Our Guide to European Sustainability Reporting Standards (ESRS)

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?

The acronym "ESRS", otherwise known as European Sustainability Reporting Standards, is a pivotal component in CSRD – as they help to standardize 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.

💡 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:

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.

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.

💡 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.

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.

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. 

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 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.

As a whole, European Sustainability Reporting Standards (ESRS) are more stringent than the current sustainability reporting standards which currently exist in the United States. 

While both the United States and Europe follow the Global Reporting Initiative, or the GRI, European Sustainability Reporting Standards have been demanding more detail from more companies at a faster rate than sustainability initiatives in the United States. This is depicted in the level of detail presented in the ESRS in comparison to the SEC Climate Disclosure Rule. 

👉 Does ESRS demonstrate that Europeans and Americans view climate change differently?

Europe has infamously been known to be extremely climate-forward – with this being noted in the smallest of efforts, which ultimately speak volumes. An example of this is how Paris and France as a whole have become determined to encourage residents to bike, much like the Dutch and German, in order to reduce emissions across the country. These incentives, while being implemented in the U.S. in large cities – have yet to be encouraged to the same extent.

👉 Even if U.S. 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.

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.

💡 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.

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