An EU Sustainability Reporting Standards (ESRS) Explainer - Last Updated: May 9, 2022

What are the EU Sustainability Reporting Standards (ESRS)?

The European Union Sustainability Reporting Standards (ESRS) are an upcoming set of EU compliance and disclosure requirements first previewed by the European Commission and the European Financial Reporting Advisory Group (EFRAG) on May 3, 2022. The ESRS are designed to make corporate sustainability and environmental social governance (ESG) reporting within the EU more accurate, common, consistent, comparable, and standardized, just like financial accounting and reporting.

The ESRS, a key provision of the EU Corporate Sustainability Reporting Directive (CSRD), will apply to all companies with:

  1. Over 250 employees
  2. More than €40M in annual revenue
  3. More than €20M in total assets
  4. Publicly-listed equities and have more than 10 employees or €20M revenue

Any EU company that meets those criteria is required to file an annual report using the final ESRS guidelines, including disclosure of how sustainability influences their business, as well as the company's impact on people and the environment.

According to ESRS, companies should use the same reporting period in its sustainability reporting as the one(s) used for its financial statements. In cases where ESRS required disclosure information is already included in another financial report, that data can be referenced consistent with ESRS 1 Guidance in Chapter 5.1.

EU ESRS Sustainability Reporting Standards

The ESRS is an amendment to the existing EU's Non-Financial Reporting Directive (NFRD), and is planned to go into effect throughout the European Union in 2023. It's estimated 50,000+ companies who do business in Europe will need to report and comply with ESRS.

A big goal of ESRS is to reduce corporate greenwashing by standardizing and codifying material sustainability reporting for companies.

According to EFRAG:

"The overall architecture of [ESRS] Exposure Drafts is designed to ensure that sustainability information is reported in a carefully articulated manner"

However, despite the direct use of 'Sustainability' in its name, ESRS isn't just about sustainability disclosure: it shares difference reporting sections for environmental, social, and governance reporting. The ESRS aims to serve as the architecture for one annual ESG report that meets the needs of EU regulators, investors, and other stakeholders.

The first Draft ESRS standards are currently accepting public comment by EFRAG until August 8, 2022.

EU Sustainability Reporting Standards (ESRS) Requirements

To comply with ESRS, organization's will need to take the following annual compliance steps, expected to begin in 2023:

  1. Prepare and submit an ESRS report - A company's first ESRS report will be due in early 2024 based on the company's 2023 fiscal year environmental performance
  2. Track and disclose the required information - According to EFRAG, "the undertaking shall disclose all material information on its sustainability-related impacts, risks and opportunities in accordance with applicable ESRS. Applicable ESRS mandate reporting under standardised sector-agnostic and sector-specific disclosures. These disclosures are complemented by entity-specific disclosures to be developed as prescribed under the principles established by this [draft] Standard." ESRS reports must cover environmental, social, and governance matters, including management commentary and data on a company's:
    • Strategy and business model in relation to sustainability
    • Governance and organization in relation to sustainability
    • Materiality assessment process to select material ESG themes, topics, risks, and opportunities, including a description of the process to identify sustainability impacts, risks and opportunities and assess which ones are material
    • Sustainability and ESG performance implementation measures, covering policies, targets, actions and action plans, and allocation of resources
    • Performance metrics
  3. Digital data and tagging - Companies must prepare their financial statements and management statement in XHTML format in accordance with the ESEF regulations and the EU sustainability taxonomy, then digitally ‘tag' their reported sustainability information according to a digital categorisation system specified by the ESRS Regulation (or use ESG software like Brightest that can auto-tag and format data)
  4. Third party assurance - Organizations reporting under ESRS will also be required to seek "limited" assurance of the sustainability information they disclose from a neutral, trusted, and experienced third party who reviews the data. "Limited" assurance is less strict than a financial audit, but still requires working with a sustainability reporting partner organization

Similar to IFRS financial reporting standards, ESRS requires reported information to meet certain quality standards:

  • Relevance - Information must be topical and capable of making a difference to investor's or reviewer's decision-making under a double materiality approach
  • Faithful representation - Sustainability information should provide a complete, neutral, and accurate depiction of the information it's intended to represent, including appropriate descriptions and explanations. Information should be presented as a neutral depiction without bias
  • Comparability - Sustainability information must be comparable to disclosures from other companies, and with the company's prior reporting periods so it can be compared over time
  • Verifiability - Sustainability information is verifiable if it is possible to corroborate such information itself or the inputs used to derive it
  • Understandability - Sustainability information is understandable if it is clear and concise, while enabling all (knowledgeable) intended users to readily comprehend the information being communicated

ESRS also notes that, in some cases, companies my need to go above and beyond ESRS's required disclosures to meet stakeholders needs or fully present the material aspects of a company's business:

"The undertaking shall disclose sustainability-related information following standardised disclosures prescribed by ESRS and when relevant through entity-specific disclosures. To achieve a high degree of comparability, disclosure requirements that are mandated for all undertakings or undertakings in a specific sector are standardised on a sector-agnostic and sector-specific bases. However, as every undertaking operates under specific facts and circumstances and deals with a unique combination of impacts, risks and opportunities, disclosure requirements mandated by ESRS may not be sufficient for the undertaking to depict in a faithful manner all its material sustainability-related impacts, risks and opportunities following its double materiality assessment. The undertaking shall therefore define, when necessary, additional entity-specific disclosures that best illustrate its unique situation."

EU Sustainability Reporting Standards (ESRS) Architecture

In its current form, ESRS has two parts:

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EU Sustainability Reporting Standards (ESRS) Timeline

As of today, the ESRS is still in draft form and has not yet been passed into law. The European Parliament and the European Council still have to integrate EFRAG's recommendations and public commentary, agree on a final version, and adopt ESRS requirements into law. These steps are expected to happen over the course of 2022, although it's possible other pressing EU issues like Russia's invasion of Ukraine may delay or modify this process. Right now, the timeline for the ESRS coming into effect is:

This means companies need to prepare to plan and implement their ESRS compliance approach by 2023 in order to be ready for the 2024 reporting cycle and stay compliant. It's not yet know exactly how the EU Commission or specific member states might penalize businesses who fail to comply with ESRS, but according to the Commissions’ requirements within the Directive, non-compliant eligible organizations will be forced to pay a meaningful fine.

EFRAG also says its "ESRS architecture foresees the preparation of sector-specific standards," but does not provide any additional guidance on them at this time.

EU Sustainability Reporting Standards (ESRS) vs. IFRS Standards

From a timing perspective, the Draft ESRS standards follow closely behind the release of the International Financial Reporting Standards Foundation's initial IFRS Sustainability Reporting Standards. For those following sustainability reporting standards closely (and we certainly don't blame you if you aren't), there's some concern that ESRS and IFRS create competing standards. If Europe follows ESRS and the rest of the world to aligns with IFRS, we've got two competing standards instead of one - particularly for international companies operating in the EU and other jurisdictions.

EFRAG recognizes this problem, and, while it doesn't propose a full solution, at least shares a detailed comparison guide between ESRS and IFRS.

A Few Helpful Recommendations

Your Next Steps With ESRS Sustainability Reporting

For organizations in the early stages of their sustainability reporting journey, we have a few general recommendations, additional reading, and suggested next steps:

Materiality assessment - Before collecting data or thinking about preparing your first report, you need to conduct a “Materiality Assessment” to help determine what your sustainability goals, targets, KPIs, and reporting topics should be under the ESRS. A materiality assessment is a project which determines and ranks the most material and impactful themes for your business based on market data, stakeholder interviews, and surveys. For example, a healthcare company might focus on healthcare access, affordability, innovation, and its supply chain. A bank should focus on ethics, financial controls, and the Scope 3 emissions in its business and lending portfolio. Pick and rank the right sustainability themes depending on your organization’s mission, sector, model, value chain, and ESG maturity.

Sustainability data systems and process - While this might go without saying, in order to report your organization's sustainability and ESG performance, you need to know what it is - with a high degree of accuracy. Your materiality process can help guide you toward the main sustainability themes you may need to focus on and collect data around. Is employee travel a big source of your organization's carbon footprint? Facilities? Manufacturing sites? Where does that data exist today, and how will you access or collect it? Many organizations start their sustainability reporting with relatively simple spreadsheets, surveys, and documents, but things can get complex fast - particularly for larger companies. If you're an organization with a medium-to-large or complex environmental footprint, you likely need dedicated sustainability reporting and data management software, like the kind we design here at Brightest to help organizations stay ESG compliant. Ongoing report archiving, version control, and governance are also important to think about, since you'll be reporting under ESRS every year.

Further reading - Our free guides to sustainability measurement, sustainability reporting, and ESG reporting provide additional, detailed guidance and insights on how to measure and report your sustainability performance. Or, if you're ready to up-level your sustainability reporting and data maturity to meet ESRS requirements, please contact us for a free assement or demo of Brightest's intelligent, award-winning ESG platform.