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EFRAG and the European Sustainability Reporting Standards

January 17, 2023

In a drive to lead and promote European standards of responsible business and economic sustainability, the EU has been adopting new ESG-related rules, with a particular focus on corporate reporting as a tool to ensure accountability. Of all the mandatory public disclosure rules being brought into force, the Corporate Sustainability Reporting Directive (CSRD) has some of the widest implications for EU companies and non-EU entities operating in the region. Under the CSRD, the European Sustainability Reporting Standards (ESRS) developed by EFRAG is an instrumental reporting standard that will define how companies disclose their sustainability performance.

What is EFRAG?

EFRAG is short for European Financial Reporting Advisory Group, a panel of member organisations that supports the development of the International Financial Reporting Standards (IFRS). EFRAG was established to provide input on behalf of EU member nations in the standard-setting process for financial reporting and to advise the European Commission on related matters.

What is ESRS?

The European Sustainability Reporting Standards (ESRS) is a set of corporate reporting standards that is still in development on a broad range of ESG topics. It was developed to increase corporate accountability and improve reporting quality and transparency in response to investor needs for sustainability-related information. The ESRS supports the CSRD, a new legislation to replace the Non-Financial Reporting Directive (NFRD) in October 2022.

EFRAG has released 13 ESRS exposure drafts for public comment. The ESRS outlines reporting guidelines covering 13 topics grouped into four categories:

1. Cross-cutting (universally relevant for all industries)

  • General principles
  • General, Strategy, Governance, Materiality assessment

2. Environment (topics related to the environmental impact of business from its production or end-use processes)

  • Climate change
  • Pollution
  • Water and marine resources
  • Biodiversity
  • Resource use and circular economy

3. Social (the treatment and welfare of employees, local communities, and other people who come into contact with a business or its goods/services)

  • Own workforce
  • Workers in the value chain
  • Affected communities
  • Consumers and End-users

4. Governance (the system of controls within a company that governs key functions for business continuity)

  • Governance, Risk management and Internal control
  • Business conduct

These are the companies affected by the new reporting standards

Companies that already fall under the scope of the NFRD are required to comply with the ESRS. On top of that, the CSRD has even more stringent requirements, targeting approximately 50,000 companies more than those under the NFRD.

The coverage extends to:

  • All large listed companies in the EU with more than 250 employees on average over the financial year, minimum net turnover of €40 million, and a balance sheet total of €20 million.
  • Non-EU companies operating in EU-regulated markets with a net turnover of €150 million or more at the consolidated level, net turnover of €40 million or more at the EU subsidiary/branch level, and at least 250 employees at the EU subsidiary/branch level or listed on the EU market. The EU branch or subsidiary must publish a sustainability report for the consolidated company.
  • Listed SMEs.

All credit and insurance companies are subject to the CSRD regardless of the requirements. Separate reporting standards will be applied to listed SMEs proportionate to their scale and size, as well as for non-EU companies that fall within the scope of the CSRD.

When will the ESRS come into force?

The public consultation period for the draft standards ended on 8 August 2022. The ESRS will be finalized in October 2022 and put to practice once the CSRD takes effect from 2024. The timeline for implementation varies based on the type of company:

  • Companies that fall within the scope of the NFRD will have to comply with the ESRS for fiscal years starting on or after 1 January 2024, with disclosures to be published in 2025.
  • Companies out of the scope of the NFRD but within the scope of the CSRD will have until 1 January 2025 to begin reporting, with disclosures to be released in 2026.
  • SMEs that fall within the scope will have to start reporting from 1 January 2026, with disclosures to be published in 2027.
  • Non-EU companies with EU operations have until 1 January 2028 to comply with the new rules, with disclosures to be released in 2029.

What is next for companies?

Companies that fall within scope have time to build their reporting capabilities to make the transition to the new standard. The earliest implementation date for the CSRD is 1 January 2024, giving companies at least one year from now to prepare.

The new requirements of the ESRS are more detailed compared to even the IFRS Sustainability Disclosure Standards, which are also still in development but expected to have a key influence on general EU reporting requirements. The comprehensive disclosure guidelines of the ESRS will force companies to provide quality disclosures that capture ESG aspects and that can be externally assured. The latter is another mandatory ESRS requirement – disclosures must be assured by an independent third party. This means that companies must not only measure ESG data, but they also have to be able to keep track of the data and ensure accountability of each data point.

Using sustainability reporting software to meet regulations

These rigorous demands on data can be an additional burden on companies whose data collecting and reporting processes are still done manually. Companies can consider two methods to manage the challenges of complying with these reporting rules. The first is to hire an external reporting service to handle the entire reporting process. The second is to deploy ESG software, which gives full control of company data, thus keeping reporting capabilities and ownership internal to the organisation.

Sustainability management software solutions are powerful engines that make organising data, analysing performance, and preparing reports so much easier. Relying on cloud-based technology, this software saves time and effort through automation features and by facilitating in-platform information exchange even with sources outside the organisation. These advantages can be the difference between a sub-par report and one that complies and reassures investors and regulators of your sustainability efforts.

How we help you

  • We explain the ESRS and CSRD and guide you through the mandatory requirements to achieve compliance.
  • We simplify the collection of ESG data in your organisation by offering one central platform and integrations into ERP, HRM, CRM, EMS etc., to automate data collection.
  • We facilitate data collection from your suppliers and ensure that relevant information such as climate or supply chain-related information is obtained in a complete and accurate manner. We will handle the burden of information exchange with your suppliers.
  • We help you complete the information requests from regulators or investors and guarantee the protection of business-critical information.

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