The Dawn of European Sustainability Reporting: Navigating the New ESRS Landscape

Empowering Companies to Prioritize Relevant Sustainability Issues and Drive Meaningful Change
The Dawn of European Sustainability Reporting: Navigating the New ESRS Landscape
Publ. date 3 Aug 2023
In the pursuit of a sustainable economy, the European Commission has taken a pivotal leap by adopting the European Sustainability Reporting Standards (ESRS) on July 31st. These standards, which are strategically aligned with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI), ensure a high degree of coherence in global sustainability reporting. With the EU's integration of ISSB standards into ESRS, companies can prevent redundant reporting, facilitating global comparability leading to comprehensive reporting on ESG issues. This not only reinforces the EU's commitment to sustainability, but also paves the way for a unified global framework for meaningful corporate disclosure. Set to influence all companies under the Corporate Sustainability Reporting Directive (CSRD), the ESRS provides businesses with a structured guideline for ESG reporting. This article delves into these standards, shedding light on their phased rollout, the pivotal role of double materiality assessments, and their game-changing prospects for enterprises.

Relevance of ESRS for your company

ESRS are the new cornerstone of a company’s sustainability reporting journey, serving as a roadmap to attract conscious investors and build trust among stakeholders. Data provided in traditional sustainability reports can lack depth or consistency, comprehensive metrics, and standardized guidelines, leading to questions about its reliability and resulting in potential skepticism among investors and stakeholders. The ESRS addresses these gaps, empowering companies to demonstrate their alignment with the European Green Deal Agenda.

Companies will undergo a phased implementation of ESRS, offering ample time for preparation, ensuring a smooth transition, and allowing companies to allocate sufficient time and resources to ensure compliance:

  • 2025: Companies previously subject to the Non-Financial Reporting Directive (NFRD) (large listed companies, large banks and large insurance undertakings – all if they have more than 500 employees), as well as large non-EU listed companies with more than 500 employees: information related to financial year 2024.
  • 2026: Other large companies, including other large non-EU listed companies: information related to financial year 2025.
  • 2027: Listed SMEs, including non-EU listed SMEs: information related to financial year 2026, with a two-year opt-out option.
     

Navigating Materiality Assessment for Impactful Corporate Disclosure

 At the heart of the ESRS reporting process lies the critical element of a double materiality assessment. By adopting a "double materiality" approach, companies must report not only on their impact on people and the environment but also on how ESG issues create financial risks and opportunities. While the same sustainability topics included in the November 2022 EFRAG draft are confirmed as part of the double materiality assessment process, it is essential to note that companies should consider a broader spectrum of issues, beyond just the specified ESRS topics, to capture the full scope of their sustainability impact and challenges. As of the draft, the topics emphasized are:

  Category ESRS Topics
  Environment        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 ESRS S1 Own workforce

ESRS S2 Workers in the value chain

ESRS S3 Affected communities
ESRS S4 Consumers and end users
  Governance     ESRS G1 Business conduct


A robust double materiality assessment is then necessary to determine what is relevant or not among the different topics of the ESRS. It ensures that companies prioritize information that truly matters to their business and stakeholders, making their sustainability reporting more impactful and meaningful. This will avoid the costs associated with reporting information that may not be relevant. This is referred to as making more of the reporting requirements "subject to materiality" (i.e. it allows companies to omit information if it is not relevant in their particular circumstances), as opposed to being mandatory for all companies.

The robustness of the double materiality assessment remains consistent with mandatory disclosures absent except for ESRS 2 – General Disclosures. A significant shift, however, relates to climate change reporting under ESRS E1. If a company determines that climate change is not material to its operations, it is now required to elucidate the conclusions of its materiality assessment. This rationale should not just explain the current stance, but also project into the future. It involves analyzing potential scenarios—evaluating future contexts, challenges, and trends—in which climate change factors might become relevant or influence the company's strategy and operations in later evaluations.

Interestingly, this adaptation harks back to the initial drafts from November, where the mandatory nature of E1 was more pronounced. A conjecture arises from this: given the magnitude and reach of climate change, it is challenging to accept that companies of substantial size could dismiss it from their materiality. While some might venture this claim, the broader community awaits their rationale — or perhaps the potential absence of it — with keen interest.

Recognizing the significance of materiality assessment, the European Commission, in collaboration with the European Financial Reporting Advisory Group (EFRAG), will publish non-binding technical guidance on the application of ESRS. The forthcoming guidelines will provide companies with comprehensive support for conducting materiality assessments, with a particular focus on value chain analysis and the identification of financially material ESG factors.

In conclusion, ESRS presents a transformative opportunity for companies to take the lead in sustainability reporting and secure sustainable finance. Embracing these standards will empower companies to communicate their impact, inspire trust, and drive long-term success. As companies embark on their sustainability journey, it is vital to prioritize materiality assessments and diligently engage in the phased compliance process. Embrace ESRS not merely as a regulatory requirement but as a catalyst for sustainable growth, laying the foundation for a more resilient and prosperous future.

ESG Acceleration Tips

  1. Business Context & Value Chain Analysis: Before jumping into the phased implementation, a thorough understanding of your company's business context and its entire value chain is indispensable. Companies need to undergo a comprehensive value chain analysis, ensuring their sustainability efforts are holistically integrated and creating a robust foundation for ESRS compliance.
  2. Prioritize Double Materiality: The concept of double materiality plays a central role in ESRS. Companies need to assess both the impact of their activities on the environment and society, as well as the potential risks and opportunities these issues pose to the business.
  3. View ESRS as a Strategic Opportunity: Beyond the regulatory framework, ESRS offers companies a chance to shine in the sustainability landscape. Through the development of a framework that not only ensures compliance but also paves the way for a resilient and prosperous future, companies can capitalize on this opportunity, aligning reporting with best practices, and setting themselves apart in attracting responsible and conscious investors.

If your organization requires support on its double materiality journey, reach out to Johana Schlotter, at Johana@finchandbeak.com or call +31 6 28 02 18 80 to discuss how Finch & Beak can support you in meeting your ambitions, through our services:

  • CSRD-Readiness Assessment – which you can also find in this article.
  • Materiality Assessments including double materiality and value chain analysis.
  • Impact Measurement and Valuation.
  • Activation of Materiality through business case development.

Photo by Alex Mihis on Unsplash

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