New European Sustainability Reporting Standards
How new European Sustainability Reporting Standards will impact many US companies
By Joe Maneri, Audit & Assurance partner, Deloitte & Touche LLP
Talking points:
- The new European Sustainability Reporting Standards (ESRS) will require changes in the way many companies track and report sustainability information.
- Among its many requirements, a larger scope of companies must now conduct double materiality assessments, report nonfinancial climate and sustainability data, and seek limited assurance on this reporting.
- Depending on specific applicability, ESRS will have a staggered rollout from January 1, 2024, through the end of 2029.
According to a new report from the World Meteorological Organization (WMO), Europe has warmed at twice the rate of any other continent1 over the past 30 years, which could lead to a host of severe consequences. The findings in the report, entitled State of the climate in Europe 2022, underscore a driving factor for the European Commission’s (EC) latest sustainability regulations: the ESRS and CSRD (Corporate Sustainability Reporting Directive).
The EC adopted the CSRD, along with the supporting ESRS, to increase the breadth of nonfinancial sustainability-related information that companies operating in the EU must report and to encourage them to submit information that is relevant, comparable, reliable, and easy to access. Longer term, the CSRD and ESRS support the EU’s European Green Deal objectives2 and 2050 climate-neutrality targets.3
Here is a summary of the main requirements and potential impacts of the new standards.
Expanded scope of affected companies: CSRD broadens the scope of reporting beyond large public-interest entities to include EU companies or subsidiaries that meet two of these characteristics:4
- More than 250 employees
- Greater than €20 million balance sheet
- Greater than €40 million net turnover
Non-EU businesses with more than €150 million net turnover in the EU and at least one EU subsidiary may also be required to report.5 This expansion brings a larger number of businesses, including US businesses, under the reporting requirements.
Reporting of nonfinancial information: The ESRS aims to integrate a comprehensive range of nonfinancial environmental, social, and governance (ESG) data into a company’s financial reports and risk management processes. Required ESG reporting includes risks, opportunities, and performance metrics, as well as accompanying management commentary on the company’s ESG strategy and performance. Companies will likely need to adapt their accounting systems to track and report on this wider range of ESG compliance metrics.
Standardization and comparability: ESRS also seeks to standardize the reporting framework to enhance comparability between companies’ sustainability performance. Businesses should implement consistent measurement methods and reporting formats, which might necessitate changes to their existing accounting practices.
Double materiality assessment: CSRD requires companies to perform a double materiality assessment to identify the most important ESG issues from both an impact and financial perspective. Accounting processes and previously performed materiality assessments may need to be adjusted, modified, and/or enhanced to incorporate these assessments and ensure accurate reporting of material ESG issues.
Assurance requirements: To increase the accuracy, consistency, and reliability of sustainability reporting, ESRS imposes an assurance requirement on sustainability reporting. In-scope companies will be required to seek limited assurance over their reported sustainability information initially, with potential phase-in of reasonable assurance over time.
Digital reporting and accessibility: ESRS emphasizes digital reporting using structured data formats, making information more accessible, comparable, and analyzable. Businesses may need to invest in technology and systems that permit digital tagging of reported sustainability information in accordance with a digital taxonomy to help users quickly locate information.
Stakeholder engagement: Compliance with CSRD and ESRS requires recognizing the vital role of stakeholder engagement in both sustainability reporting and the double materiality assessment process. Companies might need to develop mechanisms to incorporate stakeholder feedback into their reporting processes.
Training and capacity-building: Compliance may also require training and capacity-building to develop the requisite skills, knowledge, and systems to meet CSRD/ESRS requirements. Businesses may have to invest in training programs to address any skills gaps.
What role can Deloitte play?
Deloitte can provide advice as you work to understand and implement ESRS and CSRD requirements. To learn more, please visit our CSRD Frequently Asked Questions page. You can also find detailed information on global sustainability regulation and let us know what questions you have.
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