ESRS: The European Sustainability Reporting Standards

ESRS in brief

The European Sustainability Reporting Standards (ESRS) are part of the EU's strategy for sustainable finance and aim to help companies uniformly report on their sustainability performance. Together with the Corporate Sustainability Reporting Directive (CSRD), they require companies to transparently disclose their Environmental, Social, and Governance (ESG) performance. The ESRS includes detailed reporting requirements on "Impacts," "Risks," and "Opportunities," allowing companies to provide a comprehensive view of their sustainability performance and related challenges. The ESRS are deeply rooted in the vision of the European Green Deal, which aims for a climate-neutral EU by 2050. This includes the Sustainable Finance Disclosure Regulation (SFDR), providing investors with clear information on the sustainability of financial products. Developed by the European Financial Reporting Advisory Group (EFRAG), the ESRS aims to create a standardized format to measure and compare companies' sustainability.

The ESRS encompasses general and specific standards for various industries, addressing topics such as climate protection, pollution, water resources, biodiversity, working conditions, and corporate governance. The introduction of the ESRS brings advantages such as improved transparency and access to sustainable financing, but also presents challenges like high implementation costs.

To implement the new standards, companies should analyze their current ESG reports, close knowledge gaps, optimize internal processes, and communicate with stakeholders. The ESRS promote more sustainable corporate governance and could contribute to a more environmentally friendly and socially just economy in the EU, potentially serving as a model for global standards.

What are the European Sustainability Reporting Standards?

The European Sustainability Reporting Standards (ESRS) are an important part of the EU strategy for sustainable finance. They are intended to help companies in the EU to report on their sustainability in a similar way. The ESRS make environmental, social and governance(ESG) information clearer and more comparable. They give investors, customers and other stakeholders a good basis for making informed decisions. Their development comes from the growing demand for real, relevant and consistent data to assess how sustainable companies are.

The Corporate Sustainability Reporting Directive, or CSRD for short, is a legal framework that requires companies to produce detailed and reliable reports on their sustainability performance. This link with the European Sustainability Reporting Standards (ESRS) emphasizes the importance of the ESRS for companies. The CSRD requires companies to transparently disclose their environmental, social and governance performance. In doing so, it strategically positions companies in a market that is increasingly environmentally aware. The ESRS and CSRD are part of a comprehensive plan that aims to promote and standardize sustainable practices across the EU economy. This encourages companies to rethink and adapt their sustainability strategies to meet the new requirements.

Impacts, Risks and Opportunities

As the ESRS are part of the EU's Corporate Sustainability Reporting Directive, they set out detailed requirements for companies' sustainability reporting. The terms "impacts", "risks" and "opportunities" play a central role in the context of the ESRS. Here is a brief explanation of what they are all about:

1. impacts

"Impacts" refers to the effects that a company has on the environment, society and the economy. This includes both positive and negative effects. As part of the ESRS, companies must explain how their business activities and practices influence the following aspects:

• Environment: emissions, use of resources, waste production, etc.
• Social: working conditions, human rights, communities, etc.
• Economy: Local economy, jobs, added value, etc.

2. risks

"Risks" refers to the risks that may arise for the company itself as a result of sustainability aspects. These include

• Physical risks: Risks due to climate change such as extreme weather events, rising sea levels, etc.
• Regulatory risks: Risks from new laws and regulations in the area of sustainability.
• Reputational risks: Risks resulting from public perception and stakeholder expectations.

3. opportunities

"Opportunities" refers to the chances that can arise from sustainable business activities. These opportunities may include

• Market opportunities: New markets and customers through sustainable products and services.
• Cost savings: Efficiency gains through sustainable practices and technologies.
• Reputation gains: strengthening the brand and corporate image through sustainable action.

Implementation in reporting

Companies must report comprehensively on these three aspects as part of the ESRS. This includes:

• Identification and assessment: Analysis of the material sustainability impacts, risks and opportunities.
• Measures and strategies: Presentation of the strategies and measures taken to minimize negative impacts, manage risks and exploit opportunities.
• Targets and progress: Setting specific targets and reporting on progress towards these targets.

By considering "impacts", "risks" and "opportunities", companies should provide a comprehensive picture of their sustainability performance and the associated challenges and opportunities. This not only helps to meet legal requirements, but can also contribute to strengthening stakeholder confidence and long-term success.

Background and development

The development of the European Sustainability Reporting Standards is deeply rooted in the vision ofthe European Green Deal to establish a pioneering role for the EU on the path to a sustainable, inclusive economy that is climate-neutral by 2050. This goal requires major changes in all sectors of the economy. Clear and reliable reporting on sustainability is considered very important in this context.

In this context, the Sustainable Finance Disclosure Regulation, or SFDR for short, provides a legal framework that offers investors clear information on the sustainability risks and opportunities of financial products. The disclosure requirements can be used to channel the flow of capital into more sustainable economic activities. The SFDR shows how environmental, social and governance (ESG) are taken into account in investment decisions and advice. It is therefore important to have standardized, comparable and reliable ESG data.

As a result, it has become clear how important it is to have uniform and comprehensive reporting on environmental, social and corporate governance. This enables various groups, such as investors, customers and politicians, to receive reliable information. To meet this need, the European Financial Reporting Advisory Group (EFRAG) is developing European standards for sustainability reporting. This initiative aims to create a uniform format for measuring, comparing and evaluating the sustainability of EU companies.

The ESRS consider sustainability in all areas - environment, society and corporate governance. They want to improve reporting on these topics so that it is more than just a duty. The aim is to make companies more valuable and strengthen the trust of their stakeholders.

Setting binding sustainability reporting standards for large companies in the EU is an important step forward for Europe's sustainability goals. The ESRS provide a clear framework for sustainability reporting. They respond to the desire for more transparency and at the same time help to accelerate the transition to a more sustainable economy. The European Commission voted on the ESRS on July 31, 2023.

These developments show how serious the EU is about being at the forefront of global efforts for a sustainable future. They also show that the future of our economy is closely linked to sustainability.

Core features of the ESRS

The European Sustainability Reporting Standards (ESRS) are an important step forward in environmental, social and governance reporting. They provide companies with a detailed system to make their sustainability practices clearer and more accountable. The key features of the ESRS aim to set a common standard that thoroughly addresses the diverse and complex challenges of sustainability.

Extensive

The ESRS cover more than usual reports and deal with many important topics for sustainable development. These include areas such as climate change, biodiversity conservation, social justice and ethical business management. By covering a range of topics, the standards ensure that companies present a comprehensive picture of their sustainability and its impact. This makes environmental, social and governance reporting more relevant and effective.

Detailed

Another feature of the EU directives on sustainability reporting is the level of detail required of companies. In addition to ESG measures, companies must also disclose risks and opportunities. This includes methods to identify, assess and manage these risks. More detailed information should help all stakeholders to better understand a company's ESG performance and make informed decisions.

Comparable

By introducing standardized reporting formats and metrics, the ESRS facilitate the direct comparison of ESG data between companies and sectors. This comparability is very important for investors and other stakeholders who want to make sustainable decisions. The ability to compare the sustainability performance of different companies helps to raise awareness of good practice and encourage competition for sustainability.

Focused on materiality

A central principle of the European sustainability reporting standards is the emphasis on materiality, also known as materiality assessment. Companies are encouraged to focus on the sustainability aspects that are most relevant to their specific business activities and stakeholders. This includes the consideration of double materiality, where both environmental impacts and social aspects are relevant. This means that reporting must be tailored and clearly focused to show the particular challenges and opportunities a company sees in its sustainability efforts. It is important that the reports are not only comprehensive and detailed, but also relevant and targeted to help with decision-making.

The standards in detail

The introduction of the European Sustainability Reporting Standards(to the standards) was initiated by the European Financial Reporting Advisory Group (EFRAG) on behalf of the European Commission. It marks an important milestone in the evolution of sustainability reporting within the European Union. 

The new standards are divided into two sets, data points: One for all sectors (Set 1) and one that will be defined later for specific sectors (Set 2). They are intended to enable reporting that addresses the specific needs of different sectors while at the same time respecting the EU's environmental and social objectives.

Basic standards ESRS 1 and ESRS 2

• ESRS 1 lays the foundation for sustainability reporting by establishing basic requirements and formal reporting guidelines. This standard is designed to create a consistent starting point for all companies.
• ESRS 2 places higher demands on companies. It requires them to disclose material information about their sustainability strategy and management. This includes an explanation of how companies identify and address sustainability impacts, risks and opportunities, as well as the measures they take to monitor and manage their objectives and performance in these areas.

Environmental standards (ESRS E1 - E5)

These standards address specific environmental issues that are crucial to achieving the EU's environmental goals:

• ESRS E1 focuses on climate change mitigation and adaptation, including reporting on emission reduction strategies.
• ESRS E2 deals with environmental pollution and requires transparency on the release of pollutants.
• ESRS E3 focuses on the management of water and marine resources, calls for reports on water consumption and protective measures for aquatic ecosystems.
• ESRS E4 addresses the protection of biodiversity and ecosystems and expects companies to assess their impact on natural diversity.
• ESRS E5 focuses on resource efficiency and the promotion of a circular economy in order to minimize the ecological footprint.

Social standards (ESRS S1 - S4)

These standards cover a broad spectrum of social responsibility areas:

• ESRS S1 and S2focus on working conditions, equal rights and human rights within the company and at suppliers.
• ESRS S3 and S4 focus on the protection of communities affected by business activities and the protection and security of consumers and end users.

Governance standard (ESRS G1)

• ESRS G1 addresses topics such as business ethics, relationships with suppliers, corruption and political commitment. It shows how important good corporate governance is in order to promote sustainable development.

The ESRS standards provide a clear framework for companies to openly and consistently demonstrate and improve their sustainability. This helps to increase awareness and responsibility for environmental and social issues.

Advantages and disadvantages for companies

The new European standards for sustainability reporting are an important step for companies. They bring both advantages and challenges. This detailed examination of the advantages and disadvantages shows what companies need to pay attention to when reporting.

Advantages for companies

Improved transparency and credibility with investors and customers:

When companies report in accordance with European standards, they show that sustainability is important to them. This makes them more trustworthy and improves their reputation with current and future investors and customers. This openness can attract more customers and interest investors who value sustainability.

Easier identification & management of ESG risks and opportunities:

The detailed reporting requirements of the ESRS enable companies to analyze their ESG risks and opportunities in greater depth. As a result, companies understand their sustainability better. They can then act more quickly to reduce risks and take advantage of opportunities. This approach can make the company stronger and more competitive.

Strengthening sustainable financing options:

If companies comply with European sustainability reporting standards, their access to environmentally friendly financing improves. Many investors and banks want to see clear evidence that a company is acting sustainably. This can lead to better credit conditions and help companies to finance their environmental goals.

Disadvantages for companies

High implementation and reporting costs:

Adapting to the detailed reporting requirements of the new European standards can be expensive. A lot may need to be invested in new systems, processes and training. This could be particularly difficult for smaller companies because they often do not have as many resources as large companies.

Complexity of requirements can be a challenge:

The complexity and scope of reporting can be difficult for companies of all sizes. It is necessary to address many different ESG (environmental, social, governance) issues and provide accurate information. This requires good planning and perhaps new systems for managing and analyzing data.

The new European sustainability standards bring challenges for companies, such as high start-up costs and difficult implementation. But they also provide an opportunity to become more open and trustworthy when it comes to sustainability. By teaching companies to better manage environmental, social and corporate risks and to utilize new sources of financing, these standards can help them to be more stable and successful in the long run.

It is a good idea to see the application of the new European sustainability reporting standards as an investment in the future. They not only help you to comply with the law, but also promote sustainability and the value of your company.

Practical steps to prepare for the ESRS

To prepare for the new European sustainability reporting standards, companies should plan well and strategically. Careful planning will help to follow the new rules and use them as an opportunity to improve sustainability and report on it more openly. Here are some useful steps to take:

1. stocktaking of current ESG reporting practices

• Analyze existing reports: Start by closely reviewing your current sustainability reports and ESG documents. Compare them with the new EU standards to find out what has already been implemented correctly and what is still missing.
• Evaluate internal data sources: Look at what internal data sources you already use and how you collect, store and process this data. This will help you understand whether your current systems are good enough or whether you need to change them to comply with the new EU standards.

2. identification of knowledge gaps and organization of training courses

• ESRS-specific training: Organize training for your employees who work on reporting so that they understand the new EU standards and how they differ from previous methods.
• Promote a sustainability-oriented mindset: Expand your training programs to raise awareness of sustainability throughout the company. This supports a corporate culture in which sustainability is anchored in all business areas.

3. establishment of internal processes and systems

• Develop efficient data collection processes: Implement processes that allow you to systematically collect and analyze environmental, social and governance (ESG) data. This may require the use of specialized sustainability management software.
• Ensuring data quality: Establish rules and processes to ensure the quality of your data. This includes regular checks and confirmations to ensure that the information you report is accurate and reliable.

4. communication with stakeholders

• Stakeholder engagement: Create a plan to engage with your stakeholders so that you understand their expectations of your sustainability performance and reporting. This could include workshops, surveys or regular meetings.
• Feedback integration: Use feedback from stakeholders to improve your sustainability plans and reports. Talking openly about your successes and problems builds trust and credibility with all stakeholders.

Preparing for the EU directives on sustainability reporting is complicated, but it's worth it. It not only helps companies to comply with rules, but also to become more sustainable. If companies involve all parts of their organization and focus more on sustainability, they can not only improve their reports according to the European standards. They can also be good for the environment and society in the long term.

Conclusion

The role of the European Sustainability Reporting Standards in Europe's sustainable development

The introduction of European standards for sustainability reporting is a big step towards a greener and fairer economy in the EU. Not only do these standards help to make environmental, social and governance (ESG) data clearer and more comparable, but they also encourage big changes. By setting clear rules for reporting, they encourage companies to review their ways of working and make sustainability the main objective of their strategy.

The European sustainability reporting standards could change the way companies operate in the long term. They encourage companies not only to think about money, but also to recognize the value of sustainable action. In this way, they promote an economy that is durable, robust and socially responsible. This change not only helps to achieve the EU's goals for a climate-neutral and fairer Europe. It also helps to tackle global problems such as climate change, the disappearance of animal and plant species and social injustices through delegated acts.

The EU directives on sustainability are important for two main reasons. Firstly, they provide clear rules on how companies should report on their sustainability efforts. Secondly, they help companies to develop and apply sustainable business practices and plans. These rules are also important to make investors, customers and all people aware of sustainability. They also help to ensure that more money flows into environmentally friendly technologies and sustainable projects.

In the future, the EU rules on sustainability reporting could serve as an example for other countries. These could then help to set the same standards for sustainability worldwide. This would make it easier to understand and compare environmental, social and governance (ESG) data in the same way everywhere. It would also help us to work together for a greener economy.we urgently need solutions to environmental and social problems. The European rules on sustainability reporting show how important and progressive it is to work towards this. These rules make it clear that the EU is serious about being a leader in the global drive for greater sustainability.