European Sustainability Reporting Standards - this is what you should know about ESRS

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ESG reporting for many companies is an important part of their policy and strategy. It contributes to sustainability goals and helps meet non-financial disclosure requirements. As of 2024, new standardized reporting rules are in effect, replacing the former GRI Standards. We are talking about ESRS. What is worth knowing about this reporting scheme?

ESRS - what is it and what is its significance?

ESRS (European Sustainability Reporting Standards) is a new unified standard for non-financial reporting (or more specifically, sustainability reporting) prepared by EFRAG (European Financial Reporting Advisory Group). It is expected to make disappear the problems associated with a lack of reporting transparency, when individual companies could build their reports using different rating systems. They are mandatory for all companies subject to the CSRD except for those in the SME sector. These smaller companies can use the simplified ESRS LSME standards.

The main advantage of developing ESRS standards is the introduction of clear criteria for companies to implement ESG policies. The need to disclose more information on, for example, greenhouse gas emissions, market management or employment policies is expected to make a company covered by ESRS more transparent not only to stakeholders, but also to other market participants.

The ESRS guidelines consist of five elements:

• two cross-cutting standards - ESRS 1 and 2;
• three thematic standards developed for - environment, corporate area and social governance.

The important thing is that the ESRS apply directly in each member state. There is no need to implement them, so a foreign company operating in a country must meet exactly the same requirements as domestic companies.

ESRS standards - key requirements and guidelines

To understand what information a company actually has to report, it's worth taking a closer look at the double materiality rule. It is divided into impact materiality and financial materiality. It is about the impact of key issues on both the company's environment and its financial position. On this basis, specific disclosures and points to be included in the report are selected. It should be noted, however, that the principle of dual materiality applies only to thematic standards, such as environmental, and it does not matter how many levels this materiality occurs on (one or both). The double materiality principle does not apply to the cross-cutting standards - ESRS1 and ESRS2. They apply to all companies covered by sustainability reporting.

How to understand impact materiality?

The materiality of an impact can be spoken of when an issue relates - even if only potentially and in the distant future - to the company's impact on people and the environment. It can be both a positive and negative impact, and in assessing it, it is necessary to determine:

• what is the scale and scope of the impact;
• whether the impact is negative, and if so, whether its effects can be remedied;
• how likely the impact is to occur.

What is financial materiality?

Financial materiality, in turn, refers to the risks and opportunities of capital gains and losses and cash flows. It takes into account the company's access to various forms of financing and the cost of raising capital.

What areas are covered by ESRS reporting?

Now that we know when a specific issue should be included in an ESRS report, let's take a look at the different areas that can be covered by reporting:

• the environmental area covers five groups of issues - climate change, pollution, water and water resources, biodiversity and ecosystems, and resource use and the circular economy;
• the social area includes four groups of issues - the company's own employees, employees in the value chain, communities affected by the company's operations, and consumers and end users;
• the corporate governance area consists of business operations.

It is important that reporting is carried out with due diligence. The EU legislature stipulates specific requirements for due diligence on both ESRS 2 and thematic standards. In simple terms, it can be said that it is about consciously identifying potential risks, managing risks and seeking to reduce the negative impact of a company's activities on its environment.

European sustainability reporting standards - benefits for companies

Sustainability reporting should be seen not as another onerous formality, but as an opportunity for growth. Companies that consciously and responsibly implement ESG in the spirit of ESRS build their image as a reliable contractor who cares about their company's environment, not just their financial performance.

Many of the activities aimed at achieving the environmental thematic goals of ESRS also bring tangible economic benefits in the form of reduced expenditures, reduced fixed costs and the creation of a “passive” organization that sources much of its infrastructure from RES. In turn, the realization of social and corporate goals translates into higher employee productivity, job satisfaction, and this often entails a measurable increase in financial performance.

Preparing for ESRS reporting - practical tips

Many companies may struggle to identify sustainability reporting coverage. Which processes should be mapped for ESRS, and which are no longer relevant? The value chain principle is helpful in this, it assumes that data aggregation should take into account all the resources, activities and relationships of the company in which it operates and its external environment. If your company is just a subcontractor on a large project, so don't be surprised if a contractor asks you to provide information relevant to its ESRS reporting.

For many companies, ESRS reporting will be a major challenge not only because they are preparing such a document for the first time, but also because the reporting rules are undergoing a revolutionary change. Taking advantage of the fact that the standards are coming into effect gradually and as ESG will affect more and more businesses, consider implementing the changes in your business model now. What can you do to comply with the new requirements? The potential for action should be evaluated from the point of view of each subject area.

At Reo.pl, we will help you achieve your environmental goals first and foremost. We offer the possibility to conclude PPAs on favorable terms and obtain electricity exclusively from renewable sources (photovoltaic, wind energy). In turn, energy balancing services will help you obtain electricity at a lower cost.

The environmental aspect is also affected by a number of measures you can implement on your own. Investments such as energy storage facilities, the provision of a DSR service or the purchase of a fleet of EVs with charging stations reduce a company's environmental impact in multiple ways.

ESG and ESRS are the proverbial uncharted land, which will gradually be discovered by entrepreneurs a as more groups of companies come under the requirements. However, there is no golden mean here, and a thorough analysis of the profile and scale of the business is required in each case.