The world of sustainability reporting is a fast-changing environment. From standards to directives and regulations, it can sometimes be difficult to keep up with all the changes and developments. In this article, we will give you a clear overview of how sustainability reporting standards have evolved in recent years, and which are the most important ones to use if you want to become compliant with Corporate Sustainability Reporting Directive (CSRD).
When people talk about sustainability reporting, the following standards immediately come to mind: Global Reporting Initiative (GRI), Sustainability Accounting Standards Boards (SASB), International Sustainability Standards Board (ISSB), Task Force on Climate-related Financial Disclosures (TCFD)… These are a lot of acronyms to remember, and it can be confusing when to use which standards.
Fortunately, when the European Commission adopted the CSRD it asked the European Financial Reporting Advisory Group (EFRAG) to develop the European Sustainability Reporting Standards (ESRS). These standards were adopted by the Commission in July 2023 and were developed to provide detailed guidance on the information companies need to disclose regarding their sustainability impact, risks, and opportunities.[1]
The European Sustainability Reporting Standards
The ESRS have been adopted by the Commission as “common standards” to help companies communicate and manage their sustainability performance more effectively and ultimately improve their access to sustainable finance. The ESRS are mandatory for companies that are obliged by the CSRD to disclose sustainability information. By enforcing the use of common standards, the CSRD aims to ensure that companies across the EU report comparable and reliable sustainability data. These common standards standardise and improve sustainability reporting across the EU which will also help companies to reduce reporting costs in the medium and long term by eliminating the need to rely on multiple voluntary frameworks.[2]
The three most important features of the ESRS are that firstly, they are the mandatory reporting standards for companies subject to the CSRD. Compliance with the CSRD means adhering to the ESRS and by following the ESRS, companies automatically meet the requirements of the CSRD.
Secondly, the ESRS contains both sector-specific and general standards. They cover topics such as climate change, biodiversity, social issues, and governance. These sector-specific standards are designed to ensure that reporting is highly relevant and insightful, addressing the unique sustainability challenges and opportunities faced by different industries.
Lastly, ESRS adopts the concept of “double materiality”, this means that companies must report not only on their impacts on environmental, social and governance (ESG) topics, but also on how these ESG topics create financial risks and opportunities for the business.[3]
Interoperability between ESRS and other reporting standards
The ISSB & GRI
The key point to remember is that compliance with the CSRD requires the use of the ESRS. The European Commission has worked to ensure a high level of alignment between ESRS and the ISSB and GRI standards. From the early stages of the ESRS drafts developed by EFRAG, the GRI served as a key reference, with many ESRS reporting requirements drawing inspiration from GRI standards. In addition, the ESRS and the first two ISSB standards were developed in parallel. Intensive discussions between the Commission, EFRAG and the ISSB have resulted in a strong alignment between the two sets of standards where they overlap. The aim of this alignment is to ensure that companies that are required to report under the ESRS and also wish to comply with the ISSB standards do not have to report separately under both frameworks.
By adopting the ESRS, the EU has gone further than any other major jurisdiction in incorporating ISSB standards into its legal framework, making a significant contribution to the creation of a coherent global reporting framework and improving the comparability of sustainability information worldwide.[4]
At the same time, the ESRS is in line with the EU’s broader policy objectives on sustainable finance and the European Green Deal. The ESRS includes topical standards covering the full range of environmental, social and governance (ESG) issues, whereas the ISSB has previously issued a detailed standard focused solely on climate change. In addition, as required by the CSRD, the ESRS mandates reporting on a company’s impact on people and the environment, as well as how social and environmental issues create financial risks and opportunities for the company. In contrast, the ISSB standards focus primarily on how these issues create financial risks and opportunities for companies.[5]
The SASB
The SASB Standards are a set of industry-specific guidelines, developed through consultation with companies and investors, that focus on identifying financially material sustainability factors across 77 industries.
Both the ESRS and the SASB Standards aim to enhance the usefulness of sustainability reporting to investors by emphasising materiality. However, the ESRS is broader in scope, with detailed requirements covering social and governance issues, while the SASB Standards are more narrowly focused on industry-specific sustainability issues that directly impact financial performance.
Unlike the voluntary, global GRI and SASB standards, the ESRS is mandatory for certain EU companies under the CSRD.[6]
The TCFD
The TCFD was established to help businesses in disclosing climate-related financial information. Specifically, it aimed to identify the key information that investors, lenders, and insurance underwriters need to properly evaluate and price climate-related risks and opportunities. To achieve this, the Financial Stability Board (FSB) established the industry-led TCFD. The Task Force was charged with developing voluntary and consistent recommendations for the disclosure of clear, comparable, and reliable information on the risks and opportunities posed by climate change.[7]
More specifically three commitments during the COP26 were set up to be achieved by the TCFD, these were the following: 1) “The IFRS Foundation to establish the ISSB whose mission is to deliver a global baseline of sustainability-related financial disclosure standards for the capital markets.” 2) “To consolidate the investor-focused sustainability disclosure landscape, noting the crucial importance of interconnectivity between financial and sustainability disclosure reporting.” 3) “To publish the first two prototype sustainability reporting standards, on general requirements disclosures and climate-related disclosures.”
In June 2023, the ISSB released its first two sustainability standards, “IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures”. Subsequently, in July 2023, the ESRS were adopted, building on the TCFD. This means that EU companies fully compliant with the ESRS no longer need to report separately under TCFD. Following their endorsement by the International Organization of Securities Commissions in July 2023, the TCFD successfully completed its mandate and was officially disbanded at COP28.[8]
In conclusion, if you want to be sure the sustainability report of your business is compliant with the CSRD, companies must focus on the ESRS, as it provides the mandatory framework for sustainability reporting in the EU.
[1] “Commission Delegated Regulation 5EU) 2023/2772 of 31 July 2023 supplementing Directive 2013/34/EU of the European Parliament and of the Council as regards sustainability reporting standards” (Hereafter: Delegated Act 2023/2772); https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4043.
[2] https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4043.
[3] https://www.unepfi.org/impact/interoperability/european-sustainability-reporting-standards-esrs/; https://www.sweep.net/insights/what-are-the-european-sustainability-reporting-standards-esrs.
[4] https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4043.
[5] https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4043.
[6] https://www.coolset.com/academy/european-sustainability-reporting-standards-esrs#:~:text=Sustainability%20Accounting%20Standards%20Board%20(SASB)%20Standards,-The%20SASB%20Standards&text=ESRS%20is%20broad%20in%20scope,that%20directly%20impact%20financial%20performance.
[7] https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf.
[8] https://www.bdo.com.au/en-au/insights/esg-sustainability/taskforce-on-climate-related-financial-disclosures-disbanded-at-cop28#:~:text=With%20the%20three%20commitments%20of,Dubai%20in%20November%2FDecember%202023