The Impact of ESRS on European Businesses
European Sustainability Reporting Standards or ESRS have been devised to level-set different European sustainability reporting standards across businesses of various types and sizes; to establish a uniform reporting framework. The ESRS guidelines cover critical aspects of environmental, social, and governance (ESG) related functions that drive the non-financial performance of a business. Since their rollout, ESRS has increasingly become binding for companies that are listed and traded over various stock exchanges within Europe. Through its adoption, ESRS lays down ESG reporting standards that provide transparent and comprehensive intelligence to various investors, stakeholders, and regulators, for informed decision-making. As strong tailwinds of sustainability and corporate responsibility sweep across Europe, ESRS compliance drives significant value by strongly positioning a company in the eyes of its customers, suppliers, and investors.
What is ESRS?
At its heart, ESRS aims to bring structure and uniformity in a world of chaos. Before its rollout, non-financial performance, particularly in the area of ESG reporting in Europe was being characterised by ad-hoc voluntary standards that would vary from business to business. The main problem with such reporting was the non-standardization of information disclosure which created a huge challenge for readers of the reports. Not only was the degree of reliance on such reports reasonably low, but also companies would have to incur additional costs in servicing piecemeal requests for information from its investors, advisors, and regulators. With the advent of ESRS, European sustainability reporting standards are witnessing a huge shift towards commonly understood, reported, and interpreted information disclosures.
Key Components of ESRS
The building blocks of ESRS in its current form are sector-agnostic and broad-based for all kinds of businesses. While sector-specific standards and SME-focused guidelines are still awaited, the current guidelines cover key areas of E (environmental standards), S (social standards), G (governance standards), and cross-cutting standards. The underlying standards for each of the ESG pillars can be seen below:
- E (environmental standards)
- E1: Climate change – the effectiveness of the enterprise in mitigating the harmful effects of climate change
- E2: Pollution – the posture of the business towards reducing or operating within acceptable levels of pollution
- E3: Water and marine resources – how well structured the operations are in terms of water and marine usage
- E4: Biodiversity – determining how the business does its bit to promote biodiversity
- E5: Resource use – how waste optimization is done to achieve circularity of operations
- S (social standards)
- S1: Own workforce – the extent of employer commitment towards the well-being of its workforce
- S2: Employees in the value chain – extending beyond the direct business perimeter the value that the business brings to suppliers, customers, and other stakeholders
- S3: Affected communities – the focused effort that the business takes to bring equity to disadvantaged sections of the society
- S4: Consumer and end users – how the key buyer/ consumer is treated across the lifecycle of the product/ service
- G (governance standards)
- G1: Business management – how effective and efficient the internal governance standards are in achieving the mission/ vision
- Cross-cutting standards
- General principles – Overall guidelines set out
- General strategy and overarching management principles, and the significance of the assessment
Overall, the ESRS provides a holistic framework for achieving harmony in ESG reporting in Europe. In addition, the inclusion of the Corporate Sustainability Reporting Directive (CSRD) within the overall scope has now made it onerous for companies to declare their sustainability actions that are in turn bringing in more transparency than ever before.
Impact on European Businesses
The coverage of ESRS for businesses within Europe is significant. As per the ESRS, this includes companies that were earlier under the NFRD, listed companies with over 500 employees outside the European Union (EU) but with the first sustainable development report to be published in either 2025 or 2026, and companies outside the EU with annual turnover over €150m but with a branch in EU with annual turnover over €40m. Given the scale of coverage and the potential benefits ESRS is likely to bring, the overall impact on European businesses is likely to include the following.
- Greater focus on transparency and comprehensibility of published information
- Standardisation of terminology, usage, metrics, and reporting of critical information
- Greater collaboration among stakeholders, investors, and regulators
- Enhanced risk management processes that drive lower materiality of losses
- Long-term sustainability and ecosystem development
- Evolving corporate strategy programs that are focused on non-financial performance
- Adoption of innovation, change management, and agile business decision making
Challenges and Opportunities
While anything new takes some degree of change management and learning to implement, ESRS brings its own set of unique challenges that create opportunities for businesses to reflect and revisit their ways of working. Some key areas of opportunities are the following.
- Data-driven operations: ESRS compliance requires the collection and reporting of various metrics. This is a good opportunity for businesses to relook at their quantitative management processes and invest in people, processes, and technology around the collection, storage, and reporting of numbers.
- Value chain integration: With the ESRS standards, it becomes imperative for businesses to take a more holistic look. This requires collaboration with upstream and downstream partners and building levers of cooperation and information exchange. This creates opportunities for a more global outlook for businesses.
- Navigating complexity and cultural shifts: ESRS unlocks a whole new world of operations and governance. Engaging with the right partners and consultants can offer businesses new ways to reimagine what they are doing and better navigate through the maze of ESRS.
How to Prepare for ESRS Compliance
ESRS is a transformative experience for businesses and they are better placed to onboard this journey by engaging with the correct partner who can help set up an enterprise strategy that is customised for the business and also help establish the processes and controls that are required to be compliant with the overall guidelines. With the right mindset and commitment, the assessment can reveal insightful areas for the management to focus on, to build a resilient business that is future-proof and contributes to a better tomorrow.
Conclusion
When not viewed purely in terms of compliance, ESRS can unlock opportunities for businesses to take a 360-degree look at their purpose, their operations, and the outcomes they are creating for society. While there may be initial challenges in adopting the standards, eventually ESRS-compliant businesses will be more robust, and purpose-driven, and create lasting value for all their investors, stakeholders, and customers.
FAQ
How does ESRS benefit businesses?
ESRS creates checks and balances for operations in areas of environment, society, and governance. By providing guardrails, ESRS not only guides the operations of the business but also makes them more value-centric, while also determining the output metrics that can be monitored transparently.
What kind of data do companies need to collect for ESRS reporting?
Data for ESRS reporting is primarily non-financial and in areas of procurement, operations, human resources, legal, and governance. They can easily be collated and processed once a formal data framework is established and automation is put in place for data collection, analysis, and reporting.
What role does technology play in ESRS compliance?
Technology plays an important role in automating the data and reporting process. Once the end-to-end process is established, technology will make it repeatable and accurate by removing manual overheads and creating strong data/ reporting footprints.