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Our Guide to European Sustainability Reporting Standards (ESRS)

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
2023-06-09T00:00:00.000Z
en-us

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?

European Sustainability Reporting Standards, otherwise known as ESRS, are 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. 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. 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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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.

👉 ESRS is important because sustainability 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.

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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 to understand their impact for short, medium, and long-term improvement.

Here is a breakdown of some of the elements required 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.

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 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.

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 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.

The ESRS on the other hand, 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
study guide

How is ESRS different from sustainability reporting in the United States?

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

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 – something the United States remains divided on. 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.

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What are the pros and cons of following the guidelines provided by ESRS, and is it worth adhering to?

The 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.

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.

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.

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!

Understanding international and domestic sustainability standards can be hard to keep track of, but don’t worry – Greenly is here to help. Book a demo with one of our specialists to learn more. 

Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.

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