An important event for sustainability reporting just occurred in the European Union

Canals in Bruges, Belgium
Canals in Bruges, Belgium

On October 18, 2023, the European Parliament reaffirmed its commitment to the European Sustainability Reporting Standards (ESRS). This means that approximately 50,000 companies will have to comply with the ESRS starting in January 2024. The adopted ESRS was amended from its original draft issued in November 2022.

Who will have to report?

EU companies are covered if they meet at least two of the following criteria:

  • Over 250 employees
  • More than 40 million euros in annual revenue
  • More than 20 million euros in total assets
  • Publicly listed equities and have more than 10 employees or 20 million euros revenue.

Starting in 2028, non-EU companies operating in Europe must report their impacts using the ESRS or equivalent standards. That means that non-EU companies are covered if they have both of the following:

  • More than 150 million euros annual revenue within the EU
  • Have at least one subsidiary or branch in EU exceeding certain thresholds.

How will this affect companies that are currently using the GRI Standards to report their sustainability impacts?

There is good news for you if you have been using the GRI Standards.

Because the Global Reporting Initiative (GRI) has been involved with the development of ESRS there is considerable alignment between the ESRS and GRI’s impact standards. Companies will be able to use their existing reporting information to meet these new EU requirements. The GRI is currently finalizing interoperability tools, which includes a digital taxonomy and multi-tagging system. This will simplify the reporting process and allow companies to use one sustainability report while being in accordance with both ESRS and the GRI Standards. The high level of interoperability between the new ESRS and the GRI Standards involved an intentional approach to making concepts and disclosures on impacts as fully aligned as possible.

The ESRS requires companies to use a double materiality assessment, which involves identifying impact materiality (your company’s significant impacts on the economy, environment, and society) and financial materiality (your company’s significant sustainability-related financial risks and opportunities). If you are using GRI Standards, you have already been identifying your significant impacts on the economy, environment, and society. For example, an impact on the environment could be your use of water in manufacturing. Determining impact materiality in GRI reporting puts you are in a good position for complying with the impact materiality portion of ESRS.

To identify your sustainability financial risks and opportunities, you will need to do a materiality assessment that is separate from the impact materiality assessment. To do this, you need to think about what and how environmental and social impacts could affect your financial performance, financial position, and cost of capital. For example, changes in environmental laws such as a carbon tax could increase the cost of manufacturing your products. Your operating costs would increase if you must pay the tax. But by changing your processes to reduce carbon emissions, taxes would be decreased and, once the capital expenses needed to reduce emissions were paid, your operating costs would also likely be reduced. If, as another possibility, your business involves manufacturing products that reduce carbon emissions, the demand for your products would likely increase due to these new EU regulations.

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