To encourage and enhance sustainability reporting in the EU, the European Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD) in April 2021. In November 2022, the EU adopted the CSRD, and on January 5, 2023, it entered into force. The directive aims to replace the existing Non-financial Reporting Directive (NFRD). One of the key provisions of the CSRD is compliance with the European Sustainability Reporting Standards (ESRS). Thereby, the CSRD will support the EU's Green Deal by requiring certain large companies to report on sustainability metrics in accordance with the ESRS.
The ESRS were developed primarily by the European Financial Reporting Advisory Group (EFRAG). They are designed to ensure the quality and relevance of reported information.
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When do companies need to report?
The reporting requirements will come into effect over a period of four years, starting in 2024. The report itself should be published no later than four months after the end of the indicated financial year.
From January 1, 2024 Large public-interest companies (with over 500 employees) already subject to the non-financial reporting directive, with reports due in 2025
- From January 1, 2025 Large companies that are not presently subject to the non-financial reporting directive, meeting two of the three following criteria, with reports due in 2026:
- more than 250 employees
- € 50 Mio in turnover
- € 25 Mio in total assets
Note: Since December 2023, new thresholds for balance sheet and net turnover have applied for all company sizes; see updated list above.
From January 1, 2026 Listed SMEs and other undertakings, with reports due in 2027 → SMEs can opt-out until 2028
From January 1, 2028 Non-EU companies with a net turnover over € 150 Mio in the EU, if they have at least one subsidiary or branch in the EU and exceed certain thresholds, with reports due in 2029
As a result, reporting in accordance with the ESRS will be mandatory for around EU 50,000 companies by January 1, 2025.
What do companies need to report under the ESRS?
A total of 84 disclosure requirements, or 1,144 data points, are formulated in the ESRS's final draft, which EFRAG published in November 2022. They also include queries about strategy, risks, opportunities, impacts, and materiality attributes, in addition to those that are strictly quantitative. This means that conclusions regarding the actual processing effort required can only be made to a limited extent based on the pure quantity of disclosure requirements in each specific sub-area.
The ESRS Structure
The first set of ESRS comprises the so-called sector-independent standards, which determine the contents that need to be disclosed under the ESRS. These are further divided into four areas (see graphic):
Cross-cutting general standards
Environment
Social
Governance
Points 2 to 4 are so-called topic-specific standards. The cross-cutting standards define the fundamental concepts of the disclosure requirements and thus create a basis for all contents of the topic-specific standards. Within the four individual areas, which are further split into 12 standards, corresponding disclosure requirements are specified. Companies have to report according to these, either mandatory or depending on the results of their materiality analysis.
Further key concepts of the ESRS
The ESRS also includes the principle of "double materiality", which requires companies to consider not only the impact of the environment on their operations but also the impact of their operations on the environment (including social and governance issues). Learn more about the concept of double materiality in our insights article.
The concept of rebuttable presumption included in previous versions of the ESRS was eliminated in the final drafts. The ESRS now distinguishes between disclosures that are reportable regardless of the materiality analysis and those that can be excluded from the reporting requirement due to materiality criteria. If a requirement is excluded completely, companies are required to provide a justification. In the case of exclusion of individual reporting requirements ("disclosure requirements") or data points, these must be stated.
How companies can approach sustainability reporting according to the ESRS
Companies should start preparing for ESRS reporting now to ensure an efficient and well-organized implementation. But how can companies tackle the ESRS reporting challenges? Here are three steps to recommend in order to be well prepared for ESRS disclosure requirements:
1. Estimate processing time and effort
The disclosure requirements are extensive and complex. The final ESRS drafts are guiding with regard to the detail of the information to be disclosed in the future and thus the implementation effort for companies. The processing effort for the questions formulated in the ESRS should certainly not be underestimated. It is important to consider a company's starting position with regard to ESG reporting:
Companies that already have structured sustainability reporting can either continue with their current reporting and, in addition, report in accordance with the ESRS. Otherwise, they can adjust their prior reporting to the ESRS's requirements. Depending on the reporting standard now in use, they may utilize a database that already exists as well as processes and resources that have been established within the firm.
Companies that have not yet implemented structured sustainability reporting will first have to develop the necessary structures and allocate the required resources. This will also entail the necessary human resources for data collection and processing. Furthermore, in many cases it will first be necessary to create awareness of the topic ESG within the company and thus to integrate it into the corporate culture.
In general, it is crucial that management and responsible persons from the various corporate divisions familiarize themselves with the standards, as ESG issues affect a company on a global level. This can create an awareness of what the requirements mean for their own company at an operational level.
2. Check data collection
Another reason to address ESRS requirements early on is to reconcile required and existing data and information. As a result of the ESRS reporting obligations, companies will have to process and disclose a large amount of sustainability-related data. It should be accurately recorded which ESG data must be disclosed as part of the reporting requirement and for which data a compilation is still pending. This will enable companies to set up targeted structures, strategies and processes for data analysis and evaluation.
3. Track legislation
Lastly, it is advisable to continuously track the legislative process regarding ESRS. This allows companies to prepare for changes, adjustments or extensions to the reporting requirements at an early stage.
Next steps and prospects for the ESRS
The European Commission has adopted the ESRS's final versions on July 31, 2023. Sector-specific standards will also be released later, presumably in 2024. As of right now, EFRAG is developing these standards. With the help of industry experts, the current emphasis is on identifying pertinent and significant sustainability concerns for the corresponding industries. It is expected that the industry-specific standards will cover each of the following individually: agriculture, livestock and fisheries, coal mining and mining, energy and utilities, food and beverage, transportation, and others.