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The Corporate Sustainability Reporting Directive (CSRD) is set to replace the Non-Financial Reporting Directive (NFRD) in 2024, bringing significant changes for companies subject to extra-financial reporting obligations. Extra-financial reporting, like the CSR directive, serves as a mechanism for companies to report on their performance in areas such as the environment, social issues, and governance, in addition to their usual financial performance. At the heart of this transition are the ESRS (European Sustainability Reporting Standards).
What Are ESRS?
ESRS (European Sustainability Reporting Standards) are emerging as a unified framework for extra-financial reporting in the European Union. Established by the EFRAG (European Financial Reporting Advisory Group) under the CSRD directive, these standards aim to harmonize ESG (Environmental, Social, and Governance) reporting criteria for all European companies.
The importance of ESRS in standardizing extra-financial reporting is undeniable. This standardization provides a consistent framework for communicating the ESG performance of European companies, thereby enhancing comparability and reliability of information. By unifying reporting practices, ESRS contribute to strengthening transparency and credibility of ESG data, addressing the growing needs of investors and other stakeholders seeking to assess the social and environmental impact of companies.
The implementation of ESRS represents a significant milestone in harmonizing extra-financial reporting practices across Europe, offering a common framework for assessing and communicating the ESG performance of companies.
Which Companies Are Affected?
The new ESRS standards, established under the CSRD directive, significantly broaden the scope of extra-financial reporting, impacting a diversity of companies. The CSRD aims to enhance transparency regarding environmental, social, and governance (ESG) performance for a substantial number of economic actors. Here are the main categories of companies affected by these new requirements:
Large Enterprises:
Large enterprises, characterized by their size and significant economic impact, are among the primary targets of the CSRD. To be affected, they must meet at least two of the following criteria: have more than 250 employees, achieve an annual turnover exceeding 50 million euros, or have a total balance sheet exceeding 25 million euros.
Listed SMEs:
Small and medium-sized enterprises (SMEs) listed on EU regulated markets are also affected by these new standards. To be subject to the requirements, they must meet at least two of the following criteria: have more than 10 employees, achieve an annual turnover exceeding 900,000 euros, or have a total balance sheet exceeding 450,000 euros.
Non-European Companies Operating in the EU:
Companies established outside the European Union but operating within its territory are also included in the scope of the CSRD. They are affected if their turnover in Europe exceeds 150 million euros and if they have at least one subsidiary or branch within the EU.
These criteria, defined under the CSRD, aim to ensure broad and inclusive coverage of the European economic landscape, promoting increased transparency and better management of ESG risks and opportunities for all relevant stakeholders.
Focus on the 12 ESRS Standards
Cross-Cutting Standards: ESRS 1 and ESRS 2
These standards encompass general criteria for extra-financial reporting. They aim to provide an overview of the company’s sustainability performance. The annual report should address the company’s strategy and its objectives for improving its ESG performance.
Environmental Dimension: ESRS E1 to E5
Environmental standards cover a wide range of topics, from climate change to biodiversity, pollution, and resource use. Companies must disclose their greenhouse gas emissions, actions to reduce them, and practices aimed at minimizing pollution risks.
Social Dimension: ESRS S1 to S4
This dimension focuses on the social aspects of the company, including the workforce, workers in the value chain, communities affected by activities, and consumers. HR data, health and safety practices, and efforts to promote inclusion and equity within the company are among the elements to be disclosed.
Governance Dimension: ESRS G1
This standard focuses on business conduct and corporate governance practices. It requires transparency and the establishment of internal control systems to ensure integrity practices.
Conclusion
In the complex spectrum of financial and extra-financial regulation, the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) play a crucial role. The transition from the Non-Financial Reporting Directive (NFRD) to the CSRD has introduced significant changes in the landscape of European companies’ extra-financial reporting.
The involvement of the AMF and other regulatory bodies in the implementation of the CSRD underscores the growing importance of sustainability in the business environment. Companies are encouraged to delve deeply into regulatory texts, develop internal expertise, and adapt their data collection and production tools to meet ESRS standards.
In this perspective, it is important for companies to actively prepare for CSRD reporting obligations by identifying relevant criteria, establishing appropriate roadmaps, and developing robust internal controls. By adopting a proactive approach and a thorough understanding of ESRS standards, companies can turn this major regulatory shift into an opportunity to enhance their ESG performance and commitment to sustainability.
In summary, the CSRD and ESRS represent a major turning point in the field of extra-financial reporting, offering a harmonized and structured framework for European companies. By integrating insights from various parts of this discussion, companies can better understand the challenges and opportunities associated with this crucial regulatory evolution, while strengthening their positioning in terms of sustainability and social responsibility.
