The European Union (EU) is leading the charge with ambitious climate policies to achieve its near and long-term sustainability targets. New legislation adopted by the member states will directly impact businesses' environmental, social, and governance (ESG) reporting. 

‍

Keeping track of climate regulations is essential to avoid non-compliance and ensure you do your part to curb carbon emissions. Unfortunately, not every business has the capacity or resources to have a dedicated ESG manager to keep track of policy changes. 

‍

So, what should you do? Fork out tons of cash? Hire an ESG manager on the cheap? Google it? Maybe not. With the right information and a little bit of elbow grease, you can quickly get up to speed on everything related to ESG legislation.

‍

In this article, we’ll provide all the details regarding the new ESG legislation passed in the EU, particularly the Corporate Sustainability Reporting Directive (CSRD), so that you can get by without needing a dedicated ESG manager. Woohoo!

Europe’s climate ambitions

Before we discuss the new reporting requirements applicable in the EU and the greater European Economic Area (EEA), it’s worth revisiting the climate targets set by the block. These targets align with the Paris Agreement and provide the impetus for the new rules that are much more comprehensive and stricter than their predecessors.

‍

• The Paris Agreement requires signatories to pursue efforts that keep the global temperature rise at 1.5 °C compared to pre-industrial levels
• The EU has committed to reducing its net carbon emissions by 55% by 2030 (compared to levels in 1990)
• ‘Fit for 55’ is a package of proposals to revise EU legislation regarding emissions reporting, trade, and carbon credits to help the block reach a 55% reduction in emissions by 2030 
• By 2050, the EU plans to achieve complete carbon neutrality through balance and removal of emissions 
• As part of the ‘Fit for 55’ proposals, member states must renovate existing buildings to have net-zero emissions by 2050 by implementing building efficiency best practices and using renewable energy
• The Emissions Trading System (ETS) aims to reduce emissions of the impacted sectors (large industries and power plants) by 62% by 2030 (compared to 2005 levels) 

New EU ESG reporting requirements

To ramp up efforts to reach its climate goals by 2030 and 2050, the EU has adopted new legislation, the CSRD. This directive replaces the 2014 Non-Financial Reporting Directive (NFRD) in phases. CSRD extends the ESG reporting requirements, bringing even more companies into the mandatory reporting bracket. To implement the directive, the EU has introduced the European Sustainability Reporting Standards (ESRS). 

‍

CSRD and ESRS

First off, here’s everything you need to know about the CSRD:

• CSRD will go into effect beginning January 2024 in four phases
• It will mandate ESG reporting for EU and EEA companies and non-EU businesses with a presence in member countries through subsidiaries 
• It will make third-party assurance and external auditing mandatory to ensure transparency and accuracy
• Companies must perform a materiality assessment to determine their environmental and climate change impact (this was already required under the NFRD)
• Companies must report material impacts, risks, and opportunities (IRO) for business operations and the value chain (upstream and downstream)
• Companies must provide targets and metrics to measure material sustainability and tie them to their financial reporting 
• The new directive is set to impact nearly 50,000 companies in the EU, up from the 12,000 under the NFRD
• It targets the companies' direct and indirect emissions (Scope 1, 2, and 3) 

‍

And now, the ESRS. Introduced in July 2023, the ESRS provides a common framework for reporting for companies impacted by CSRD. ESRS consists of 12 standards covering various aspects of ESG reporting. This includes two general standards, five environmental standards, four social standards, and one governance standard. In brief, the ESRS provides guidance for preparing the ESG reports by companies as per the CSRD. 

‍

It’s a lot of initialisms, we know.

‍

Who is affected by new ESG reporting requirements? 

The CSRD impacts primarily medium and large enterprises in the EU and EEA. All publicly listed companies (listed on regulated markets in the EU) must comply with CSRD and follow the ESRS for reporting. 

Other EU companies that meet at least two of the following three conditions are also required to comply with the CSRD:

• 250 or more employees
• Euro 20 million in assets
• Euro 40 million in net turnover

‍

Non-EU companies with at least one subsidiary registered in the EU with a turnover of Euro 150 million are also required to report. Only some companies impacted by the new legislation have to start reporting immediately. Companies already subjected by the NFRD must follow the CSRD and ESRS beginning with the 2024 financial year. However, companies not subject to the NFRD but are to the CSRD will need to begin reporting in 2026. Non-EU companies under CSRD eligibility conditions must begin reporting with the 2028 financial year. 

‍

Take a sigh of relief because you may not need an ESG manager right now after all if you’re part of a small or medium-sized enterprise (SME). But don’t be too complacent; there’s talk of creating a separate standard for SMEs to adopt voluntarily and report emissions, for example, to banks or investors. We’ll be sure to update you if and when this happens!

‍

That’s a wrap

If you’re a business in the EU or abroad impacted by the CSRD, you’ll need to follow the new standards for ESG reporting. The new directive, although more stringent and wider-reaching, is designed to make carbon accounting more accurate and transparent. And you know, help save the world.

‍

It’s high time European and international organisations took even stronger initiatives to reduce and offset emissions. Fortunately, the CSRD and ESRS will push and inspire companies to do more and assess the carbon footprint of its operations, subsidiaries, and supply chain.