All companies within scope of the European Union’s (EU) Corporate Sustainability Reporting Directive (CSRD) requirements, which we explain in depth in our CSRD article, will be required to report sustainability information in accordance with European Sustainability Reporting Standards (ESRS). These requirements are designed to provide stakeholders with comprehensive insights into a company’s ESG performance and impacts and standardize ESG reporting quality and consistency. Here are the key features of ESRS:
1. Double Materiality
- Financial Materiality: Companies must assess and report on sustainability matters that could affect their financial performance, position, or cash flows. This involves analyzing how environmental, social, and governance issues might impact the company’s financial health.
- Impact Materiality: Companies are also required to disclose how their activities impact the environment and society. This includes reporting on the company’s contributions to climate change, resource depletion, social inequalities, and other sustainability issues.
2. Comprehensive ESG Disclosures
- Environmental: Companies must report on their strategies and performance related to climate change, including mitigation and adaptation efforts. Disclosures should cover areas such as greenhouse gas emissions, energy use, water and waste management, biodiversity, and pollution.
- Social: Reports should include information on workforce-related issues such as employee well-being, diversity and inclusion, and labor practices. Companies must also address their impact on human rights, community engagement, and social value creation.
- Governance: Disclosures should cover governance structures and practices, including board diversity, executive remuneration, business ethics, and anti-corruption measures. Companies should also report on their risk management frameworks and internal controls related to ESG issues.
3. Sector-Specific Standards
- The ESRS include sector-specific standards that tailor reporting requirements to the unique characteristics and risks of different industries. This ensures that disclosures are relevant and meaningful, reflecting the specific sustainability challenges and opportunities faced by each sector.
4. Assurance and Verification
- To enhance the credibility and reliability of sustainability reports, companies are required to obtain limited assurance from an independent third party on their reported information. This step is intended to build trust among stakeholders and improve the quality of disclosures.
5. Digital Reporting
- Companies are encouraged to use digital formats for their sustainability reports, which facilitates easier access, analysis, and comparison of data by stakeholders. This aligns with broader trends towards digitalization in corporate reporting, making information more accessible and user-friendly.
6. Alignment with Global Standards
- The ESRS are designed to align with international sustainability reporting frameworks such as the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD). This alignment helps reduce the reporting burden on companies operating across multiple jurisdictions and ensures consistency in global sustainability reporting.
7. Governance and Risk Management
- Companies must detail their governance structures and processes for managing sustainability-related risks and opportunities. This includes describing the roles and responsibilities of the board and management in overseeing ESG matters and integrating these considerations into the company’s overall strategy and risk management framework.
By adhering to these requirements, companies can provide stakeholders with a comprehensive view of their ESG performance and impacts, ultimately contributing to more informed decision-making and sustainable business practices. The ESRS represent a significant step towards standardizing sustainability reporting across the EU, promoting greater transparency and accountability.
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