The CSRD, the European Union’s Corporate Sustainability Reporting Directive, will gradually introduce new obligations to provide more detailed and comparable information on the sustainability of companies and the non-financial aspects of their business from 2024. ESRS (European Sustainability Reporting Standards) provide guidance on what information companies will be required to report and how.
The obligation of non-financial reporting will not pass away for a significant number of companies operating in EU Member States and beyond. The content of reporting is determined mainly by the CSRD and other EU legislation, and implementing acts and national legislation will also play a significant role. Common standards, procedures and terminology are essential to ensure that the information in reports and companies’ ESG-related outputs in general are understandable and comparable. This is where the ESRB – the EU sustainability reporting standards, which have now been finalised – come into play.
In the following article, we summarise the basic information about ESG standards, what they mean, who they are binding on and what specific disclosure requirements they contain.
What are the EU sustainability reporting standards?
The EU Sustainability Reporting Standards, adopted by the European Commission under delegated powers (European Sustainability Reporting Directive – ESRS), are the new mandatory EU standards to which CSRD companies must align their ESG reporting. The aim of these standards is to ensure that companies that fall within their scope report comparable, relevant and reliable sustainability information, while being absolutely clear about what they are expected to report. For the first time ever at an EU-wide level, environmental, social and governance information and corporate sustainability disclosures will be required in a standardised, comparable and more consistent format – just like financial reporting.
The ESRS standards have now been finalised and will be the main source of information for the preparation of the non-financial reporting – ESG report, which will be mandatory for many companies from 2024, after the end of the audit period and after the entry into force, i.e. from 1 January 2024. Both the first drafts, published in November 2022, and the current current and final version of the ESG standards were prepared by the European Commission in cooperation with the European Financial Reporting Advisory Group (EFRAG[1]).
ESRS standards consist of individual standards that cover different aspects of the sustainability of a company’s operations. These include, for example, the environmental impact of the business, social and working conditions, ethics and governance, supply chain, customer responsibility and other relevant areas. These standards provide precise definitions of indicators, measurement methods and reporting methods to be used by companies when reporting on sustainability (more on this later in the article).
The twelve ESGs are categorised into (i) general reporting principles, (ii) cross-cutting disclosure requirements and (iii) thematic disclosure standards on ESG topics (more on these later in the paper).
What should the reporting contain?
The key areas and requirements for sustainability reporting under ESRS are as follows:
ESRS 1 – General requirements:
- define basic general standards and regulations for sustainability reporting.
ESRS 2 – General information:
- contain basic information about the company, including identification, reporting period and other basic data.
ESRS E1 to E5 – Environmental aspects:
- E1: Climate change;
- E2: Pollution;
- E3: Water and marine resources;
- E4: Biodiversity and ecosystems;
- E5: Resource use and circular economy.
ESRS S1 to S4 – Social aspects:
- S1: Own workforce;
- S2: Workers in the value chain;
- S3: Affected communities;
- S4: Consumers and end-users.
ESRS G1 – Governance: this section contains requirements relating to the governance of the company and how it manages its sustainability initiatives.
Each of these areas and sub-sections contains specific requirements and standards for reporting sustainability information in a given topic or area to provide companies with a comprehensive view of their activities and their environmental, social and governance impacts[2].
Deferral of effectiveness for certain undertakings
The European Commission has presented a new proposal to amend Directive 2013/34/EU of the European Parliament and of the Council, which aims to postpone the deadline for the implementation of ESRS standards for companies operating in certain sectors and certain third country entities until 30 June 2026. The aim of this measure is to facilitate administrative procedures for companies operating in the EU, including those from third countries. It is intended to make it easier for businesses to adapt to the new requirements without undermining key sustainable development objectives, to increase the efficiency and accessibility of reporting obligations, with an emphasis on supporting small and medium enterprises.
Conclusion
The ESRS specify a harmonised format for the presentation of non-financial reporting. It is crucial for obliged entities to understand the specific requirements and learn how to collect the required data. So make sure that all information regarding your company is properly documented and ready for inclusion in your reports.
It is also essential to keep up to date with the latest information and any changes to the ESRS so that you can quickly and easily adapt your reporting processes to the new requirements. Ensuring that your non-financial repos are in line with the ESRS is important for compliance with European Union regulations and standards. Careful preparation and implementation of processes in line with these standards are key to ensuring the accuracy and credibility of your reports. The different areas of disclosure requirements (in particular environmental, social and governance aspects) are quite extensive and detailed in the ESRS. We will address these individually in our following articles.
If you have any questions about non-financial reporting, please do not hesitate to contact us, our PEYTON legal team is at your disposal.
[1] Further information can be found here: https://www.efrag.org/About/Facts
[2]Further information can be found here: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=PI_COM%3AC%282023%295303
Rachel Kouklíková, legal assistant – kouklikova@plegal.cz
Tereza Hrudková, legal assistant – hrudkova@plegal.cz
Mgr. Jakub Málek, managing partner – malek@plegal.cz
13. 2. 2024