Understanding ESRS: A Deep Dive into New Sustainability Reporting

As sustainability takes center stage in business strategy, stakeholders are increasingly demanding transparency. This demand has spurred a wave of regulations aimed at standardizing how businesses report their sustainability performance. This is where ESRS comes in, set to become a game-changer for businesses operating in, or connected to, the European Union.

But understanding the ins and outs of ESRS and what it means for your business can feel like navigating uncharted territory. What exactly are these standards, how will they impact your company, and where do you even start preparing?

Decoding ESRS: A New Era of Sustainability Reporting

The European Sustainability Reporting Standards (ESRS) represent a new framework designed to bring consistency and comparability to corporate sustainability disclosures. They outline a comprehensive set of requirements, urging businesses to go beyond traditional financial reporting and provide a holistic view of their Environmental, Social, and Governance (ESG) impacts.

Delving into the Details: Why ESRS Matters

Adopted by the European Commission on July 31, 2023, ESRS marks a significant shift in how businesses will be expected to measure, manage, and communicate their sustainability efforts. This new framework aims to answer stakeholder calls for more transparency and empower investors and consumers to make informed decisions.

Unlike previous reporting guidelines, ESRS adopts a "double materiality" perspective. This means businesses are obligated to report their impacts on people and the environment, as well as how ESG factors influence their own financial performance and risks.

Unpacking the Components of ESRS

To provide a clearer picture of the requirements, let's take a look at the twelve draft standards the EFRAG Sustainability Reporting Board (EFRAG SRB) initially proposed:

Standard	Focus Area
ESRS 1	General Requirements - outlining the foundation and overall principles for sustainability reporting.
ESRS 2	General Disclosures - encompassing essential information about the reporting organization's strategy, governance, and materiality assessment process.
ESRS E1	Climate Change - addressing governance, strategy, and metrics related to climate change mitigation and adaptation.
ESRS E2	Pollution - covering various forms of pollution, including air, water, and land pollution.
ESRS E3	Water and Marine Resources - emphasizing responsible water usage and impacts on marine ecosystems.
ESRS E4	Biodiversity and Ecosystems - covering topics related to biodiversity protection and the responsible use of natural resources.
ESRS E5	Resource Use and Circular Economy - addressing efficient resource utilization, waste management, and circularity practices.
ESRS S1	Own Workforce - focusing on employee-related aspects, including diversity, inclusion, and working conditions.
ESRS S2	Workers in the Value Chain - covering labor practices throughout the entire supply chain.
ESRS S3	Affected Communities - considering impacts on local communities, indigenous rights, and land use.
ESRS S4	Consumers and End-Users - focusing on consumer health, safety, and data privacy.
ESRS G1	Business Conduct - encompassing ethical conduct, anti-corruption measures, and lobbying practices.

The evolution of these standards and their specific requirements can be tracked through official EFRAG resources. The European Commission has outlined open consultations in the delegated regulation. Technical bodies will utilize the open consultations to refine the ESRS. Companies can then utilize reporting publications from these technical bodies to better understand how to comply with new disclosure requirements.

Understanding the Ripple Effect: Who's Impacted and How

While initially designed for large companies and publicly listed entities (including SMEs), the reach of ESRS extends far beyond. Companies with over 250 employees, a net turnover exceeding EUR 40 million, and/or a balance sheet total of over EUR 20 million fall under its scope.

This broad reach highlights the growing significance of sustainability reporting. This applies whether it's a small business looking to do business in the EU, a global corporation with a high degree of material impact on society, or part of a complex supply chain. It's not merely about compliance; it's about acknowledging the interconnectedness of business and sustainability.

The implementation of ESRS is expected to have a ripple effect across various aspects of business operations. This includes data collection, reporting processes, supply chain management, and even investor relations. Businesses will need to adapt their strategies to incorporate these new standards. They'll also need to ensure they have the necessary infrastructure and expertise to meet the reporting requirements.

Preparing for the ESRS Journey

As the saying goes, "the best time to plant a tree was 20 years ago. The second best time is now." ESRS adoption is a process, and starting early is key to a smooth transition.

Familiarize yourself with the ESRS framework and guidelines. Businesses can gain insights from valuable resources like the ESRS application guide offered by the Autorite des Normes Comptables (ANC). Also, companies can leverage support specifically designed for smaller enterprises, as demonstrated in the first version of ESRS for European SMEs. These guides offer practical advice and best practices for navigating the new standards.

Conduct a thorough materiality assessment to identify and prioritize the ESG issues most relevant to your business and stakeholders. This step is crucial for ensuring that your sustainability reporting is focused and impactful. For many businesses, this will involve incorporating climate change into their business strategy for the first time.

Evaluate your current data collection and reporting processes. Do you have the systems and processes in place to gather the necessary information? Gap analysis will be critical to successful implementation of the ESRS.

Engage with your stakeholders, including investors, customers, employees, and suppliers. Understand their expectations and concerns related to sustainability and how ESRS might affect your relationships.

It's critical to take proactive measures today, preparing your business to meet the demands of this new reporting landscape. Embracing ESRS is more than compliance, it is a strategic move toward sustainable and responsible business practices.

A New Standard for Business

The emergence of ESRS signifies a critical turning point in the corporate landscape, pushing companies to think differently about sustainability. It is about understanding that sustainable practices are not just good for the planet but also make good business sense. By embracing ESRS, businesses can demonstrate their dedication to transparency, responsible operations, and a more sustainable future. This is a path paved with opportunities for growth, resilience, and positive societal impact.

Ready to embrace the ESRS and streamline your sustainability reporting? Ameta can help you track your ESG KPIs and simplify your reporting processes. Get in touch today to see how we can support your business in meeting the new EU standards.