Last week, IR professionals at 50,000 companies worldwide were left with many questions after news broke that the European Commission voted to adopt the recently introduced European Sustainability Reporting Standards (ESRS), which requires companies to embed environmental disclosures in annual reports beginning in 2024. While legislated in the EU, it impacts all IR professionals with large operations in the European Union.
The European Sustainability Reporting Standards (ESRS), originally legislated on a voluntary basis for public companies, aims to encourage public companies to report their ESG impact, risks, and opportunities more regularly to the market. This increased transparency of the sustainability performance of implicated companies as part of the European Green Deal. After a period of voluntary participation, the European Commission changed the conversation on 31 July by adopting ESRS compliance standards, mandating adherence for EU-based or EU-operating companies. Our in-house ESG experts have analyzed and summarised these changes and how they implicate compliance efforts for IROs, CFOs, and other affected IR leaders.
Who is impacted?
For public companies based in the EU, IR teams can expect to or will be affected by the news, with the exception of micro-enterprises. For markets based outside of the EU, ESRS applies to all companies generating revenue of EUR 150 million or more within the European Union and have at least one large subsidiary or branch in the region. Large businesses will be required to adhere to the mandate starting in 2024, followed by a phased implementation across the market for medium-sized businesses through to 2026.
Additionally, while your company might already have an ESG reporting framework in place, it might not comply with the new standards. It is important to review your current plan in comparison to the ESRS to ensure compliance.
What does full ESRS compliance mandate?
Following the adoption by the European Commission, impacted companies will need to conduct an in-depth assessment of how their business model affects environmental issues that are most material to their operations. Companies will need to review both their impact and their exposure to potential ESG risks. Companies that deem themselves not materially affected by climate mitigation will need to report their reasoning.
- General requirements (see legislation)
- General disclosures (see legislation)
- Climate Change
- Water and Marine resources
- Biodiversity and Ecosystems
- Resource use and Circular Economy
- Own Workforce
- Workers in the Value Chain
- Affected Communities
- Consumers and End-users
- Business Conduct.
How is the framework structured?
The ESRS framework is primarily structured around double materiality. This has two parts:
- Financial materiality: requires disclosure of any sustainability-related information that (might) trigger a financial response to a company’s development (i.e. cash flow).
- Impact materiality: requires disclosure of a company’s sustainability-related information that has a material impact on the company’s potential, the company’s impact on people, and their impact on the environment (i.e. building a new facility).
For companies already sharing their ESG narrative, how does this change their reporting?
The new standards include a required framework for all companies, as well as sector specific requirements. It’s probable that there is overlap between the framework you currently use and the ESRS framework. Nevertheless, it is important to evaluate your existing reporting structure and compare it to the ESRS framework to ensure that you are not missing any requirements.
What opportunities does the ESRS provide?
While aimed at increased transparency on corporate ESG efforts, the new standards are also designed to provide companies with increased investment opportunities (one European firm received a EUR 50 million grant for prioritising ESG reporting), as well as a framework of reporting expectations across sectors. Historically, ESG reporting has been very disjointed, as many companies are able to pick and choose from different reporting frameworks. In turn, this resulted in competitors reporting on different metrics, making it hard for investors to compare peers. The ESRS provides clarity on reporting expectations, making it easier for investors to find the information most relevant to their investment decision.
Many investment portfolios, particularly in the European Union where over 50% of global sustainable finance originates from, prioritise ESG disclosure before making their investment decision. Not only will ESRS afford companies with the opportunity to receive investment from these funds, but it will also make it easier for investors to find the information they are looking for.
What should I start doing now?
First, it is important to understand when and how the ESRS framework will impact your business. If your firm already has a reporting framework in place, now is the time to see how your reporting framework differs from ESRS. If your firm does not currently have an ESG programme in place, it is crucial to start developing one. This starts by collecting data from across your organisation that is relevant to the 12 main areas of the ESRS framework. Partners like Novisto bring expert insights and assistance in streamlining this process.
Once you have aggregated all of your data and aligned on the information that you would like to include in your reporting, you must align on how you would like to communicate your reporting to investors. Best practices suggest working with an industry expert to develop your ESG website to house your sustainability impact documents, as well as hosting an ESG event to kick-start and amplify your narrative.
For more on next steps and for any questions, connect with an ESRS expert today or read review our webinar recap with a panel of experts discussing the ESRS.