CSRD and ESRS - a new quality of reporting
We have known for a long time that in today's dynamic business environment, corporate social and environmental responsibility is becoming increasingly important. The idea of sustainability is gaining momentum all the time and is already an integral part of almost every field of business. We have become accustomed to the fact that it is no longer just a marketing slogan, but has become an obligation affecting companies around the world. In order to meet the expectations of stakeholders and contribute to the achievement of global sustainability goals, at the end of 2022 the European Commission adopted the CSRD, followed in July 2023 by the new reporting standards, or ESRS, which are an integral part and complement of the new directive. The goal of both of these documents is to standardize and streamline the non-financial reporting process. This entails not only challenges - as we think today - but also opportunities.
A few words about the CSRD
I have devoted a separate article to the CSRD, but a few words as a reminder. It aims to expand the scope and quality of non-financial reporting. In addition, it covers more companies than previous directives and introduces a number of key changes:
Increase in Scope - will include large companies that are listed on EU regulated markets and companies with significant social and environmental impact. This means that many more companies will be required to publish non-financial reports.
Common Report Structure - introduces a standard structure for non-financial reports to improve data comparability and information transparency.
Enhanced Verification - will require verification of non-financial reports by independent verifiers. This will increase the reliability of the information provided.
Consolidated Group Reports - parent companies will be required to publish consolidated reports that include data from all group companies.
What are these ESRSs?
ESRS (European Sustainability Reporting Standards), or sustainability reporting standards, complement the CSRD, which was adopted at the end of 2022. Their aim is to increase the reliability and comparability of companies' reported information on sustainability activities. EU companies will have to report their sustainability activities more accurately and uniformly. The adoption of the ESRS is a milestone toward harmonizing and standardizing sustainability reporting, which will make it much easier to assess the social, environmental and economic impact of companies' activities.
The ESRS are a comprehensive set of guidelines that define how companies report their sustainability activities. Here are the key features of the ESRS:
Cover all companies - they make reporting mandatory not only for large corporations, but also for medium-sized and smaller companies. This means that information on their environmental, social and economic impact will have to be presented by many more companies.
Introduce key indicators - introduces a set of specific indicators that companies should include in their reports. These include, among others, greenhouse gas emissions, social inequality indicators, investment in research and development, and many other categories.
Address the entire value chain - they place a strong emphasis on reporting sustainability activities in the supply chain as well. Companies will have to track and report the impact of their business partners on their sustainability goals. This is an important step toward increasing transparency and scrutiny of activities among the entire set of contractors as well.
Mandate independent verification - require companies to have their non-financial reports independently verified by external parties, which will improve the credibility and reliability of the information published in the reports.
Introduce the three pillars of sustainability - they are based on the three pillars of sustainability: economic, social and environmental. This means that companies will have to disclose both their financial performance and the social and environmental impact of their operations in their annual reports. These three pillars form the basis of the ESRS structure, which aims to ensure comprehensive and consistent non-financial reporting by companies.
Here is a brief description of each of the ESRS pillars:
Economic Pillar: This pillar focuses on aspects related to the financial and economic performance of a company's operations. Under this pillar, companies report data on their financial performance, risk management, innovation, investment, and report on the overall impact of their operations on the economy. This information allows stakeholders to assess how a company's operations contribute to sustainable economic growth.
Social Pillar: This pillar covers aspects of a company's social impact and stakeholder relations. Under this pillar, companies disclose information on labor issues, human rights, diversity, employee health and safety, community relations and community involvement. This provides an assessment of how the company contributes to improving living and working conditions in the community.
Environmental Pillar: This pillar focuses on a company's impact on the environment. Companies report here on their environmental practices, energy efficiency, greenhouse gas emissions, waste management, natural resource consumption and biodiversity conservation efforts. This information makes it possible to assess how a company contributes to environmental protection and works toward sustainable resource management.
A structure based on these three pillars aims to ensure consistency and comprehensiveness in non-financial reporting, enabling stakeholders to better understand the impact of companies' activities on various social, environmental and economic aspects. With this structure, companies can provide comprehensive information to better assess their commitment to sustainability.
What are the differences between the ESRS and GRI Standards?
When comparing the European ESRS Standards with the Global Reporting Initiative (GRI) Standards, there are several significant differences:
Geographic scope - ESRS are specifically tailored to the requirements and economic and business realities prevailing in the European Union, while GRI Standards are applied at the global level.
Focus on European Union priorities - ESRS have a strong focus on the sustainable development goals and priorities set by the European Union, which can lead to greater consistency of action among member states. The GRIs, due to their global nature, focused more strongly on the ESG factors themselves, rather than reflecting them in local realities.
Supply chain requirements - The ESRS introduce more detailed requirements in this area, focusing on the European Union region, which will require companies to be more transparent and scrutinize the activities of their contractors. GRI Standards leave some flexibility in interpreting the guidelines and can be applied globally.
Challenges and opportunities
As I mentioned earlier, the introduction of CSRD and ESRS brings both challenges and opportunities for companies:
Challenges Companies will need to adjust their reporting processes, collecting more detailed and accurate data. Requiring verification may also incur additional costs.
Opportunities With more detailed non-financial reporting, companies can gain greater acceptance among investors, customers and the public. Transparent and comprehensive reports can help increase trust and strengthen brand image.
In conclusion, CSRD and ESRS are the next step towards more responsible, transparent and sustainable business in Europe. While they present some challenges, they also provide an opportunity for companies to demonstrate their commitment to building a better future for society and the environment. Investors, in turn, will find it easier to compare ESG market data and make more informed investment decisions based on it.