The European Sustainability Reporting Standards (ESRS) adopted by the European Commission and the IFRS Sustainability Disclosure Standards from the International Sustainability Standards Board (ISSB) provide a structured pathway for businesses to align with a net-zero economy, driving innovation, risk mitigation and investor confidence. They aim to offer an organised approach to ESG disclosures, enhancing companies’ transparency, comparability and forward-looking insights.
Some of the main European Sustainability Reporting Standards indicators out of around 100 in total:
- Transition plan for climate change mitigation including GHG emission reduction targets, locked-in GHG emissions, decarbonisation levers, and key climate change mitigation actions;
- Gross Scopes 1, 2 and 3, and total GHG emissions;
- Targets related to pollution, and use of substances of concern;
- Policies related to own workforce, notably on discrimination, harassment, equal opportunities;
- Metrics on diversity (by gender and age groups), persons with disabilities and health and safety (work-related injuries).
Anne Demay, Manager at CIB Regulatory Anticipation at BNP Paribas highlights the importance of sustainability disclosures and the crucial role they play in corporates’ transition journeys.
❝ Sustainability disclosures are key in companies’ transition as they allow them to stocktake on their current impact and dependencies, and plan ahead towards more sustainable business models. ❞
European Union sustainability reporting mandatory for many
The EU Corporate Sustainability Reporting Directive (CSRD) entered into force in January 2023 and requires companies to report on sustainability risks, impacts and opportunities. It seeks to provide transparency, comparability, and quality by providing commonly used standards that cover environmental, social and governance matters across industries. Companies subject to this directive will have to report according to European Sustainability Reporting Standards (ESRS), adopted by the European Commission in July 2023, providing the application methodology.
European Sustainability Reporting Standards and double materiality
The ESRS are built on the concept of “double materiality”, whereby companies should disclose not only the financial impact of sustainability issues on their business, but also the impact of their business on society and the environment.
To facilitate its implementation, these standards will only require companies to disclose on indicators that have been found to be material by a CSRD-aligned double materiality assessment. The exception to this is in ESRS 2 General Information, which mandates that companies must provide an explanation for why a topic is not material when it relates to climate. The standards also provide some voluntary indicators, for companies that elect to provide data points on specific issues. For reports to be compliant they must be included in a company’s management report and validated by external reviewers.
IFRS Sustainability Disclosure Standards designed as globally accepted standards
IFRS Sustainability Disclosure Standards (IFRS S) published by the ISSB in June 2023, both S1 and S2, are intended to become globally accepted sustainability standards either adopted by companies on a voluntary basis or made mandatory by local regulators. In its first standards the ISSB focused on climate and is expected to make a decision on future disclosure standards in the first half of 2024. Potential topics include biodiversity, human rights and human capital. The ISSB has also stated that it will prioritise work to support the application of IFRS S standards through capacity building initiatives.
A common foundation
ESRS and IFRS S are both built on the Taskforce for Climate Financial Disclosures (TCFD) framework. The European Financial Reporting Advisory Group (EFRAG), the public body which has developed the ESRS, and the ISSB worked together to align definitions and concepts to reduce the risk of duplicate reporting for international companies. Both standard-setters have prioritised interoperability, which is essential and welcomed by global companies.
While IFRS S currently only cover general sustainability disclosure requirements and climate-specific requirements, the ESRS provide specific mandatory reporting requirements for biodiversity, water, pollution, circular economy and social aspects.
Benefits for investors
Investors are expected to benefit significantly from these standards. The ESRS and IFRS S disclosures introduce crucial economic forward-looking indicators: access to transparent, quality data and comparability of disclosures among the most anticipated benefits, complementing information from SFDR reporting.
ESRS indicators that will benefit investors:
- Carbon Emissions Intensity: this metric measures the efficiency of resource used in generating revenue, showing how well a company balances emissions with growth.
- Climate Risk Exposure: companies must disclose their exposure to climate-related risks, including physical and transition risks. For example, a manufacturing firm identifies supply chain vulnerabilities due to climate events and invests in climate-resilient sourcing. The understanding of companies’ management of transition and physical risk is crucial for investors to assess long-term viability.
- Sustainable Investment Ratio: this metric gauges the portion of capital expenditures allocated to sustainable initiatives. A higher ratio reflects a stronger commitment to sustainability. For example, when a utility firm allocates 30% of capital expenditures to renewable energy projects, it signals a shift towards a low-carbon energy mix.
- Stakeholder Engagement: engaging stakeholders, including employees, communities, and investors, is pivotal for driving positive change, and can result in innovative solutions.
Issuers: a virtuous circle expected
Compliance with ESRS and IFRS S standards can present challenges for issuers, mostly on the implementation and adaptation phase as they build robust data collection and reporting capacities. However, this will also provide access to an extended array of data that may be leveraged for business purposes.
ESRS and ISSB both require forward-looking data including transition plans and targets. Companies will therefore need to disclose efforts to anticipate and mitigate ESG risks, and shift business models to align with sustainability goals. For many companies this will reduce exposure to transition risk and may also stimulate new business opportunities and improve operational efficiency.
ESG disclosures are expected by many to create a virtuous circle, by supporting the development of sustainable value chains, and attracting investors with strategies that consider sustainability in their decision-making.
A worldwide priority
At international level, Canada, Japan and Singapore are consulting on the introduction of sustainability-related disclosures in their respective regulatory frameworks using the IFRS Sustainability Disclosure Standards. Further jurisdictions — such as Australia and Malaysia — have recently closed similar consultations.
The ISSB is also currently deliberating on its work plan following feedback. It is exploring the potential development of new thematic standards covering biodiversity, human capital and human rights. The ISSB intends to finalise the work plan in the first half of 2024.
In Europe, EFRAG is working on sector-specific standards to provide industries with specific sets of disclosures. To reduce the reporting burden for companies, in February 2024 the European Parliament agreed to a two-year postponement of adoption deadlines for sector-specific ESRS and ESRS for certain non-EU companies to allow more time to apply the first batch of standards and prepare for the next ones.
In the meantime, sector-agnostic standards will start being rolled out to companies subject to the Non-Financial Reporting Directive (NFRD), which currently covers certain large companies and groups with more than 500 employees, followed by large companies and SMEs. The Regulator will issue guidance to facilitate ESRS implementation, notably on materiality assessment and value chain, based on a proposal from EFRAG.
From 2025 (reporting for the period full year 2024), CSRD will gradually cover around 50,000 companies following the timeline below:
- 2025: EU Companies already subject to the NFRD, including large EU public interest companies with more than 500 employees and over EUR50 million turnover, and/or over EUR25 million on the balance sheet.
- 2026: Other large EU companies with threshold lowered to 250 employees.
- 2027 (with a 2-year opt-out): SMEs listed on EU regulated markets.
- 2029: Other third-country groups with European turnover that exceeds EUR150m and with a large branch or subsidiary based in the EU.
According to Jeanne Aing, Head of CIB Regulatory Anticipation at BNP Paribas: “The European Sustainability Reporting Standards and IFRS Sustainability Disclosure Standards represent a paradigm shift in sustainable investing. These standards will empower investors with reliable ESG data and encourage issuers to embrace sustainability. As global recognition grows, these frameworks have the potential to reshape investment practices and enhance transparency, despite significant challenges around implementation.”
❝ These standards will empower investors with reliable ESG data and encourage issuers to embrace sustainability. But their interoperability remains a key success factor and a key efficiency factor for global companies. ❞
