reporting obligation would also apply to privately-owned companies.
Estimates suggest the number of entities affected by these new regulations will increase five-fold.
How Can Organizations Prepare for ESRS?
With ESRS potentially taking effect by the start of 2023, affected organizations will need to start planning how they will collect and report on the many new requirements included in the ESRS. To best cover, the 13 proposed ESG issues, companies will need to put systems in place to provide accurate and auditable information in their sustainability reporting.
Organizations can be proactive in preparing for the newly proposed ESRS requirements by:
- Planning their ESG strategy to include all requirements of the ESRS and other ESG frameworks which are material or relevant to their organization
- Setting up ESG data management policies and systems to collect necessary information for their reporting disclosure requirements
- Performing a materiality assessment of their sustainability-related impacts, risks, and opportunities
- Implementing measures, policies, targets, actions, and action plans in accordance with ESRS
These are just a few steps companies can take to begin preparing for ESRS. It is a big undertaking, but it is especially cumbersome for large organizations or those with a complex supply chain. Luckily, there are technological solutions that these companies can implement to help meet the reporting requirements of the ESRS.
Need help preparing your organization for the ESRS? The FigBytes ESG Insights Platform makes it easy to manage your sustainability reporting requirements.
