European Sustainability Reporting Standards (ESRS): 2024

Last year marked a significant milestone in the European Union's journey towards sustainability and transparency, with the Commission adopting the European Sustainability Reporting Standards (ESRS). This initiative, integral to the European Green Deal, was established to enhance the reliability and comparability of sustainability information reported by large and listed companies.

The Rationale Behind ESRS Adoption

The EU's decision to implement the ESRS stemmed from the need to address several deficiencies in the existing sustainability reporting landscape:

• Inadequate Reporting: Many companies were found to exclude crucial information deemed important by stakeholders.
• Comparability Issues: There was a noticeable difficulty in comparing sustainability data across different companies.
• Reliability Concerns: Stakeholders, especially investors, often questioned the trustworthiness of the sustainability information provided.

These issues not only obscured the sustainability-related risks faced by companies but also impeded the flow of investments into environmentally sustainable initiatives, a core objective of the European Green Deal.

Objectives and Impact of ESRS

The ESRS, mandated under the Corporate Sustainability Reporting Directive (CSRD), aims to standardize sustainability reporting across the EU. Its primary goals are to:

• Enhance the comparability and reliability of sustainability data.
• Streamline the communication and management of corporate sustainability performance.
• Improve access to sustainable finance by providing clearer information.

The adoption of these standards is expected to reduce long-term reporting costs and bridge the accountability gap that previously existed in sustainability reporting.

Development Process and Stakeholder Involvement

The ESRS was developed with technical advice from the European Financial Reporting Advisory Group (EFRAG), reflecting a broad range of stakeholder inputs. This inclusive approach involved consultations with investors, companies, auditors, civil society, and other relevant parties. The Commission's commitment to a transparent process also included public consultations and discussions with various EU bodies.

Reporting Framework Under ESRS

Adopting a “double materiality” perspective, the ESRS requires companies to report on both their environmental and social impacts and the financial implications of these issues. The standards encompass a wide array of sustainability topics, from climate change and pollution to social aspects like workforce rights and consumer protection.

Modifications for Flexibility and Proportionality

In response to feedback, the Commission introduced modifications to the ESRS to ensure they are proportionate and adaptable to different company sizes and sectors. This includes phased implementation for certain reporting requirements and greater flexibility in materiality determination, reducing the reporting burden while maintaining the integrity of the information provided.

Alignment with EU Legislation and Global Standards

The ESRS aligns with other EU sustainable finance regulations, offering clear datapoints for compliance. This alignment is crucial for the coherence of the EU's sustainable finance framework. Additionally, the ESRS is closely aligned with global standards like those of the ISSB and GRI, contributing to a unified global approach to sustainability reporting.

SMEs and the ESRS

While the ESRS imposes no new reporting obligations on non-listed SMEs, it offers a proportionate regime for listed SMEs. EFRAG is also developing voluntary standards for non-listed SMEs to efficiently manage sustainability information requests.

Guidance and Future Directions

EFRAG continues to provide technical guidance on the application of the ESRS. The standards are designed to evolve in line with global sustainability standards, ensuring that the EU remains at the forefront of sustainable finance and corporate responsibility.

Implementation and Next Steps

A year after its adoption, companies are gearing up to start reporting under the ESRS, following the timeline set out by the Commission. This marks a new era in corporate sustainability reporting, with the EU leading the way in integrating comprehensive and reliable sustainability information into the corporate and financial landscape.