The New Normal: European Sustainability Reporting Standards

The New Standards in Sustainability Reporting

Last month, the European Financial Reporting Advisory Group (EFRAG) released the first set of drafts of the European Sustainability Reporting Standards (ESRS) to the general public. These drafts outline the general requirements and disclosures for companies to follow when reporting on their sustainability. Alongside these general guidelines, the ESRS also outlines how to report on more topical standards, like the effect the company has on the environment, the company’s social impact, and how its business conduct. 

The purpose of these drafts is to have companies report using a “double materiality perspective in compliance with the European Sustainability Reporting Standards adopted by the European Commission as delegated acts”, according to the EFRAG. Double materiality was an issue previously brought up by the EFRAG in a working paper about incorporating double materiality into future reporting standards – an issue that has since been materialized with the publication of these new drafts.

First Steps Towards Transparency

Now that the first drafts for the ESRS have been developed, what’s next for the development and implementation of these new reporting standards? As of now, the European Commission will be consulting with EU bodies and member states on the draft standards before adopting the final provisions as delegated acts in June 2023 (which will follow a scrutiny period by the European Parliament and Council). Once those are released, the reporting requirements are expected to be phased out over the next few years depending on the type of company. Large and listed companies have to apply the standards in 2024 or 2025 and publish the report for the standards in the following year. Small to medium sized enterprises are given a 2-year grace period to apply the standards in 2026.

The Real Outcome

It is expected that, given the extent of the drafts and new reporting requirements, a company’s effect on the environment and society, in general, will now be more transparent and easier for investors to interpret. However, the use of such information will be at the hands of investors, as some may assess the sustainability purely based on its effect on financial returns and other may build portfolio’s to generate real a real impact on the planet. Many data companies will be required to disclose key sustainability data, leaving less room for greenwashing, as there is more emphasis on quantitative metrics (such as GHG intensity, energy intensity, water consumption, etc.) and objective data that is more difficult to exaggerate or falsify (such as actions taken related to a specific topic, policies, targets and impact metrics). 

We won’t be able to see the actual outcomes of these standards for the next couple of years, but there is hope that it will bring greater transparency and more structured data for investors to analyze and make informed decisions on in the future.

Physis is a fintech company that offers investors a variety of sustainability offerings and data to track the impacts of their investments, including insights on a company’s ability to meet its COP27 commitment! We make it easy for institutional investors to prove the sustainability of a company or fund beyond the ambiguous ESG score. Find out how we can help you today!