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Jan 05 2024

ESRS Simplified | Why, What and How of the European Sustainability Reporting Standard?

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ESRS Simplified | Why, What and How of the European Sustainability Reporting Standard?

"Investing in the European Sustainability Reporting Standard (ESRS) isn't just about ticking boxes; it's a strategic move for companies aiming to make a positive impact, build trust, and secure lasting value in the European market."

As businesses face increasing pressure to be transparent about their environmental and social impacts, a new sustainability reporting standard is emerging in Europe that could set the global benchmark. The European Sustainability Reporting Standards (ESRS) aim to bring much-needed consistency and comparability to corporate sustainability disclosures.

Why ESRS Matters

The calls for companies to adopt more sustainable business practices have grown louder in recent years from investors, regulators, and the public. However, a lack of standardized reporting requirements has made it difficult to assess companies' non-financial performance and compare different organizations.

The ESRS seeks to address this challenge head-on. By mandating specific sustainability reporting metrics and presentations, it will provide stakeholders with clear, comparable data to evaluate companies' ESG risks and impacts. This increased transparency can facilitate more informed decision-making by investors and hold businesses accountable.

What is Covered in ESRS

The draft ESRS released in 2022 consists of two main sets of disclosure requirements:

  1. Environment - Covering areas like greenhouse gas emissions, pollution, water/resource use, biodiversity and circular economy.
  2. Social - Addressing workforce, respect for human rights, governance and corporate culture. There are also cross-cutting standards for strategy, governance and materiality assessment to be applied across the environmental and social topics. The reporting requirements are comprehensive, calling for disclosure of sustainability targets, action plans, performance metrics and compliance. Small and non-listed companies have more limited obligations initially.

How ESRS Will Be Implemented

The ESRS was developed by the European Financial Reporting Advisory Group (EFRAG) and is expected to be adopted as an EU regulation in 2023. It will become applicable in phases:

  • January 2024: EU companies already subject to the Non-Financial Reporting Directive
  • January 2025: Companies listed on EU regulated markets except micro-enterprises
  • January 2026: Large non-EU companies with turnover in the EU above €150M
  • January 2028: Listed SMEs, small and non-complex credit institutions and captive insurance undertakings

Companies will need to report per the ESRS for fiscal years starting on or after the applicable date. Early adoption is permitted.

While compliance will initially be mandated for entities operating in the EU, the ESRS could become the de facto global baseline given the EU's regulatory influence. Companies worldwide may opt to align with these standards to satisfy European investors and access EU capital markets.

As stakeholder demands for ESG accountability intensify, the ESRS aims to usher in a new era of comprehensive, standardized sustainability reporting across the continent and potentially beyond. Businesses will need to prepare robust data collection and disclosure processes to adapt to these heightened transparency requirements.

Conclusion: Embracing the Future of Sustainability Reporting

As the EU's sustainability reporting landscape evolves, ESRS emerges as a beacon of standardization, transparency, and accountability. By embracing ESRS, companies can navigate the complexities of sustainability reporting with confidence, driving positive change and contributing to a more sustainable future.

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