- What is ESRS?
European Sustainability Report Standards (ESRS)[1] is a standardised way for companies to report their level of sustainability. It is useful to understand the position of the ESRS concerning other European Union legislation. The EU is currently pursuing the objectives set out in the programme known as the European Green Deal, which aims to make Europe the first climate-neutral continent and thus prevent rapid environmental change, the consequences of which could be catastrophic for any attempt at economic and social growth. As part of this programme, the so-called Accounting Directive[2] has been amended. This amendment, in force since January this year, is called the CSRD[3] and requires the European Commission to supplement this Directive with standards for sustainability reporting[4]. Thus, after a month-long comment procedure, the Commission adopted the final ESRS on 31 July 2023. As neither the European Parliament nor the Council objected by the end of September, the current ESRS entered into force.
- Why is sustainability reporting important?
The purpose of the ESRS is primarily to clarify the information to be reported by companies under the CSRD[5]. Until now, companies have mainly reported this information through non-standardised methods, which has led to situations where they have been confronted with issues that are not in any way related to their field of activity. More bureaucracy and time consumption means more resources and less efficiency. The reverse is also true, that is if a company uses non-standard methods, some information may be omitted. The absence of information on the sustainability of a company creates the impression of a company’s lack of credibility and thus deters potential investors, especially as they have certain sustainability standards that their investments must meet as set out in the SFDR[6]. Another disadvantage of non-standardised reporting is the inability to compare the level of sustainability of individual companies with each other, which reduces the efficiency of the market as a whole. This is what the ESRS addresses and prevents.
ESRS allows companies to assess how their activities affect people and the environment. This also allows them to see whether or not their activities are bringing them financial benefits. ESRS offers a comprehensive solution for the whole market, as sustainability information is not only used by the company itself but also by investors, consumers, public bodies and non-profit organisations.
- Who will be affected and from when?
The obligation to report sustainability information under the Accounting Directive, or CSRD, goes hand in hand with the obligation to use the ESRS to meet this objective. However, this obligation comes in phases. The regulation prioritises large companies that have so far been subject to the NFRD[7], i.e. large listed companies, large banks and large insurance companies if they have more than 500 employees, as well as large non-EU listed companies with more than 500 employees. They are obliged to report sustainability using ESRS for the 2024 financial year, with the first sustainability statement published in 2025. Other large companies, including other large non-EU listed companies, are obliged to do so for the 2025 financial year and thus publish their first sustainability statement in 2026. This means a large company within the meaning of Article 3(4) of the Accounting Directive, i.e. companies that exceed at least two of the three thresholds of a balance sheet total of €20,000,000, a net turnover of €40,000,000 and an average number of 250 employees during the financial year at the balance sheet date.
As for SMEs, they will not be obliged to report until the 2026 financial year, and will therefore publish their first sustainability statement in 2027. However, if they are listed, they have the right to opt out of the reporting requirements for the next two years and start complying with their obligation in the 2028 financial year, with the first sustainability statement published in 2029.
- What is the structure of the ESRS?
The structure has been retained as proposed by the original institution, EFRAG[8]. It was inspired by the sustainability reporting standards introduced by the independent international organisations GRI and IFRS. At the same time, the Commission gave companies more flexibility within the standards to decide what information to report. This includes a greater number of reporting requirements that companies can omit if they are not relevant to their particular circumstances.
In its final form, the ESRS is a 250-page document. The final structure of this document is divided into two parts, which for the sake of clarity can be called the general and the special parts. The general part is further divided into two chapters, general requirements and general information, labelled ESRS 1 and ESRS 2 respectively. The general requirements do not in themselves constitute specific requirements, but are a description of the principles to be followed in drawing up the statement. The general information then sets out the basic list of information that each company must include in its accounts, irrespective of relevance.
Finally, the special section is further divided into 3 headings: environment, society and corporate governance, i.e. ESG. The individual headings are further divided into chapters. The environment theme covers climate change, pollution, water and marine resources, biodiversity, ecosystems, resource use and circular economy. The society heading focuses on the company’s workforce, affected communities and consumers. The management section deals with corporate behaviour.
- How can we help you with your statement?
Are you unsure about the new reporting standard? At PETERKA & PARTNERS, we will be happy to help you with the wide range of obligations that the new reporting standard brings. We can help you understand the ESRS requirements and find the most suitable solution for your company. Based on our experience and expertise, we will prepare for you a high-quality and informative sustainability report that meets all ESRS requirements. If you want to learn how to produce such a report yourself as a company, we will train your employees on the ESRS requirements and how to produce a quality sustainability report. Alternatively, if you have already produced such a report, we can arrange for an independent audit to verify its quality and compliance with ESRS requirements.
[1] Commission Delegated Regulation C(2023)5303, European Standards for Sustainability Reporting
[2] Directive 2013/34 on annual accounts.
[3] Corporate Sustainability Reporting Directive, Directive 2022/2464, on corporate sustainability reporting.
[4] Article 29b
[5] Article 19a in the case of companies, Article 29a in the case of concerns.
[6] Regulation 2019/2088, on disclosure of sustainable finance information.
[7] Directive 2014/95 on non-financial reporting
[8] European Financial Reporting Advisory Group
