The engine that powers sustainable organisations
To promote European standards of responsible business and economic sustainability, the EU has been creating new ESG-related rules. By making companies report on these issues, they are held accountable for their actions and can work to improve their sustainability.
The EU has created a new rule called the Corporate Sustainability Reporting Directive (CSRD) that requires companies to share information about their sustainability practices. This rule affects many companies in the EU and even some companies outside the EU that do business there.
One of the key parts of the Corporate Sustainability Reporting Directive (CSRD) is the European Sustainability Reporting Standards (ESRS) developed by EFRAG, which is a set of guidelines that tell companies how to report their sustainability performance.
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.
The European Sustainability Reporting Standards (ESRS) is a set of corporate reporting standards that was 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 European Sustainability Reporting Standards for public comment. The ESRS outlines reporting guidelines covering 13 topics grouped into four categories:
1. Cross-cutting (universally relevant for all industries)
2. Environment (topics related to the environmental impact of business from its production or end-use processes)
3. Social (the treatment and welfare of employees, local communities, and other people who come into contact with a business or its goods/services)
4. Governance (the system of controls within a company that governs key functions for business continuity)
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 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.
The public consultation period for the draft standards ended on 8 August 2022. The ESRS will be finalized in October 2022 and came into force in January 2023. But they will be put in practice once the CSRD takes effect from 2024. The timeline for implementation varies based on the type of company:
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.
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.