On 31st July 2023, the European Commission approved the ESRS for use by all companies subject to the Corporate Sustainability Reporting Directive (CSRD) – another step forward in the transition to a sustainable EU.
In a groundbreaking move towards environmental responsibility, the European Commission has taken the historic step of adopting the first set of European Sustainability Reporting Standards (ESRS). These standards will make it mandatory for companies, both within and outside the EU, to disclose their impact on critical environmental factors such as climate change, pollution, water, ecosystems, and biodiversity. This development, set to take effect from 2024, will redefine how businesses approach supplier sustainability and drive progress towards a net-zero and nature-positive future.
To ensure global alignment and minimise reporting burdens on companies, the ESRS have been developed in consultation with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI). This collaboration should guarantee a high degree of interoperability between EU and global standards, preventing redundant reporting and streamlining the process for companies.
Europe's alarming warming rate underlines the urgency of climate and nature action that goes beyond international borders. The news is also timely, as July 2023 is the hottest month on record, and the hottest in around 120,000 years. The adoption of the ESRS presents an opportunity for companies to take collective action and address environmental challenges.
Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union, said: “The standards we have adopted today are ambitious and are an important tool underpinning the EU’s sustainable finance agenda. They strike the right balance between limiting the burden on reporting companies while at the same time enabling companies to show the efforts they are making to meet the green deal agenda, and accordingly have access to sustainable finance.”
With approximately 80% of a company’s greenhouse gas emissions coming from suppliers in the Scope 3 category, businesses must collaborate and innovate with suppliers to achieve their net-zero commitments effectively.
CDP, a Vizibl partner and non-profit organisation operating the most widely-used global environmental disclosure system, has played a crucial role over the last two decades in preparing companies for the upcoming ESRS requirements. Currently, out of the 18,700 companies worldwide reporting to CDP, more than 18,000 organisations have already demonstrated readiness by disclosing board-level oversight. Additionally, around half of these companies have established processes to assess climate risks and opportunities.
In doing so, many of these businesses have already addressed key aspects of the ESRS, including governance, strategy, risks and opportunities, and metrics and targets. However, the true test of the robustness of their sustainability reporting will come in 2024, when the ambitious ESRS standards become mandatory, and the results of their supplier engagement and collaboration efforts will be truly revealed.
While the adoption of ESRS is undoubtedly a significant milestone, it won’t come without its challenges. One notable compromise is that all disclosures, including scope 3 greenhouse gas emissions and biodiversity, will be subject to companies' own materiality assessments. This means that certain topics may be disregarded based on companies' individual assessments of their material impact – which may not be representative of the true problem. This in turn enables organisations to under-report their impacts while still claiming to be on the right track.
To ensure the effectiveness of ESRS, understanding why certain issues are excluded will be crucial in providing meaningful and comparable information for investors, auditors, and regulators. Striking the right balance between flexibility and accountability will be essential to drive genuine progress towards sustainability.
The European Sustainability Reporting Standards (ESRS) represent a groundbreaking milestone in the realm of corporate environmental responsibility. As businesses around the world gear up to comply with the mandatory reporting standards, the true success of ESRS lies in how corporations embrace the challenge and take meaningful action towards a net-zero and nature-positive future.
Incorporating the true value of nature into financial accounting will be critical for companies to effectively address their environmental impact. By collaboratively working towards sustainable supply chains and embracing the spirit of ESRS, businesses can collectively lead the charge in creating a more sustainable and prosperous future for people and the planet. As we embark on this journey, the collaborative efforts of companies, regulators, investors, and organisations like CDP will play a pivotal role in shaping a world that prioritises environmental stewardship and sustainability.
With the adoption of the European Sustainability Reporting Standards, the EU takes a decisive step towards a sustainable and prosperous future, encouraging businesses to prioritise environmental and social responsibility, while providing investors with the essential information needed to make conscious and informed decisions. As these standards are gradually implemented, companies will have the opportunity to integrate sustainable practices into their supplier base, and with the Vizibl platform, it’s never been quicker or easier to achieve true supplier collaboration.