On July 31, the European Commission adopted the first set of rules under the European Sustainability Reporting Standards (ESRS).[1] The ESRS is an important follow-up to the adoption of the Corporate Sustainability Reporting Directive (CSRD) in January by the European Union (EU). CSRD requires EU and non-EU companies with activities in the EU to file annual sustainability reports. EU companies—including EU subsidiaries of non-EU companies—will file reports prepared in accordance with ESRS.
The ESRS will apply to all 27 EU member states, and reporting will be required as early as the 2024 reporting period. The ESRS addresses three areas:
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General reporting principles
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Mandatory disclosure requirements related to the identification and governance of sustainability matters
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Ten environmental, social, and governance (ESG) topics where disclosure is required (climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy, own workforce, workers in the value chain, affected communities, consumers and end-users, and business conduct)
Disclosures under the 10 ESG topic areas are based on the concept of “double materiality.” What this means is that disclosure is required if a matter is material from either a financial standpoint (similar to the standard applicable to audited financial statements) or from an impact perspective. Determining whether a matter has a material impact brings with it much judgment and is sure to be one of the more difficult aspects of the standards to address.
The standards published in July are only part of the guidance to be issued. Additional sector-specific standards will come out addressing issues unique to information technology, electronics, pharmaceuticals and biotechnology, and others. Additionally, standards for non-EU parent companies will be released.
To say that the ESRS gets rather granular would be an understatement. Clocking in at 245 pages, there’s a lot to go through. The standards describe the disclosure requirements in significant detail. This means that now, more than ever before, it is critical to establish strong internal controls over all aspects of sustainability disclosures, treating this area no differently than the requirements associated with accounting and financial reporting.
1 European Commission, “ANNEX to the Commission Delegated Regulation (EU) supplementing Directive 2013/34/EU of the European Parliament and of the Council as regards sustainability reporting standards,” July 31, 2023, https://ec.europa.eu/finance/docs/level-2-measures/csrd-delegated-act-2023-5303-annex-1_en.pdf.
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