The European Commission has adopted new sustainability reporting standards (ESRS) that will be mandatory for all companies subject to the Corporate Sustainability Reporting Directive (CSRD). The ESRS are designed to ensure that companies across the EU report comparable and reliable sustainability information, helping to improve the quality and transparency of sustainability reporting.

What Will Companies Have to Report in ESRS?

The ESRS take a "double materiality" perspective, requiring companies to report both on their impacts on people and the environment and on how social and environmental issues affect the company's financial risks and opportunities. The ESRS cover a wide range of sustainability topics critical to our planet's well-being including:

1. General Requirements
2. General Disclosures
3. Climate
4. Pollution
5. Water & Marine Resources
6. Biodiversity &Ecosystems,
7. Resource Use & Circular Economy
8. Own Workforce
9. Workers in the Value Chain
10. Affected Communities,
11. Consumers & End Users
12. Business Conduct

How were the ESRS Developed?

The ESRS were formulated based on technical advice from the European Financial Reporting Advisory Group (EFRAG). EFRAG, an independent advisory body, collaborated with stakeholders such as investors, companies, auditors, civil society, and academics during the development process. The Commission also sought input from various EU bodies and ran a public consultation, allowing companies to provide feedback. After substantial modifications to the initial drafts, the standards were submitted to the Commission for adoption.

The Commission made a number of modifications to the draft standards submitted by EFRAG, in order to ensure that they are proportionate and do not impose unnecessary costs on companies. These modifications include phasing-in certain reporting requirements, giving companies more flexibility to decide what information is relevant, and making some of the proposed requirements voluntary.

ESRS Coherence with Other EU Legislation

ESRS align with the International Sustainability Standards Board (ISSB) and Global Reporting Initiative (GRI) standards, facilitating global comparability of sustainability information. Companies can expect a high degree of overlap between ESRS and ISSB standards, promoting coherence and preventing separate reporting.

When will the ESRS be implemented?

The ESRS will be applicable from 2024 for large companies and listed companies, and from 2026 for other companies. The standards will be reviewed after five years to ensure that they are still fit for purpose.

The ESRS delegated act will be transmitted to the European Parliament and Council for scrutiny in the second half of August. The scrutiny period runs for two months, extendable by another two months. While the Parliament or Council may reject the act, they cannot amend it.

Companies will need to commence reporting under ESRS as follows:

• Companies previously subject to the Non-Financial Reporting Directive (NFRD), including large listed companies, large banks, and large insurance undertakings with over 500 employees: Financial year 2024, with the first sustainability statement published in 2025.
• Other large companies, including large non-EU listed companies with over 500 employees: Financial year 2025, with the first sustainability statement published in 2026.
• Listed SMEs, including non-EU listed SMEs: Financial year 2026, with the first sustainability statements published in 2027. Listed SMEs have the option to opt out of reporting for an additional two years, with the last possible reporting date being the financial year 2028 and the first statement published in 2029.

Additionally, non-EU companies generating over EUR 150 million per year in the EU, with a branch exceeding EUR 40 million turnover or a subsidiary classified as a large company or listed SME, will be required to report sustainability impacts at the group level from financial year 2028. The first sustainability statement will be published in 2029, with separate standards adopted specifically for this case.

Conclusion: The adoption of the European Sustainability Reporting Standards represents a significant stride towards sustainability in the EU economy. By enhancing the quality of sustainability information and promoting global alignment, these standards will empower stakeholders to make informed decisions and channel investments towards environmentally friendly activities.