European Union’s Strides Towards Sustainable Business Practices: The Adoption of ESG Reporting Standards

The European Union (EU) has taken a significant step forward in promoting sustainable business practices with the introduction of European Sustainability Reporting Standards (ESRS) as part of its European Green Deal. This article, brought to you by Vision Compliance, provides an in-depth look at the ESRS, their development process, and what it means for companies within the EU. We will also offer suggestions on how businesses can navigate these changes.

Table of Contents

  1. Understanding ESRS
  2. The Need for ESRS
  3. Development of ESRS
  4. Reporting Requirements under ESRS
  5. Amendments to the Draft Standards
  6. Materiality in ESRS
  7. Impact on Small and Medium Enterprises (SMEs)
  8. Guidance on ESRS Application
  9. Alignment with Global Standards
  10. Timeline for ESRS Application

1. Understanding ESRS

The ESRS is a set of regulations mandated by the EU law, designed to standardize how large and listed companies (excluding listed micro-enterprises) disclose information regarding their impact on social and environmental issues. They feed into the EU’s broader strategy for a greener and more sustainable economy, embodied in the European Green Deal.

2. The Need for ESRS

Despite pre-existing sustainability reporting requirements, evidence shows that the current state of corporate sustainability reporting is inadequate. Many companies fail to disclose essential information, making it difficult for investors and stakeholders to evaluate their sustainability performance. This lack of transparency hinders the effective channeling of investments towards environmentally friendly activities and creates an accountability gap. ESRS aims to bridge this gap, providing common standards to enhance transparency and comparability of sustainability information across companies.

3. The Development of ESRS

The European Financial Reporting Advisory Group (EFRAG), an independent advisory body primarily funded by the EU, developed the ESRS. The process involved a comprehensive consultation with various stakeholders, including investors, companies, auditors, civil society, trade unions, academics, and national standard-setters. The Commission adopted the standards based on EFRAG’s technical advice and made several modifications to ensure proportionality and achievability of policy objectives.

4. Reporting Requirements under ESRS

ESRS obliges companies to report on their impacts on people and the environment, as well as how social and environmental issues present financial risks and opportunities for them. The standards encompass 12 distinct areas, spanning across general, environmental, social, and governance issues:

ESRS Reporting Requirements:

Cross-cutting Group:

  • ESRS 1: General Requirements
  • ESRS 2: General Disclosures

Environment Group:

  • ESRS E1: Climate
  • ESRS E2: Pollution
  • ESRS E3: Water and Marine Resources
  • ESRS E4: Biodiversity and Ecosystems
  • ESRS E5: Resource Use and Circular Economy

Social Group:

  • ESRS S1: Own Workforce
  • ESRS S2: Workers in the Value Chain
  • ESRS S3: Affected Communities
  • ESRS S4: Consumers and End Users

Governance Group:

  • ESRS G1: Business Conduct

5. Amendments to the Draft Standards

The Commission made several modifications to the draft standards developed by EFRAG. These can be summarized into three categories:

  1. Phasing-In Certain Reporting Requirements: Some reporting requirements, especially those considered challenging for companies, will be phased in over time to allow companies to prepare and spread the initial costs.
  2. Providing Companies with More Flexibility: Companies now have more discretion to determine what information is relevant or “material” to their specific circumstances, thus avoiding the costs of reporting irrelevant information.
  3. Making Some Requirements Voluntary: Some of the previously mandatory requirements have been made voluntary to reduce the burden on companies.

6. Materiality in ESRS

Materiality in ESRS refers to the relevance of the information that a company is required to report. If a company deems a particular topic as immaterial—like climate change—it must provide a detailed explanation of its materiality assessment. This approach ensures that all necessary sustainability information will be disclosed.

7. Impact on Small and Medium Enterprises (SMEs)

While the ESRS does not impose new reporting requirements on SMEs (except listed ones), it does outline a proportionate reporting regime for listed SMEs. Separate, proportionate standards are being developed for these entities, which will be less demanding than the full set of ESRS. EFRAG is also developing simpler, voluntary standards for non-listed SMEs.

8. Guidance on ESRS Application

EFRAG will periodically publish non-binding technical guidance on the application of ESRS. The Commission has also suggested that EFRAG prioritizes the development of guidance on materiality assessment and reporting with regard to value chains.

9. Alignment with Global Standards

The Commission has worked closely with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) to ensure a high level of alignment between ESRS and global standards. Despite this alignment, ESRS has a broader scope than ISSB standards, as it requires reporting on a company’s impacts on people and the environment.

10. Timeline for ESRS Application

The ESRS will be formally transmitted to the European Parliament and the Council for scrutiny in the second half of August. The initial application dates for the standards will vary depending on the size and listing status of the companies.

Conclusion: How Vision Compliance Can Help

As the ESRS fundamentally reshape the landscape of corporate sustainability reporting in the EU, businesses need to adapt and prepare for the changes. At Vision Compliance, we understand the complexities of complying with these new standards. We can help your company navigate these changes, providing you with the support and expertise needed to successfully meet your ESG reporting obligations. Adhering to these standards will not only benefit your company’s sustainability performance but also reinforce your commitment to creating a more sustainable future.

By understanding these ESRS and implementing them properly, businesses can contribute to the EU’s goal of a greener and sustainable economy while also enhancing their own ESG performance. The introduction of the ESRS is a significant step in the right direction, and at Vision Compliance, we’re here to guide you every step of the way.

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