The European Sustainability Reporting Standards (ESRS) are taking shape through an iterative process of rule-making and revisions. As the requirements get finetuned and expanded, keeping track of the latest developments is crucial for companies to stay ahead of the curve on compliance. This blog covers some key recent updates that could impact your ESRS reporting approach.
Alignment with Global Baseline on Sustainability Disclosures
In a move to enhance international harmonization, the European Financial Reporting Advisory Group (EFRAG) and the International Sustainability Standards Board (ISSB) have agreed to a joint vision for aligning the ESRS with the ISSB's newly-released global baseline standards on sustainability disclosures.
While the topical areas and overarching structure will largely remain consistent between the frameworks, the ISSB's standards provide an opportunity to streamline concepts, terminologies, and specific disclosure requirements across the foundational pillars.
From a reporting standpoint, companies can expect to see changes trickling into the ESRS related to:
Climate reporting methodologies, definitions, and metrics
Refinements to "sustainability matters" terminologies
Materiality determination criteria and processes
General disclosure requirements around governance, strategy, and risk management
Common industry-based disclosure requirements (e.g. through SASB Standards)
The degree of change remains to be seen as EFRAG and the ISSB continue collaboration over the next 12-18 months.
Sector-Specific ESRS Updates
Supplementing the cross-cutting standards already finalized, EFRAG has published the first set of Exposure Drafts outlining sector-specific disclosure requirements under ESRS. Key sectors covered include:
Agriculture
Food and Beverages
Manufacturing of Vehicles, Transport, and Machinery
Construction and Real Estate
Digital Economy
Retail
The sector-specific standards aim to capture sustainability matters most pertinent to organizations based on their industry dynamics, business models, and value chain activities. For instance, the draft Agriculture sector standard goes deep into areas like soil management, pesticide use, biodiversity impacts, and rural community relations.
EFRAG is undertaking public consultations and World Standard Setters feedback before finalizing the sector suite. Depending on the outcomes, companies may need to adjust their reporting processes, data collection mechanisms, and internal controls to address the sector-specific disclosures. Early familiarization is advisable for smooth implementation.
SME Proportionality Criteria
Small and Medium Enterprises (SMEs) have raised concerns about the reporting complexity given resource constraints. In response, EFRAG has defined multi-layered proportionality criteria that could provide SMEs with some targeted relief from certain ESRS disclosure requirements.
The draft criteria factors in aspects like:
Company size thresholds based on revenue, employees, balance sheet
Listing status, high-risk sector classification
Materiality of specific sustainability matters based on the entity's impacts
Degree of outsourcing, value chain complexity and external data reliance
Different SME categories would then have varying levels of disclosure requirements. Importantly, the proportionality criteria aims to balance SME reporting burdens while preserving sufficient transparency around material sustainability impacts and risks.
EFRAG is evaluating feedback to finalize the SME proportionality criteria and related ESRS disclosure schedules.
As ESRS continues to take shape, impacted companies need to consistently monitor regulatory developments from EFRAG, the European Commission, and other authoritative sources. Updating reporting processes, controls and systems proactively will help avoid last-minute scrambles.
Those seeking to get ahead can begin assessing potential gaps compared to the expected ESRS updates. Aligning with the evolving regulations from an early stage will not only ensure compliance readiness but position organizations for more streamlined, automated, and reliable sustainability reporting in the long run.