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  • Shmulik Schwartz

Understanding European Sustainability Reporting Standards (ESRS)

Updated: Jun 8

Brussels, 31 July 2023 - In the era of conscious capitalism, transparency and accountability reign supreme. The adoption of European Sustainability Reporting Standards (ESRS) by the Commission marks a pivotal moment in corporate governance and environmental stewardship. Let's delve into the intricacies of ESRS, unraveling its significance and impact on businesses across the European Union.

Why ESRS Matters

EU law mandates large and listed companies to disclose comprehensive information on social and environmental aspects, aligning with the ethos of the European green deal. However, existing sustainability reports often fall short, lacking crucial data and comparability. This poses a challenge for investors, stakeholders, and consumers striving to assess companies' sustainability performance accurately.

Bridging the Accountability Gap

Poor quality reporting not only obscures companies' sustainability footprints but also hampers investors' ability to gauge associated risks. ESRS aims to remedy this by establishing common standards, facilitating clearer communication of sustainability performance. By mandating the use of ESRS, the Commission aims to foster greater transparency, bolster investor confidence, and channel funds towards eco-conscious endeavors.

The Development of ESRS

Collaboration and consultation underpin the development of ESRS. EFRAG, in tandem with stakeholders ranging from investors to academia, crafted draft standards aligned with the Accounting Directive. Following public consultation and refinement, EFRAG submitted the standards to the Commission, setting the stage for their adoption.

ESRS in Action

Double materiality underpins ESRS, necessitating companies to report on both their impacts on society and the environment, as well as the financial implications thereof. The twelve ESRS cover a spectrum of sustainability issues, from climate action to business conduct, ensuring comprehensive reporting across domains.

Flexibility and Materiality

ESRS adopt a nuanced approach to materiality, allowing companies to tailor their reports to their unique circumstances. Reporting requirements undergo stringent materiality assessments, ensuring relevance and reliability. Companies must disclose material information while providing detailed justifications for omissions, fostering accountability and transparency.

Modifications and Phasing-In

The Commission's modifications to draft standards by EFRAG aim to strike a balance between compliance and feasibility. Additional phase-in provisions ease the transition for smaller companies, mitigating initial reporting costs. Flexibility provisions afford companies discretion in reporting, reducing the burden of irrelevant disclosures.

Aligning with Global Standards

Alignment with global frameworks underscores the credibility and comparability of ESRS. By closely aligning with International Sustainability Standards Board (ISSB) and Global Reporting Initiative (GRI) standards, ESRS ensure harmonization and facilitate global benchmarking. This integration propels the EU to the forefront of sustainable finance, setting a precedent for global standards convergence.

Empowering SMEs

ESRS recognize the diverse landscape of businesses, offering tailored provisions for SMEs. While imposing no new reporting requirements on most SMEs, ESRS provide guidance for those subject to reporting obligations. Proportionate standards for listed SMEs and voluntary guidelines for non-listed SMEs promote inclusivity and facilitate the transition to a sustainable economy.

Implementation Timeline

Companies subject to ESRS must adhere to a phased implementation timeline, ensuring a smooth transition to standardized reporting. From large corporations to SMEs, the roadmap to compliance is clear, enabling stakeholders to prepare adequately and embrace the principles of sustainability reporting.

Conclusion: A Paradigm Shift in Corporate Reporting

In adopting ESRS, the European Commission propels sustainability reporting into the spotlight, underscoring its centrality in corporate governance and investor decision-making. ESRS herald a new era of transparency, accountability, and sustainability, empowering businesses to thrive in a rapidly evolving landscape.

For further guidance on ESRS application, stakeholders can rely on periodic publications by EFRAG and technical assistance from the Commission. Together, we embark on a journey towards a greener, more sustainable future, driven by clarity, coherence, and collaboration.

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