Uniform sustainability reporting throughout the EU - a goal that is being achieved, among other things, through the CSRD (Corporate Sustainability Reporting Directive) and the associated European Sustainability Reporting Standards (ESRS). An important step in this development is the first set of ESRS, which has been mandatory since January 01.01.2024, XNUMX.
Consequently, companies that are already required to report under the NFRD must publish their first report for the 2024 financial year in 2025. This will be followed by all other large companies with a report in 2026 for 2025, and capital market-oriented small and medium-sized companies in 2027 for the 2026 financial year.
The background of the current sustainability movement
The Paris Climate Agreement of 2015 represents a groundbreaking milestone in the global fight against climate change. With the approval of 195 countries, the goal was set to limit the increase in the global average temperature while reducing emissions.[2] The EU then launched the European Green Deal, a comprehensive initiative with the aim of making the EU climate neutral by 2050 and establishing a more sustainable economy. A central component of this Green Deal is the Fit for 55 package, which includes a series of legislative proposals and measures. This package aims to reduce the EU's greenhouse gas emissions by at least 2030% by 55 compared to 1990.[3]
The package contains the following key provisions:
- CSRD (Corporate Sustainability Reporting Directive)[4]:The CSRD is an extension of the existing Non-Financial Reporting Directive (NFRD) and is designed to increase the transparency of companies' non-financial information. It aims to improve environmental, social and governance (ESG) reporting by requiring more companies to disclose non-financial information.
- ESRS (European Sustainability Reporting Standards)[5]:The ESRS are delegated legal acts based on the CSRD and support companies in documenting sustainability aspects in a transparent, comparable and reliable manner. They provide clear disclosure requirements for reporting on environmental, social and governance issues and aim to improve the quality and comparability of sustainability reports.
- EU Taxonomy Regulation[6]:The EU Taxonomy Regulation represents the regulatory roadmap for financing a sustainable EU and was developed with the aim of establishing a comprehensive classification system for sustainable economic activities. It aims to justify the associated reporting obligations in the sustainability report within the annual report of companies. An important focus is on avoiding greenwashing by clearly reporting sustainable investments. The regulation serves to provide investors and stakeholders with a transparent basis for identifying and promoting sustainable investments.
- SFDR (Sustainable Finance Disclosure Regulation)[7]:
The SFDR sets out disclosure requirements for sustainable investments and is intended to ensure that investors and consumers receive clear information about how sustainable financial products are. This regulation aims to combat greenwashing and make the market for sustainable finance more transparent.
The European Sustainability Reporting Standards Set 1
An overview
While the CSRD determines to whom and when the disclosure requirements described in the regulation apply, the ESRS provide clear guidelines on how affected companies should implement these sustainability reporting requirements. The European Financial Reporting Advisory Group (EFRAG) is responsible for developing the ESRS and must have the drafts adopted as delegated legal acts by the European Commission.
On November 22.11.2022, 1, EFRAG published a first set of ESRS drafts (Set 1), consisting of twelve ESRS - ten topic-specific (ESRS E5-1, ESRS S4-1, ESRS G1) and two cross-cutting standards (ESRS 2 + 1). In addition to general requirements for sustainability reporting in the cross-cutting standards, various topics such as climate change (ESRS E5), circular economy (ESRS E2) or employees in the value chain (ESRS S22.12.2023) are further specified and put into context in the topic-specific standards. On December 01.01.2024, 1, the delegated act was published in the EU Official Journal and Set XNUMX of the ESRS has been mandatory since January XNUMX, XNUMX.[8]
When deciding which sustainability issues are material for the company concerned, the principle of double materiality (ESRS 1-25 ff.) is decisive. Accordingly, not only the effects of the fields of action, such as the climate, on the company (outside-in perspective) must be taken into account, but also the effects of the company on the climate and other issues (inside-out perspective). If a sustainability field of action is assessed as material in the materiality analysis, the disclosure obligations are binding.
To identify the critical sustainability areas, the organization needs to identify its significant impacts, risks, and opportunities (known as Impacts, Risks, and Opportunities (IRO)) and exclude those that are not material.
A distinction must be made between:
Main impacts: These are the lasting (positive or negative) effects that a company has on its environment and stakeholders through its business activities.
Key risks and opportunities: These are sustainability-related financial risks and opportunities that arise from dependence on natural, human and social resources.
Once the main impacts, risks and opportunities have been identified, they must be categorised. A distinction is made between potential and actual impacts, as well as between negative and positive effects, and the time horizon of the IROs (short, medium or long term) is determined.
The materiality analysis aims to identify not only the obviously material IROs of the company, but also those that arise from direct or indirect business links in the upstream or downstream value chain.
A company can waive the disclosure requirements of a topic-related standard if it considers the information concerned to be immaterial. However, if ESRS E1 (climate change) is affected in this case, a detailed explanation must be provided, which sets out the conclusions of the materiality assessment.
Overview of all data points of Set 1
A guideline for sustainability reporting
For the assessment, the overview of all data points of Set 25.10.2023 of the ESRS published by EFRAG on October 1, 29 is important, which can support the implementation of the ESRS requirements as a non-legally binding tool. The overview can, for example, serve as the basis for a GAP analysis to identify which information required by the ESRS is already being reported by the company. In addition, it can help to create the required digital labeling of the sustainability information (Article 2013d of the Accounting Directive; Directive 34/XNUMX/EU).
The overview includes a total of 1178 data points, which can be divided into narrative, quantitative and monetary information, of which 265 are optional.[10]
Implementation Guidance
EFRAG is working on supporting documents for ESRS implementation
Shortly before the end of 2023, EFRAG published the final drafts of three key ESRS implementation guidelines that serve as supporting guidance. In addition to the materiality analysis, the individual guidance documents also cover the value chain and the data points from Set 1. Their purpose is to provide companies with assistance in adapting their reporting to the ESRS based on their individual business models and needs.
Until February 02.02.2024, XNUMX, interest groups were able to provide their feedback on the drafts via EFRAG surveys, allowing companies to actively participate in the development of the standards. This feedback is now being evaluated by EFRAG - the adoption of the documents in their final version remains to be seen.[11]
- Draft EFRAG IG 1: Guide to the implementation of the materiality assessment
Contains a description of the reporting obligations related to the assessment of materiality as well as FAQs on the double materiality test. - Draft EFRAG IG 2: Guide to the implementation of the value chain
Contains a description of the value chain reporting obligations including aspects such as impact management, risks, opportunities, key performance indicators and objectives, as well as FAQs with further information. - Draft EFRAG IG 3: Detailed guidelines on the implementation of ESRS data points and accompanying explanations
Provides a list of the detailed requirements included in each disclosure requirement and its associated application requirements (ESRS data points).
Your future with Moore TK
The prospects for future corporate sustainability reporting are promising. The EU-wide uniform standards help companies to meet their social and environmental responsibilities, ensure transparency and comparability, and at the same time achieve long-term business success. Companies that familiarize themselves with these standards early on and align their sustainability efforts accordingly will not only meet the new requirements, but can also benefit from increased trust from investors and stakeholders.
Moore TK supports companies of all sizes and stages of development for which sustainability reporting is relevant. Given the complexity of the topic, an end-to-end perspective is essential.
Is your company affected by the CSRD or is sustainability relevant to you? We will work with you to successfully implement and execute it. You can find more information here.
Get in touch with us!
Sources
[1] BaFin – Sustainability Reporting – CSRD
[2] Paris Climate Agreement | BMZ
[3] The European Green Deal – European Commission (europa.eu)
[4] Directive – 2022/2464 – EN – EUR-Lex (europa.eu)
[5] First European standards for sustainability reporting (europa.eu)
[6] EU taxonomy for sustainable activities – European Commission (europa.eu)
[7] Regulation – 2019/2088 – EN – sfdr – EUR-Lex (europa.eu)
[8] The first set of ESRS – the journey from PTF to delegated act (adopted on July 31, 2023) – EFRAG
[9] Accounting Directive (IFRS), Directive 2013/34/EU (lexparency.de)
[10] ESRS: Overview of all data points of Set 1 published • DRSC Website
[11] News – EFRAG
