More than 50,000 companies to be impacted by new EU sustainability reporting rules

The Commission voted on Monday (31 July) to adopt the new European Sustainability Reporting Standards (ESRS). These Standards provide more detail on the Corporate Sustainability Reporting Directive adopted last year, while also updating them to align with new international climate reporting standards issued in June.

Under the ESRS, large businesses will need to enhance their environmental disclosures by embedding them in annual reports from 2024. The Standards will then be mandated for medium-sized businesses in phases through to 2026.

Companies will need to conduct a materiality assessment to determine which environmental issues are most material to their operations and value chains. The principle of ‘double materiality’ applies; companies will need to assess both their own impact and their exposure to the impact of risks.

Any company which does not deem climate mitigation as material to their business will need to explain why. For other topics, including biodiversity and water, companies can omit disclosures not deemed material with only a “brief explanation”.

These aspects of the Standards represent a significant change from original proposals from the EU’s standards bodies, which had recommended mandatory climate impact and risk reporting from businesses in all sectors including finance.

The Standards will now be subjected to a two-month scrutiny period in the European Council, giving member states the chance to recommend changes.

Richard Howitt, the architect of the EU’s first non-financial reporting mandate, told edie that he expects the new standards to be “broadly welcomed” in principle in the private sector. This is because of the aim to ensure interoperability with new global standards being developed by the International Sustainability Standards Board (ISSB).

However, there is likely to be a push from investors for mandatory climate-related disclosures. Investors are in search of robust and comparable information to meet their own climate disclosure aims and manage climate-related risk more deftly.

The financial sector was last week accused by Carbon Tracker of failing to account for the impact that global warming beyond the Paris Agreement’s recommended levels will have on the economy.

Are companies already prepared for ESRS?

Howitt said he expects many companies to “begin the process of alignment across all the new standards, even before they are formally required to do so”.

There is evidence that many companies are already reporting in line with several of the Standards’ key requirements and will not need to make great changes to annual reports.

CDP has stated that the majority (55%) of the 18,700+ companies around the world disclosing through its platform already have processes in place to measure and report climate-related risks and opportunities. More than 95% have board-level oversight for climate.

Companies representing three-quarters of the EU’s market capitalisation use CDP, and the platform’s climate aspect is by far its most popular.

CDP’s policy engagement director for Europe, Mirjam Wolfrum, said: “With approximately 50,000 companies now obligated to report on sustainability, these standards are a critical stepping stone towards making high-quality environmental reporting a business norm.

“However, compromises were made to ensure successful adoption: all disclosures, including climate-related ones, are now subject to companies’ own materiality assessment. In addition, certain disclosures including Scope 3 emissions and all of biodiversity-related disclosures have been phased in. Understanding why companies disregard certain topics will be essential to ensure comparable and meaningful information for investors, auditors, and regulators.”