The sustainability reporting landscape is expanding worldwide as more recognize the importance of ESG in sustainable economic development. Sustainability and the success of a company are linked together, with climate change and societal norms impacting businesses worldwide. As companies and investors begin to realize their impact towards the environment and the risks and threats brought about by climate change, holding companies accountable for their actions is a great leap towards sustainable development.
Mandatory sustainability reporting initiates companies to make impactful decisions and changes that mitigate or eliminate future negative impacts towards people and the planet. This helps companies build better strategies that do more good and do less harm.
One milestone in sustainability reporting is the Corporate Sustainability Reporting Directive (CSRD) introduced by the European Union (EU). The CSRD, in response to the rising need for reliable sustainability information from investors and financial institutions, helps improve the quality of non-financial information disclosures through double materiality, mandatory assurance, and the introduction of the European Sustainability Reporting Standards (ESRS).
To guide organizations in reporting their sustainability performance, the European Commission (EC) released the European Sustainability Reporting Standards. Aligned with the CSRD, the ESRS elaborates on the reporting requirements companies under the CSRD have to follow.
Sustainability reporting using the ESRS is mandatory for companies under the CSRD as of January 2024. This new standard requires companies to report disclosures that cover details on the organization’s governance, strategy, impact, risk and opportunity management, and their metrics and targets.
ESRS 1 goes through the general sustainability reporting requirements. This covers relevant concepts and principles, guiding companies on how to create their sustainability reports under the CSRD. This further explains the need for double materiality, stakeholder management, and structured sustainability statements,
One of the key highlights in the ESRS 1 is how it mandates companies to disclose all material information in relation to their sustainability-related impact, risks, and opportunities. This also covers the need to disclose information under governance, strategy, impact, risk and opportunity management, and performance disclosures. Lastly, on materiality, the ESRS 1 elaborates on double materiality and its application during the reporting process. For double materiality, a business has to cover how these sustainability factors impact the business financially and how the business impacts both the people and the planet across the value chain.
Stakeholder management is also vital when making a sustainability report. This ensures that the business is aware of its stakeholders and how they exist and relate among each other, assessing the impact they have on the business and the impact the company has on them. With the ESRS, companies are required to identify their stakeholders and the relationship they have with the business and the value chain. In addition, the ESRS also asks companies to identify primary users of the sustainability report, which can include financial institutions, investors, government organizations, and unions.
Through the ESRS 1, businesses are given clear guidelines and the minimum requirements needed to fulfill reporting requirements through standardized and effective reporting.
In ESRS 2, the general disclosure requirements, regardless of sector and relevance to the business, are detailed. General disclosures can be segmented into key pillars: governance, strategy, impact, risk and opportunity management, and their metrics and targets.
For governance, this covers processes, policies, and structures on how to manage sustainability-related impacts, risks, and opportunities. In this section, reporting companies have to explain how they integrate sustainability into corporate governance. Strategy disclosures explain how the company incorporates sustainability in their business practices, long-term plans, and in critical decision-making processes. Companies also must disclose the sustainability impact, risk, and opportunities the business has. In this section, they must elaborate on the processes they used to identify these and their materiality, and the strategies and initiatives they have in place to manage these factors. Lastly, reporting under the CSRD and ESRS requires businesses to disclose their metrics, targets, and their sustainability performance. A reporting company must be able to explain their performance and their progress, regardless if they are on track or not.
The ESRS also presents ten topical standards. Reporting using these standards are not mandatory, yet can help companies review and evaluate their sustainability performance through specific frameworks for ESG topics. These standards can help reporting be more robust and detailed. Currently, the ten topical standards, which cover environment, social, and governance topics, are as follows:
Sector-specific standards help businesses expound more on ESG factors critical and relevant to their sector as each sector has a unique and distinct relationship to sustainability. To address this need for more detailed reporting, the European Commission is currently developing these standards, which may be finalized and ready for adoption by 2026. By creating detailed reporting disclosures, sustainability reporting will be more effective, guiding businesses, leaders, and institutions on how to better reshape the world for sustainable development.
The ESRS is ready for use by 2024 and is expected to be seen in sustainability reports published in 2025. Sustainability reporting using the ESRS is mandatory for companies under the CSRD through a phased approach. Reporting starts in 2025 for FY 204 for Public Interest Entities and other large companies with more than 500 employees, a balance sheet of more than €25 million, and a net turnover of more than €50 million for the past two consecutive years.
For reporting in 2026 for FY 2025, large companies with more than 250 employees, a balance sheet of more than €25 million, and a net turnover of more than €50 million for the past two consecutive years are now under the CSRD.
Listed companies on EU-regulated markets with at least 10 employees, €450,000 balance sheet total, and €900,000 net turnover for the past two consecutive years are applicable for reporting by 2027 for FY 2026. Non-EU parent companies with a net turnover of more than €150 million are required to report by 2029 for FY 2028.
Given the establishment of other reporting standards prior to the ESRS, businesses may be challenged with the transition from one reporting framework to the ESRS. For example, the GRI Standards are used worldwide and the recent finalization of the ISSB Standards can be a hurdle businesses have to overcome.
To ease this transition, the GRI and the ISSB have worked closely with the European Commission to align the standards together, ensuring that reporting companies can effectively use them together without having to worry about additional effort and duplication.
The CSRD and the ESRS are setting a path for robust reporting and better transparency and accountability, equipping business leaders with the tools they need to recognize the importance of sustainability and establish better business practices for the future of communities and the planet. With the ESRS on its first year of reporting, businesses should get ready for new regulations by understanding these new requirements, assessing their materiality, measuring their impact, and continuously improving towards sustainable development.
At Keslio, we are deeply passionate about sustainability, equipping us with the expertise and extensive network needed to guide clients through their sustainability journey effectively and efficiently. Our expertise is particularly valuable for companies looking to embed sustainability practices into their businesses and investors looking to integrate ESG and impact into investment portfolios. To learn more about how Keslio can assist your organization on its sustainability journey, please don't hesitate to get in touch with us.
