Get Ready for the European Sustainability Reporting Standards: A Comprehensive Guide for Businesses

The European Union (EU) leads the fight against climate change globally and promotes sustainable business practices. As a part of their ongoing commitment and undertakings, the EU has implemented the Corporate Sustainability Reporting Directive (CSRD), which plays a crucial role in further expanding the requirements for sustainability reporting for businesses operating in the European market.

This article serves as a comprehensive guide for businesses of varying sizes, navigating the complexities of the CSRD and the newly introduced European Sustainability Reporting Standards (ESRS).

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Why is the CSRD Important?

The EU, which is also a large economic bloc with a population of more than 447 million, contributes significantly to global greenhouse gas emissions, accounting for approximately 10%. However, the EU is also undertaking exemplary leadership measures to reduce carbon emissions. The bloc is determined to surpass its initial target of a 20% reduction in emissions by 2020, compared to the emission levels of 1990.

Furthermore, the EU has set quite ambitious targets for the future, aiming for a 40% reduction in domestic carbon emissions by 2030 and complete decarbonisation by the end of 2050.

The CSRD plays an integral role in achieving these ambitious sustainability goals. By strictly mandating comprehensive sustainability reporting, the EU aims to:

Increase transparency and accountability of businesses with respect to their environmental and social impact.

Enhances smart decision-making abilities for stakeholders, which includes investors, consumers, and NGOs, to take strategic decisions based on a company's sustainability performance.

Drive innovation and investment in sustainable practices across a diverse range of industries and sectors.

Create a level playing field for businesses operating in the EU market by holding them accountable and responsible for the impact on climate.

Who Needs to Comply with the CSRD?

The CSRD works for a broader range of companies compared to the previous Non-Financial Reporting Directive (NFRD). Here is a simple breakdown of who needs to comply with the CSRD:

Large companies and most listed companies in the EU: This applies to any company incorporated or with a registered office in the EU that meets at least two out of the following three criteria:
- More than 250 employees
- A balance sheet total exceeding EUR 20 million
- A net turnover exceeding EUR 40 million

Large subsidiaries of non-EU parent companies (with some group exemptions): This applies to subsidiaries of non-EU parent companies operating in the EU if they meet the criteria mentioned above. However, there are exemptions for certain groups where the non-EU parent company prepares a consolidated sustainability report that complies with the CSRD.

Non-EU companies with a turnover in the EU exceeding EUR 150 million: This applies to all the companies that have headquarters outside the EU, but with a solid presence in the EU market. If their annual turnover in the EU exceeds EUR 150 million, they will be required to comply with the CSRD.

The CSRD aims to increase transparency and accountability surrounding sustainability practices across a wider range of companies compared to the previous Non-Financial Reporting Directive (NFRD).

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What are the European Sustainability Reporting Standards (ESRS)?

The ESRS are a series of comprehensive reporting standards ascertained by the European Financial Reporting Advisory Group (EFRAG) under the mandate of the European Commission (EC). These standards outline the specific information companies are liable to disclose in their sustainability reports.

The European Commission unveiled the first iteration of the European Sustainability Reporting Standards (ESRS) in July 2023. Companies within the scope of the CSRD will start applying these standards around the 2024 reporting period, depending on the specific categories they belong to.

What Impact Will the ESRS Have on Businesses?

The ESRS are strategically designed to be ambitious and significantly impacts the scope, volume, and detailed information regarding efforts toward sustainability which companies need to collect and report. Some of the key aspects of ESRS are as follows:

Double Materiality: The ESRS bring forth the concept of "double materiality," which requires companies to submit reports on how their business activities impact the environment and society. Moreover, it also looks after how sustainability-related matters affect their financial performance. Basically, it combines both environmental and financial perspectives.

Expanded Reporting Boundary: Companies must take into consideration their entire value chain, encompassing not just their own operations but also the sustainability practices of their suppliers and customers. Every aspect of the business should be in alignment with the core principles of ESRS.

Detailed Disclosures: The ESRS mandate focuses on specific disclosures across four key reporting areas:

Governance: Sustainability governance practices and policies within the company.
Strategy: How sustainability undertakings are integrated into the overall business strategy and operations.
Impact, Risk, and Opportunity Management: Identification and management of sustainability-related risks and areas of opportunities and improvement.
Metrics and Targets: Specific environmental, social, and governance (ESG) metrics and targets companies must report regularly.

What Do Businesses Need to Do Now?

The CSRD and ESRS both represent a dynamic shift in sustainability reporting requirements for businesses in the EU. Here are some key steps businesses can take to prepare:

Understand the Impact: Assess whether and how your company can benefit from the CSRD standards. Take into consideration the size of your company, structure, and operations within the boundaries of the EU.

Identify Reporting Requirements: Become well versed with the ESRS and obtain the specific information you will need to report on, as per your industry and materiality assessments.

Perform a Gap Analysis: Evaluate your current sustainability reporting practices and identify any gaps in meeting the ESRS requirements.

Develop a Plan: Draft a detailed and comprehensive plan to implement the necessary changes to your data gathering process, reporting processes, and internal operations.

Seek Professional Support: Consider seeking expert guidance from consultants such as The OAK Network, who specialises in sustainability reporting and compliance with the CSRD and ESRS.
Invest in Technology: Focus on robust data management and reporting systems and streamline your compliance efforts and provide valuable insights for long-term sustainability initiatives.
Engage Stakeholders: Proactively engage with stakeholders, including investors, customers, and even NGOs. This will help you to understand their expectations and concerns regarding sustainability. Open communication fosters credibility, trust and transparency.
Upskill Your Workforce: Train your employees on the CSRD and ESRS requirements, as well as the importance of sustainability practices among employees within your organisation.
Start Early: Don't wait until the last minute to start preparing yourself for the CSRD. Prior planning and implementation will ensure a smoother transition and avoid potential compliance issues in future.
Embrace the Opportunity: View the CSRD and ESRS not as a form of fetter but as an opportunity to enhance your sustainability performance, improve stakeholder engagement, and gain a competitive edge in the rapidly evolving marketplace.

Here are some additional considerations for businesses:

Phase-in Timeline: The CSRD will be implemented in phases. The first companies to comply will be large, listed companies and the ones that exceed certain thresholds in 2024, with the opportunity to expand to smaller companies in subsequent years.

Sector-Specific Standards: While the initial set of ESRS provides a general framework, additional sector-specific standards are under the works for further tailored and customised reporting requirements.

Assurance Requirements: While assurance (verification by an independent third party) is not mandatory for all companies initially, it may become mandatory in the years to come. Businesses should bear this in mind and be prepared for this possibility.

Conclusion

The CSRD and ESRS represent a dynamic step forward in the EU's commitment to sustainability. By embracing these regulations and consciously implementing the necessary changes, businesses can ensure compliance, enhance their sustainability efforts and performance, and contribute to a more sustainable future for all.

At OAK Network, we are here to help businesses navigate the intricacies of the CSRD and ESRS. We offer a whole range of sustainability solutions, including energy data management, reporting tools, predictive analysis and expert consultancy services.

Contact us today to learn more about how we can help your business thrive in the new era of sustainable reporting.

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