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Our Guide to European Sustainability Reporting Standards (ESRS)
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Blog...Our Guide to European Sustainability Reporting Standards (ESRS)

Our Guide to European Sustainability Reporting Standards (ESRS)

Business
Legislation & Standards
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What is the ESRS, or European Sustainability Reporting Standards, how does it work, why is it important, and how can the U.S. take note of the ESRS to improve upon their own sustainability reporting standards?
Business
2024-06-14T00:00:00.000Z
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In the United States, the SEC has been drafting new plans to ensure companies comply with sustainability reporting standards – but how do European Sustainability Reporting Standards (ESRS) seek to ensure as many companies are required to comply and be transparent regarding their environmental impact?

What is the ESRS, or European Sustainability Reporting Standards, how does it work, why is it important, and how can the U.S. take note of the ESRS to improve upon their own sustainability reporting standards?

What is ESRS?

The acronym "ESRS", otherwise known as European Sustainability Reporting Standards, is a pivotal component in CSRD – as they help to standardise reporting across the European Union. Ultimately, the ESRS provides a set of principles to help companies required to comply with the Corporate Sustainability Reporting Directive. This aligns with the new, imperative goal the EU has set for itself in the midst of global warming and in attempts to curb emissions.

👉 ESRS was approved by the European Financial Reporting Advisory Group last year in 2022, and has provided a list of requirements which pertain to numerous ESG principles – including the environment, social matters, and governance.

Across the EU, companies with more than 250 employees will be required to report under the ESRS – starting anywhere between 2024 and 2026 depending on company size and sector specific standards. ESRS will demand companies to report their environmental and societal impact, and also require them to clarify how their impact on sustainability impacts their business financially.
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💡 Remember that while the CSRD and the ESRS are interconnected, the two aren't one in the same – as the CSRD encourages reporting requirements and the ESRS provides a framework for companies required to proceed with reporting to use.

The updated timeline of the CSRD under the guidance of ESRS is as follows:

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The European Commission adopted the final delegated act of the European Sustainability Reporting Standards (ESRS) on July 31st, 2023. This means that companies that are already obligated to comply with the NFRD must begin reporting under the ESRS as soon as the 2024 reporting period.

💡 It's worth noting that in October 2023, the ESRS narrowly escaped being discarded after a majority vote in the European Parliament prevented the standards from being scrapped. The proposal to get rid of the standards stemmed from criticism that the ESRS is lacking in overlap with other disclosure requirements.

Global standard setting initiatives such as ESRS will require companies to consider financial risks, financial materiality, and even to conduct a materiality assessment or a double materiality assessment. In this sense, ESRS draws inspiration from both the International Sustainability Standards Board (ISSB) and the Global Reporting initiative (GRI) to create rigorous reporting requirements and to ensure interoperability.

👉 ESRS is important because a sustainability statement is not only key to identifying how to reduce environmental impact, but crucial to building a financially successful and reputable business. Evaluating ESG is becoming more pivotal than ever, and the ESRS will enforce this new business necessity.

What is the main purpose of ESRS?

The main goal of ESRS is to encourage companies within the E.U. to reassess their current sustainability efforts, to support implementation of new sustainable initiatives, encourage greater transparency and further details, and encourage more sustainable economy and incentive towards taking material impacts seriously.

ESRS reporting requirements are aligned with international standards such as the Task Force on Climate-Related Financial Disclosures (TCFD) to ensure that the double materiality concept and other sector specific ESRS standards are aligned with other global standard setting initiatives.

ESRS allows companies in Europe to improve the organization of their own workforce, adhere to other stakeholders, and improve their sustainability, public consultation, and data points to the greatest extent possible for current future EU legislation.

💡 In fact, the ESRS serves as an effort to help Europe establish a capital markets union to make the E.U. more attractive for investors, promote access to financial support for SMEs, and ensure that national markets remain relevant.

How does ESRS work?

The ESRS works by requiring companies to provide detailed reporting for each ESG category: environmental, social, and governance. This allows companies to get a well-rounded view of their business, and how their impact on global warming and sustainability affects different facets of their business. 

👉 The data to be collected and reported for the ESRS is both qualitative and quantitative, and allows companies subject to ESRS to understand their impact for short, medium, and long-term improvement.

ESRS includes two cross cutting standards and ten topical standards, all of which work to ensure ESRS compliance and top-tier data collection.

Here is a breakdown of some of the ESRS reporting requirements from each ESG category in ESRS:

Environmental

  • ESRS E1 Climate Change – This will require companies to be transparent regarding their use of carbon credits, their carbon dioxide equivalents, how the company plans to adapt to climate change, how the company plans to reduce their greenhouse gas emissions, and become more climate resilient.  
  • ESRS E2 Pollution – This will encourage companies to complete a further analysis regarding their pollutants: such as inorganic pollutants, ozone-depleting substances, and how human activities contribute to pollution.
  • ESRS Water and Marine Resources – This will require companies to disclose nearby areas of water that are becoming polluted or scarce (such as with the Great Lakes, Colorado River, or the Great Salt Lake), economic activities related to water sourcing, and general water scarcity. 
  • ESRS E4 Biodiversity – This will include the current variability of living organisms across various ecosystems and how they have changed as a result of a company’s environmental impact and identifying which areas remained the most sensitive to changes in biodiversity.
  • ESRS E5 Use of resources and circular economy: In the last element of environmental ESRS, companies will disclose their flow of resources and how they contribute to developing greater sustainability.
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Social

  • ESRS S1 Workers under the direct control of the company – This first element of social ESRS will require companies to disclose how they treat their employees, such as providing information regarding employee compensation, how they deliver apologies or handle conflict within the workplace, how employees of color or those with disabilities are treated, and overall social dialogue within the organization.
  • ESRS S2 Workers in the value chain – This component of social ESRS will demand companies to be transparent with how they interact with their employees, stakeholders, and suppliers. In addition to this, companies required to comply with the ESRS will need to share how workers in the value chain are impacted by their contributions to upstream and downstream effects in the value chain itself. 
  • ESRS S3 Affected communities – This part of social ESRS will ask companies to clarify how their social impact takes a toll on residents and indigenous groups, such as how oil drilling tends to impact native groups. 
  • ESRS S4 Consumers and end user – This final component of social ESRS will require information regarding consumers: such as how they acquire the products or services of a company and how they are used (i.e., for personal use of resale purposes). Also, information on end-users, otherwise known as those who end up using the product or service in question, will also be necessary in ESRS.

👉 Social and environmental issues are cross cutting standards are pivotal part of the ESRS framework and to encourage companies to provide a detailed explanation and include overarching disclosure requirements. Corporate reporting often focuses on a the impact a company creates from a financial perspective, but the ESRS redirects the necessary emphasis we need on sustainability issues.

Governance

  • ESRS G1 Governance, risk management and internal control: This component of ESRS will require information regarding the supervisory bodies and overall management of the company, information regarding the annual salary and bonuses paid to employees, benefits to be provided such as transportation, stipends, and living allowances, how stocks and shares are managed, and how overtime is compensated. In addition to this, ESRS G1 should specify how vulnerable groups are affected in the event of suffering from various consequences: such as the elderly, people with disabilities, minorities, and refugees.
  • ESRS G2 Business conduct: This part of governance ESRS should aim to disclose anti-competitive behavior that can keep companies from growing (such as by implementing fixed prices for goods and services), lobbying activities, and corruption activities being taken to illegally advance a business – including bribery, fraud, and money laundering. 

💡 Overall, ESRS ensures an in-depth reporting process to allow companies to improve their transparency, sustainability performance, reporting processes, and do a deep-dive in how each ESG area can be impacted by the actions of their company. 

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What is the difference between the CSRD, NFRD, and ESRS?

The difference between the ESRS, CSRD, and NFRD can be difficult to keep track of – bearing in mind they are all sustainability reporting initiatives or are related to sustainability, they still aren’t all the same thing. Ultimately, the ESRS serves as a guidelines while the CSRD and NFRD are compulsory sustainability reports.

The ESRS is not an actual reporting directive like the CSRD or the NFRD – but rather a supplement to help support companies required to report to the CSRD. Think of the ESRS as a comprehensive study guide for an exam: preparing you for the worst so you are more likely to succeed

The CSRD, built off of the values and serving as a detailed extension of the NFRD, is viewed as the new and improved version of the NFRD. This is because the CSRD applies to a larger scope of companies, requiring nearly 50,000 businesses in the European Union to comply.

The CSRD is also more detailed than the NFRD, while in addition to the already existing requirements to report their efforts to look into the double materiality assessment process, mitigate environmental harm, employee treatment, human right practices, promoting diversity, and avoiding corruption – the CSRD further demonstrates how companies affect ESG factors. 

👉 Other key differences between the CSRD and the NFRD include that CSRD must be audited by a third part, and that CSRD accommodates digital reporting whereas the NFRD does not.

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Will companies in the United Kingdom be affected by ESRS?

As the United Kingdom is no longer part of the European Union, the lines have blurred whether or not U.K. based companies will need to comply with ESRS reporting – but regardless of the company origin, if a U.K. business has roots in the EU, they will still be expected to share their impact materiality, digital taxonomy, and more under the CSRD.

Sustainability reporting practices continue to vary across the world, but the benefit of the European Union over Europe is that multiple countries can insinuate action and inspire others to do the same.

U.K. based businesses will be expected to comply with the CSRD and ESRS reporting if:

  • They are listed on a regulated market within the European Union
  • They have an annual revenue more than €150 million from within the EU
  • They have a branch in the EU with a net revenue over €40 million
  • They meet at least two out of the three following criteria:
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💡 Even if ESRS reveals that Europeans and Brits view climate change differently, it can still prove to be a useful guideline for any company looking to adhere to future sustainable initiatives.

👉 Even if U.K. based companies or other non EU companies hold no ties to the EU and doesn't meet the requirements to report to the CSRD, ESRS is still a framework in line with ISSB standards, sector agnostic standards, and even EFRAG (European Financial Reporting Advisory Group) – all of which can help both the first companies required to comply with ESRS reporting and those after to meet the the newfound high degree of expectations of financial institutions, local governments, and more.

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What are the pros and cons of ESRS?

There are several benefits to abiding by the guidelines depicted by ESRS, such as helping to support informed decision making, boosted transparency, and the ability to attract newfound investors. However, ESRS requires more detailed reporting, and while this can prove beneficial for companies looking to adhere to ESG values more seriously, reducing emissions, and improving upon their sustainability – it can be overwhelming for companies to follow.

In addition to the benefits of ESRS, there are a multitude of challenges for those who seek to follow the guidelines provided by the ESRS. For instance, subscribing to the notion of the ESRS is a time consuming and demanding process – one which may be too difficult for companies to allocate their resources to.

💡 Also, the ESRS may create a conflict of interest: as some companies may be wary to be transparent about their areas where improvement can be made.  

However, that being said, the ESRS can provide indispensable benefits for companies that follow the detailed guideline. For example, the ESRS can help companies to understand in depth the ESG impacts and better comply with CSRD requirements. This can ultimately help companies to attract new investors and business opportunities, as adhering to ESG data can help companies seem more worthy of being awarded financial resources. Lastly, the ESRS can help companies acquire new information on CSRD immediately – allowing them to adjust their business models accordingly without time pressure.

Additional benefits of ESRS include:

  • Improved brand reputation
  • Better risk management
  • New sustainable innovation
  • Lower operational costs
  • More thought-out & strategic planning

👉 Ultimately, the ESRS can help companies to better identify potential risks and business inefficiencies for greater improvement – both in terms of sustainability and financial success.

Overall, it's worth looking into learning more about the guidelines depicted by ESRS even if your company is required to comply – as following these standards could help your company to prepare for the day it's finally expected to comply with environmental legislation.

What about Greenly? 

If reading this article about European Sustainability Standards, or ESRS, has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!

At Greenly we can help you to assess your company’s carbon footprint, and then give you the tools you need to cut down on emissions. We offer a free demo for you to better understand our platform and all that it has to offer – including assistance with boosting supplier engagement, personalised assistance, and new ways to involve your employees.

Click here to learn more about Greenly and how we can help you reduce your carbon footprint.

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