The new European Sustainability Reporting Standards: getting up to speed – who will have to disclose what
On November 2022 the EU Council approved the Corporate Sustainability Reporting Directive (CSRD), a directive that makes disclosure of ESG data as well as other information related to their environmental and societal impact mandatory for certain companies. The disclosure requirements were developed by EFRAG (European Financial Reporting Advisory Group) in a first draft entitled “European Sustainability Reporting Standards” (ESRS).
This first draft outlines the mandatory concepts and requirements that corporate sustainability reports have to align with. It also provides a consistent framework aiming to ensure that companies report on their sustainability performance using comparable, relevant, and reliable sustainability data, in the hope of abolishing greenwashing.
Currently EFFRAG has launched the first set of ESRS and is collecting feedback from stakeholders as well as a number of companies that are piloting them, with the intention to incorporate their feedback and issue the final set of ESRS.
Which companies need to comply?
But, who are the companies required to comply with the CSRD? There are three main categories of companies based in the EU and a fourth category of companies not based in the EU that need to comply:
a) companies with a net turnover of €40 million
b) companies with assets worth €20 million
c) companies with 250 or more employees, and
d) non-EU companies with a turnover of above €150 million within the EU
Architecture and requirements of ESRS system
As shown in the figure below, the disclosure requirements of ESRS are organized in a framework (“rules of three”) that consists of 3 reporting layers (Sector agnostic, Sector specific and Entity specific), 3 reporting areas (Cross cutting, implementation and performance measures), and 3 reporting topics (Environmental, Social, Governance).
(*) Cross-cutting standards: General principles and disclosures related to General Requirements, Strategy and Business Model (SBM), Impacts, risks and opportunities (IROs) and Governance (GOV).
Source: (EFRAG, European Sustainability Reporting Standards 2022)
More specifically, the ESRS structure reflects the obligation to report under the three reporting areas and cover the entire set of ESG topics (Environmental, Social, Governance).
An overview of the main elements of ESRS is as follows:
1) Cross-cutting standards
- ESRS 1 General principles
- ESRS 2 General, strategy, governance and materiality assessment
2) Environmental
- ESRS E1: Climate change
- ESRS E2: Pollution
- ESRS E3: Water and marine sources
- ESRS E4: Biodiversity and ecosystems
- ESRS E5: Resource and circular economy
3) Social
- ESRS S1: Own workforce
- ESRS S2: Workers in the value chain
- ESRS S3: Affected communities
- ESRS S4: Consumers and end users
4) Governance
- ESRS G1: Governance, risk management, and internal control
- ESRS G2: Business Conduct
The new concept of Double Materiality
“Double materiality” is the basis for sustainability disclosures according to the new EU directive. That means that companies need to report on two levels: both their internal and their external sustainability impacts, or, put simpler, companies need to report on how sustainability issues might create financial risks for them and their stakeholders (financial materiality), but also on the company’s environmental and societal impacts (impact materiality).
When are companies bound to comply with the new EU sustainability reporting regulations?
A number of companies across Europe are running pilots using the current standards and are expected to submit their feedback. Feedback received during the public consultation is being analyzed and will be taken into account in the finalization of the standards. EFRAG is making revisions in order to meet the requirements of the reporting directive that will be finally adopted. The final set of ESRS is expected to go public by June 2023, and the first companies subject to the reporting directive will be required to submit compliant sustainability reports by 2025 on the fiscal year 2024.
The exposure drafts of the European Sustainability Reporting Standards. Source: EFRAG
How can Tekmon help?
With the Tekmon platform, all teams across all business functions are able to collaborate with ease. You can:
- Track and manage your environmental impact. Tekmon can track a company’s carbon footprint, energy usage, waste generations, and other environmental metrics.
- Manage your social responsibility initiatives, including tracking their employee diversity and inclusion metrics, tracking and managing supply chain risks, and tracking charitable giving and community involvement initiatives.
- Manage governance and risk-relates issues.
- Create unified data collection processes.
- Reduce the burden of data collection.
- Work on your data withing a single platform.
- Streamline real time KPI reporting.