On July 31, the European Commission adopted new sustainability reporting standards that will impact not only companies around Europe but throughout the world. The European Sustainability Reporting Standards, or ESRS, are designed to bring more transparency, consistency and accountability to how companies report on climate change and their other environmental, sustainability and governance (ESG) practices.
These standards are revolutionizing the way companies are required to report on their non-financial information and will require much more sustainability reporting than many are doing today.
The EU’s ESRS are the next step in the expanding future of ESG reporting. Here is what you need to know about these new standards.
Why were the EU’s ESRS developed?
In recent years, a magnifying glass has been set over ESG and how companies support these practices. These areas include how companies are reducing their negative environmental impacts; how they manage their relationship with employees, suppliers, customers and community; and how the company manages itself, including through executive pay and compliance with regulations and standards.
Thus far, the European Union has been a key trailblazer in leading the way and creating requirements for not only how companies should implement ESG standards but also how they report on their progress. The EU’s European Green Deal, which requires an assessment of companies’ sustainability performance, prompted the need for a standardization when it comes to reporting. To date, the EU found that sustainability information has not been sufficient to provide investors, consumers or other stakeholders with a clear scope over a company’s progress, or an apples-to-apples comparison to evaluate companies against each other.
The ESRS are the first step, and a significant one, in an answer to how to capture and formalize this information.
What do the ESRS require?
The ESRS are creating a system in which companies disclose ESG-related progress in a way that can capture comparable information in a standardized way. The first 12 standards that have been adopted are broken into four reporting categories:
Environmental
- Climate
- Pollution
- Water and marine resources
- Biodiversity and ecosystems
- Resource use and circular economy
Social
- Own workforce
- Workers in the value chain
- Affected communities
- Consumers and end users
Governance
Cross-cutting
- General requirements
- General disclosures
Under the new standards, companies must report on a “double materiality” perspective. This means they must report on both their impacts on people and the environment, as well as how social and environmental issues create financial opportunities and risks for the company. Companies are also required to share if they have improved sustainability performance.
More drafts of standards are being developed and are expected to be released in late 2023 or 2024.
What does this mean for companies?
The standards will be rolled out in phases to provide companies time to prepare for the new requirements. When they are fully launched, an estimated 50,000 entities will be affected.
The first group expected to comply are companies with an existing reporting obligation under the NFRD, or Non-Financial Reporting Directive, which must share an annual report with these measures in 2025. These are typically publicly traded and large private companies in the EU. From there, other large corporations with 250 employees or more, followed by smaller companies, will need to follow suit, respectively.
Although these are EU standards, US-based companies aren’t immune from needing to meet them. Third-country companies with branches or subsidiaries in the EU – that have a threshold of EUR 150 million in net sales in the EU over two years – will also need to comply.
The hope is that this standard will help companies reduce reporting costs in the long term by streamlining the multiple voluntary standards out there today.
The new ESRS are a big step toward the EU’s goal of becoming a fully sustainable and inclusive economic system. It’s also leading the way for how the rest of the world may soon do business.
How DevonWay can help
If you haven’t started tracking ESG data within your organization, now is the time – and DevonWay can help get you started.
As a longtime, leading provider of Environmental Health & Safety, Asset Management, Quality Management, and Workforce Management solutions to regulated industries, DevonWay now offers an ESG & Sustainability Solution in its suite, enabling companies to create ESG reporting and implement effective performance initiatives to achieve their ESG goals.
See how DevonWay can support your organization in reaching its ESG goals and meeting new standards. Request a demo today to understand how we can support you in keeping your ESG goals top-of-mind and within reach.
