New ESRS standards: a decisive boost to business competitiveness

Have you ever wondered why some companies have increased their value by up to 15% when they have integrated sustainable practices into their strategy? It was not a matter of luck: sustainability has become a decisive factor in advancing in markets that are increasingly demanding in terms of environmental and social impact. Organizations that aspire to preserve their competitive edge must address the European Sustainability Reporting Standards (ESRS) without delay. These guidelines, supported by the CSRD, will redefine the way companies disclose their sustainability performance and address environmental challenges.

In the following sections, you will see how the concept of dual materiality is at the heart of corporate reporting, and why ESRS offers opportunities to increase your credibility with investors, strengthen your brand reputation and foster a stronger social impact. If your goal is to anticipate market demands and transform sustainability into a lever for growth, it’s worth taking a closer look at the following.

What are ESRS standards?

The European Sustainability Reporting Standards (ESRS) are part of a regulation promoted by the European Union, whose purpose is to unify the disclosure of ESG (environmental, social and governance) information in a consistent and verifiable manner. This framework will provide investors, regulators and other interested parties with comparable, accurate and useful data when making strategic decisions.

Relationship to the CSRD Directive: the new European regulatory approach

The Corporate Sustainability Reporting Directive (CSRD) replaces the previous Non-Financial Reporting Directive (NFRD) and considerably broadens its scope. From this perspective, we have seen that the CSRD introduces dual materiality, a principle that requires organizations to report:

• Impact materiality: The way in which the business activity influences the environment, people and society.
• Financial materiality: The way in which environmental, social and governance factors may have an impact on the company’s economic and financial situation.

This reinforces the idea of sustainability reporting achieving the same relevance as traditional financial statements, supported by specific standards such as the ESRS, which are mandatory for companies under the regulatory umbrella of the CSRD.

Key changes in ESRS standards

Main new features of the first batch of standards

The first batch of ESRS, published in December 2023, covers 12 standards divided into three broad categories:

1. Cross-cutting standards
   • ESRS 1: General requirements for the preparation of information.
   • ESRS 2: Details on governance, strategy, risk management and metrics.
2. Environmental standards
   • They include criteria related to climate change, pollution, sustainable water use, biodiversity protection and circular economy.
3. Social and governance standards
   • Social factors: Labor conditions, impact on the value chain, affected communities and consumers.
   • Governance: Business conduct and organizational transparency.

The power of dual materiality in reporting

Dual materiality requires analyzing and disseminating sustainability from two crucial angles:

• External impact: The effect that the company’s activities have on the environment and society.
• Internal impact: The impact that external factors have on the company’s ability to remain profitable and sustainable.

Synergies with other regulatory frameworks: SFDR and Green Taxonomy

ESRS maintain consistency with:

• SFDR (Sustainable Finance Disclosure Regulation): Facilitates investors in assessing the sustainability of their portfolios.
• Green Taxonomy: Provides a classification of activities with environmentally sustainable criteria.

Obligations for companies

Who will be required to comply with ESRS?

• Public interest companies exceeding 500 employees and 40 million euros in annual turnover (as of fiscal year 2024).
• Listed SMEs and non-European companies with significant operations in the EU (from 2028).

Implementation schedule and exceptions

• 2024: First reports for large corporations begin.
• 2028: The incorporation of SMEs and foreign entities with high activity in the European territory is foreseen.
• Initial exceptions:
  • In the first three years, companies may report under the ‘comply or explain’ principle, provided they do not have all the necessary information on their value chain, and must detail plans to address these gaps.
  • Some flexibility in the disclosure of value chain information will be contemplated.

Reporting areas: governance, environment and social factors

Companies should detail:

• Established policies and objectives.
• Actions implemented to achieve these objectives.
• Quantitative metrics to measure the progress and effectiveness of the measures adopted.

Impact on organizations

Challenges in data dissemination along the value chain

Collecting information from each link in the chain (suppliers, distributors and consumers) will require a major effort. It will be necessary to develop or adapt monitoring systems and establish closer collaboration with trading partners.

Costs and need for technological tools

Complying with ESRS may involve investments in data analysis platforms and external audits, depending on the specific needs of each company.

Reputational benefits and sustainable financing

Companies that assimilate these standards have their credibility strengthened. In addition, access to green finance or ESG-focused investors is more feasible when solid and verified reporting is available.

How to prepare for ESRS

Adjusting internal policies and data collection systems

Organizations should conduct a thorough review of their policies and develop reliable mechanisms to collect ESG information throughout the corporate structure.

Sustainability training for key teams

Sustainability training will help ensure that the personnel responsible for implementing and monitoring ESRSs have the necessary skills to meet the new requirements.

Cooperation with value chain actors

Full compliance with transparency standards requires establishing more collaborative relationships with suppliers and customers, exchanging data in a fluid and rigorous manner.

Conclusions and future prospects

Increased transparency as the backbone of business transformation

The incorporation of ESRS will mark a turning point in the way ESG performance is communicated, placing sustainability on an equal footing with financial reporting.

Short and long term scenario

In the immediate horizon, the issuance of new sectoral standards and the gradual extension of requirements to non-listed SMEs are expected. In the long term, the regulation could deepen in more specific obligations for each economic sector.

Towards sectoral and SME-specific ESRSs

Standards tailored to particular industries are expected to emerge, facilitating the implementation and reporting of data relevant to each business model.

Ultimately, the ESRS aim to standardize sustainability disclosure and raise its relevance in corporate management. Those companies that decide to anticipate deadlines and prepare their internal procedures will be better positioned to respond to the demands of investors, authorities and customers. In a context in which sustainability is presented as a strategic differentiator, adopting these standards will not only strengthen the company’s solidity, but will also boost its ability to generate value in the long term.