The Corporate Sustainability Reporting Directive (CSRD) and its accompanying European Sustainability Reporting Standards (ESRS) are ushering in a new era of sustainability disclosure and accountability across the EU. But what exactly do these sweeping new regulations entail for companies? And how can you prepare for effective ESRS reporting? This 101 guide breaks it all down.
ESRS At-a-Glance
The ESRS form the heart of the EU's sustainability reporting overhaul. Developed by the European Financial Reporting Advisory Group (EFRAG) under the CSRD mandate, the ESRS define the specific disclosures companies must provide on their:
Environmental Impacts - Climate change, pollution, water use, biodiversity, and resource consumption
Social Impacts - Workforce policies, value chain labor conditions, community impacts, and product sustainability
Governance Factors - Business ethics, corporate culture, accountability mechanisms, and ESG oversight.
Companies must report in accordance with overarching cross-cutting standards for general requirements, disclosures, and materiality assessments. This is supplemented by topical standards specifying granular, qualitative and quantitative disclosures for each ESG subject area.
What's Revolutionary About ESRS?
Compared to previous sustainability reporting frameworks, the ESRS take things to a whole new level in several ways:
Mandatory and Comprehensive: ESRS adherence is required by law for a massively expanded number of companies, across diverse disclosure areas.
Double Materiality: Reporting must capture impacts on sustainability issues as well as those issues' impacts on the company's development and risks.
Value Chain Impacts: Disclosure is required for the full upstream and downstream value chain activities, not just direct operations.
Detail and Metrics: The ESRS define standardized, specific disclosure requirements with hundreds of granular data points and metrics to report.
Independent Assurance: Reasonable assurance from an independent provider will be required on the sustainability information.
Structured Data: Sustainability reporting must be digitally tagged and structured for incorporation into standardized platforms and databases.
Proportionate but Comprehensive: While some exemptions exist for SMEs, the overall thrust is towards comprehensive ESG transparency.
A Phased Roll-Out
The ESRS are being rolled out in phases in line with the CSRD timelines:
Jan 2024: First set of 12 cross-cutting and topical standards apply to EU public-interest entities with over 500 employees
Jan 2025: Remaining large companies in high-risk sectors required to comply
Jan 2026: Listed SMEs and some financial institutions follow
Later Years: Sector-specific, SME, and non-EU company standards to be finalized
The reporting years will reflect these phases, with large companies needing ESRS adherence from 2025 reporting onwards.
How to Prepare for ESRS Reporting
Meeting the extensive ESRS disclosure requirements is no trivial task. It calls for a cohesive, enterprise-wide exercise spanning data processes, controls, systems, and assurance. Here are some key areas of focus:
Data Collection & Quality: Implementing rigorous processes for collecting timely and accurate ESG data from internal and third-party sources across the value chain, ensuring traceability and quality.
Methodology & Frameworks: Aligning disclosures with prescribed methodologies/standards around emissions, impact assessments, risk analyses, targets setting, reporting boundaries, etc.
IT/Digital Architecture: Enabling technology platforms and solutions that can ingest ESG data, apply taxonomies/tagging, automate calculations and disclosures, and interface with assurance.
Roles & Governance: Upskilling existing resources and onboarding new talent to handle diverse ESG topics. Instituting cross-functional collaboration and oversight mechanisms for reporting.
Materiality Assessments: Instituting credible processes for conducting comprehensive, evidence-based evaluations of "double materiality" per ESRS criteria across operations and the life cycle.
Controls & Assurance: Enhancing ESG data controls, documentation trails, and audit readiness. Third-party readiness for assurance over qualitative and quantitative ESRS disclosures.
By proactively ramping up ESRS reporting capabilities, companies can turn the regulatory mandate into an opportunity for strategic value creation through optimized ESG performance, risk management, stakeholder trust, and competitive positioning.
The Future of ESRS Reporting
While the first set of ESRS has been finalized, the road ahead involves further iterations from EFRAG. New standards will elaborate sector-specific requirements, SME provisions, and supply chain layers. Alignment with other global norms like ISSB will also continue.
Rather than taking a compliance-only mindset, companies should consider embedding ESRS principles holistically into their sustainability DNA. As ESG takes center stage in business strategy, fortifying your ESRS reporting capabilities today will pay dividends in the long run. Stay tuned for more deep dives on tackling specific ESRS components!