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In an era where sustainability is no longer a choice but a necessity, the Corporate Sustainability Reporting Directive (CSRD) stands as a beacon guiding industries towards responsible growth. For founders and professionals, understanding the evolving landscape of sustainability reporting is crucial. The year 2023 has ushered in significant changes, particularly with the introduction of the European Sustainability Reporting Standards (ESRS), a set of guidelines that promises to reshape how businesses approach sustainability.
Within the European Union, the ESRS and CSRD have come together to create a comprehensive framework for sustainability reporting. The CSRD sets out the general legal requirements, while the ESRS defines the specific standards and guidelines that companies must follow to comply with CSRD. This partnership is more than a set of rules; it’s a roadmap that guides companies in disclosing sustainability information in a consistent and comparable way. For businesses, grasping the nuances of the ESRS is not just a legal necessity; it’s a strategic imperative. It’s about embracing transparency, being accountable, and aligning with a broader movement towards responsible business conduct.
This article aims to provide an in-depth exploration of the latest updates to the CSRD, in which the ESRS got published. We’ll delve into the specifics of these changes, offering valuable insights for those striving to align their business practices with the new era of sustainability. If you want to understand more about the general framework of the CSRD, please check out our previous article about this reporting directive.
DISCLAIMER: This article was written in collaboration with the IMPACT FESTIVAL, Europe’s largest B2B event and platform for sustainable innovation. This year’s edition will take place on 13 – 14 September 2023 with 170+ exhibitors, 130+ speakers on stage and over 3,000 participants. Our second partner for this article was 4L Impact Strategies. 4L Impact Strategies GmbH is a holistic sustainability strategy consultancy for medium-sized companies that want to master all sustainability challenges, become pioneers in their industry and position themselves resiliently and future-proof. 4L Impact Strategies accompanies its clients along the entire sustainability journey effectively within a lean process and enables them to implement sustainability strategically and precisely.
The journey towards sustainable regulation in the European Union (EU) has been marked by a series of significant milestones, reflecting the growing recognition of sustainability as a central concern for both economic development and environmental protection.
Building on previous efforts, the CSRD represents a significant step forward in sustainable regulation. It expands the scope of the Non-Financial Reporting Directive, requiring all large companies and all publicly listed companies to follow detailed EU sustainability reporting standards. The CSRD aims to improve the consistency and comparability of sustainability information, facilitating more informed decision-making by investors, policymakers, and other stakeholders.
The establishment of the CSRD reflects the culmination of decades of progressive policymaking in the EU, recognizing the interconnectedness of economic, social, and environmental factors.
It represents a concerted effort to integrate sustainability into the core of business practices, aligning with broader global efforts to foster responsible growth and development. As part of the final milestone of the CSRD, the European Commission has now published its proposed updates to the first draft of the ESRS.
The CSRD and the ESRS are intrinsically connected, forming a cohesive framework for sustainability reporting within the European Union. The CSRD sets out the legal requirements, mandating a broader range of companies to disclose detailed sustainability information, thereby expanding the scope of reporting. The ESRS, on the other hand, provides the specific standards and guidelines that companies must follow to comply with the CSRD, ensuring consistency and comparability across reports. Together, the CSRD and ESRS represent a unified approach to enhancing transparency, accountability, and sustainability in business practices.
The ESRS is composed of 12 standards. Two cross-cutting standards provide general reporting concepts and include overarching disclosure requirements including multiple data points and reporting spheres. Ten topical standards complement these with detailed disclosure requirements across environmental, social, and governance topics. Together, these twelve ESRSs require companies to provide information on:
For the first wave of companies, disclosures will be required as early as the 2024 reporting period. However, it is not done with the first twelve standards. The following graphics provides a more visual representation of the interaction of the two cross-cutting and topic-specific standards.
The implementation of the ESRS standards will create impactful changes based on:
But what exactly will companies need to disclose? The first topic is the environmental aspect of business, mainly reporting on climate change, pollution, water & marine resources, biodiversity & ecosystem, and resources use & circular economy. The second main topic is the social dimension of the business conduct focusing on the own workforce, workers in the value chain, affected communities and consumers and end users of the goods and services produced. The third major topic is governance where the companies must focus on reporting on their overall business conduct.
These three topics will be reported in four strategic areas:
As we already mentioned the topic of materiality twice in the four strategic reporting areas, we now need to take a look at the key features of ESRS to better understand the reporting requirements and characteristics of ESRS in detail.
The ESRS sets detailed reporting standards and requirements for companies under the CSRD. These requirements and standards can be summarized into seven specific characteristics of the ESRS, which we are going to present to give you an understanding of the extent to which companies need to report and justify their reporting.
The newly proposed standards by the EU have been open for discussion and comment over the last one and a half years. In the months leading up to the publishing of the ESRS, there have been some significant changes made to the regulatory requirements.
As the reporting requirements are broad and detailed, so will the impact of the ESRS be on the businesses that need to report on all the material topics in the future. As we have highlighted before, the new standards will require a large amount of accurate, detailed, and overall extensive information and data on all topics. This will be a huge challenge for companies since they do not only need to track their own workforce and practices but also need to observe the value chain of their products and services. Overall, reporting will get a lot more detailed and complicated for companies that did not need to report that extensively in the past.
The ESRS will put a spotlight on areas of business that other regulations have neglected in the past. Stronger focus on sustainability in the business strategy of all companies, a focus on ESG factors, and reporting on internal company policies will require some to reconsider their business practices.
We now have talked about the different areas of reporting, the characteristics of the ESRS, and the impact of the 12 new standards established. But what do companies need to do now? Especially since the bigger companies under CSRD already need to report on the ESRS requirements starting as early as next year!
The introduction of the CSRD and the ESRS has ushered in a new era for the finance industry. Let’s delve into how these changes are influencing various facets of the sector.
For many banks and financial companies, the CSRD isn’t merely a regulatory hurdle; it’s a transformative opportunity. Here’s how:
In today’s business world, innovation is taking on a new dimension. It’s no longer just about inventing new products or services; it’s about a fundamental shift in the way companies operate, embracing new business practices, product paradigms, and even entire business philosophies.
The finance industry finds itself at the heart of this transformation. By strategically investing in companies that are not merely adapting but actively leading this change, financial institutions become more than investors; they become partners in progress.
The introduction of fresh reporting standards has provided the finance industry with a new perspective. These standards aren’t just rules to follow; they’re tools that enable financial professionals to discern which companies are genuinely driving innovation and positive impact.
This isn’t just a business opportunity; it’s a call to action. It’s about identifying, supporting, and growing those companies that are forging new paths, those that are committed to more than just the bottom line. By aligning with these pioneers, the finance industry is not only investing in promising businesses but also in a future where success is defined by responsibility, purpose, and transformative growth.
In the ever-evolving landscape of business, the CSRD emerges not merely as a regulatory mandate but as a beacon guiding companies toward a future where sustainability is at the core of strategy and success. Here’s how:
Transparency: A window into the future
Building bridges: Stakeholders and sustainability
A new era for corporate strategies
The CSRD isn’t just about what companies do; it’s about why they do it. It’s a call to align business practices with a greater purpose, to see sustainability not as a constraint but as a catalyst for innovation, growth, and lasting success. In the end, it’s about forging a future where business and sustainability are not just aligned but inseparable.
The ESRS have arrived, heralding a new era of transparency and accountability in sustainability reporting. But like any significant change, the ESRS has not been without its critics. Let’s delve into some concerns and debates surrounding these new standards:
A shift from original intent?
Some experts have expressed concern that the finalized ESRS represents a dilution of the original drafts’ robustness. The question lingers: Have the standards lost some of their initial ambition and rigor?
Who’s accountable?
The intricacies of materiality and comparability
In the end, the ESRS’s success will depend on our collective ability to navigate these complexities, embracing the challenges as opportunities to refine and redefine how we approach sustainability. It’s a journey filled with promise and one that invites us all to be both critical thinkers and visionary leaders.
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