Episode 3 European Sustainability Reporting Standards (ESRS): A Comprehensive Overview
Standardizing Sustainability Reporting in Europe
Last week, we delved into the key features of the Corporate Sustainability Reporting Directive (CSRD). This week, we shift our focus to the European Sustainability Reporting Standards (ESRS), a crucial aspect of CSRD implementation. Finalized in 2023, the ESRS mark a significant step towards standardized sustainability reporting across Europe. Developed by the European Financial Reporting Advisory Group (EFRAG), these standards aim to enhance the consistency and comparability of sustainability disclosures by companies.
The 12 Pillars of ESRS
The ESRS framework comprises 12 standards, categorized as follows:
Cross-Cutting Standards (2):
These cross-cutting standards are overarching and provide general guidance on reporting in accordance with the Corporate Sustainability Reporting Directive (CSRD). They include information on how to conduct a double materiality assessment and how to report on the mandatory topical standards.
ESRS 1: General Requirements - lays the groundwork for sustainability reporting, outlining content, presentation, and auditing aspects.
ESRS 2: General Disclosures - focuses on disclosures relevant to all companies, such as governance structures and sustainability-related policies.
Together, these standards ensure consistency and coherence in reporting practices across diverse sectors and industries.
Environmental Standards (5):
ESRS E1- E5 address specific environmental areas like climate change, pollution, resource use, and biodiversity.
ESRS E1 – Climate change
ESRS E2 – Pollution
ESRS E3 – Water and marine resources
ESRS E4 – Biodiversity and ecosystems
ESRS E5 – Resource use and circular economy
Social Standards (4):
ESRS S1- S4 cover social aspects like workforce treatment, impacts on communities, and responsible interactions with consumers.
ESRS S1 – Own Workforce
ESRS S2 – Works in the value chain
ESRS S3 – Affected communities
ESRS S4 – Consumers and end-users
Governance Standard (1):
ESRS G1: Business Conduct - emphasizes ethical business practices and responsible management of sustainability risks.
Unveiling a Company's Sustainability Performance
The ESRS framework goes beyond a company's direct operations. It emphasizes reporting on sustainability impacts, risks, and opportunities (IROs) throughout the value chain. This includes a company's sustainability strategy, targets, progress on those targets, and the sustainability aspects of its products and services. Essentially, ESRS reporting provides stakeholders with a comprehensive view of a company's contribution to a broader sustainable society.
A Phased Approach for Smooth Implementation
Recognizing the complexities of integrating new reporting requirements, the ESRS adopt a phased approach. This acknowledges that not all standards can be implemented simultaneously. To ease the transition, the framework includes transitional provisions, allowing companies to gradually integrate ESRS into their reporting processes. These provisions often involve voluntary disclosures in the initial years.
Understanding Value Chain Information
A critical aspect of ESRS reporting is value chain information. This refers to environmental and social impacts occurring throughout a company's value chain, encompassing suppliers, manufacturing, distribution, and customers. For instance, a clothing company might disclose efforts to address forced labor risks in its overseas manufacturing facilities. Similarly, a steel manufacturer might report on the total greenhouse gas emissions across its entire production process, including those from raw material extraction and transportation.
The good news? Companies only need to report on material impacts. Materiality refers to the significance of an environmental or social impact on the company and its stakeholders.
ESRS: A Stepping Stone Towards Sustainability Transparency
The ESRS framework represents a significant step towards greater transparency in corporate sustainability reporting. By establishing a standardized approach, ESRS empowers stakeholders to make informed decisions and hold companies accountable for their environmental and social impacts. Next Week, we'll delve into the concept of double materiality, another cornerstone of the CSRD and ESRS.