Sustainability Reporting Standards (ESRS)

European Sustainability Reporting Standards (ESRS)

The European Commission adopted (on 31/07/2023) the first set of European Sustainability Reporting Standards (ESRS). The Thr delegated act will be transmitted to the European Parliament and the Council, and each body can accept or reject the act, but not amend it. Companies covered by the Non-Financial Reporting Directive (NFRD) must prepare to disclose their results for 2024 in 2025. The package consists of two cross-sectoral standards providing common concepts for reporting on sustainability issues and ten thematic cross-sectoral standards, including environmental, social and governance disclosure requirements. Together, the ESRS require companies to provide information on:

• management and strategies to address essential issues of sustainable development;
• the impacts, risks and opportunities arising from these matters;
• quantitative indicators and targets.

Companies will need to assess which topics to report using the concept of double materiality. Double materiality has two dimensions – impact materiality and financial materiality. Assessments will need to be made for both areas. Companies will also need to include information from their value chain.

• Financial materiality
  Under the ESRS, financial materiality will require disclosure of sustainability issues that may have material financial effects on the company’s development, e.g. cash flows, financial position or financial results, in the short, medium or long term. Materiality will be assessed based on the likelihood and (potential) size of the financial effect.
• Materiality of impact
  The ESRS will require disclosure of sustainability matters that relate to a company’s material actual or potential, positive or negative impacts on people or the environment in the short, medium or long term. This assessment includes the company’s upstream and downstream value chain impacts. Materiality will be assessed based on the severity and likelihood of impact.

Companies should prepare that disclosures are subject to scrutiny. This means that a clear audit trail and documentation of the processes and controls to support the disclosures provided will be required.

The European Commission is introducing relief measures for companies, especially smaller ones, to give them more time to implement data collection and reporting processes.