ESRS, CSRD and the European Commission

AUTHOR – Palita Timm

On July 31st, 2023, the European Commission adopted the European Sustainability Reporting Standards (ESRS), a major step towards a more sustainable EU (European Union) economy. The ESRS falls under the EU Corporate Sustainable Reporting Directive (CSRD), but what does that mean?

A History of Acronyms

In 2014, the European Financial Reporting Advisory Group (EFRAG) mandated the Non-Financial Reporting Directive (NFRD) within the EU reporting space, introducing a new era for non-financial reporting in the EU.

Initially NFRD’s application requirements were limited to a small number of EU-based companies which required them to disclose basic non-financial and diversity information.

However, in January of 2023, the EU Corporate Sustainability Reporting Directive (EU CSRD) came into force. The EU CSRD was developed by EFRAG at the request of the EU Commission with the aim to replace the NFRD. The EU CSRD is far more comprehensive in its requirements, with nearly three quarters of all businesses in the European Economic Area (EEA), close to 50,000 companies, required to disclose to the new framework. Not only is the scope of the EU CSRD far broader than its predecessor of the NFRD, but it is an innovative and game changing framework in the reporting landscape, with the pivotal addition of the concept of double materiality included in its requirements. Although some aspects may still change, the EU CSRD is expected to be rolled out in a phased manner, commencing January 2024.

EFRAG had also been commissioned by the EU Commission in 2020 to draft new EU sustainability reporting standards. In June of 2023, EFRAG submitted their final draft of the European Sustainability Reporting Standards (ESRS). The ESRS includes broader ESG (environmental, social and governance) areas such as labour practices, diversity and inclusion, climate change and biodiversity, with environment being the main focus. Environment is further broken down into five standards covering:

1. Climate change
2. Pollution
3. Water and marine sources
4. Biodiversity and ecosystems
5. Resource use and circular economy

The goal of the ESRS is interoperability with other major reporting standards such as the TCFD (since absorbed by the IFRS), IFRS, and GRI (Global Reporting Initiative) to avoid unnecessary double disclosure. The standards will apply to publicly traded companies and large private companies, with hopes to eventually phase in the standards to SMEs as well.

ESRS vs EU CSRD

So why are there seemingly so many standards and frameworks European companies have to comply with? Although a bit confusing at first, the ESRS are the standards that structure the disclosures and the EU CSRD is the directive that companies have to report to. In other words, the EU CSRD was developed to strengthen the environmental and social reporting standards applied over a larger scope of companies in order to gain a better comprehension of their sustainability performance. In order for organisations to comply with those directives, the ESRS stands as the reporting methodology that ensures that a reporting company is in compliance with the EU CSRD.

ESRS Adoption by EU Commission

Now we have a better understanding as to why the adoption of the ESRS by the EU Commission is such a pivotal decision. That being said, there has been some controversy surrounding the adoption as the so-called final standard that the commission has adopted has switched some areas of the reporting from mandatory to voluntary, making it less stringent. Some investment and finance groups in particular are not pleased with the amendments, stating that this would inhibit them from obtaining the relevant sustainability-related information to properly inform any investment decisions. In response to this, the EU Commission released a statement that “disclosure requirements subject to materiality are not voluntary” and that the materiality assessment would have to be subject to third party assurance, indicating that they still would like to commit themselves to some level of accountability.

Following the adoption of the standards, the Commission’s ESRS delegated act will be handed over to the EU Parliament and Council for a scrutiny period of two months. Each body will have the ability to reject the act, but will be unable to amend it.

What’s next?

Organisations that were previously required to report to the NFRD, alongside large non-EU listed companies with more than 500 employees, will now be obligated to disclose under the ESRS for the financial year of 2024, with first reports being issued in 2025. Listed SMEs and non-EU listed SMEs will begin issuing in 2027 (with the possibility of opting out for up to 2 years). Finally, the ESRS will also apply to non-EU companies that generate more than €150 million of revenue annually in the EU and that have a branch in the EU with a revenue of over €40 million or a subsidiary in the EU that is a large company or listed SME. They will be phased in in the financial year 2028, with reporting beginning in 2029.

How Ecometrica can help

Our sustainability reporting software combines organisational sustainability reporting with spatial and climate analysis, making us a leader when it comes to assessing your organisation’s disclosures across the ESRS’s Environment categories including Climate Change, Water and Biodiversity and Ecosystem.

Ecometrica provides audit-ready reports with capabilities across scopes 1, 2 and 3, giving you the confidence in the quality of your data disclosure. Our Sustainability Analysts guide you throughout the data collection and disclosure process.

With the Ecometrica Platform, we can help you determine materiality on a site-specific level and set up targets and comparisons across all scopes as well as various emissions categories. Our Emission Factors database contains over 120k factors that we use to ensure that your ESRS disclosure is calculated by the most relevant and up to date data available.