Exposure draft of the new European Sustainability Reporting Standards (ESRS): New materiality concept and more than 200 KPIs

What is the basic structure of the standards?

The draft standards are divided into:

• cross-cutting standards;
• topic standards;
• sector-specific disclosures; and
• entity-specific disclosures.

Sector-specific standards will be published in 2023. There is still an ongoing discussion on entity-specific disclosures, as to whether these are mandatory or voluntary in the first year of application.

How are the standards structured?

Cross-cutting standards address the general principles of reporting and especially the fundamental principle of "dual materiality". Companies must describe the impact the company has on its environment and what impact the environment has on the company to determine whether certain information and KPIs are material for the companies’ CSR-Report.

Topical standards on environment, social affairs, and governance each follow the same structure: the presentation of the general objective is followed by detailed reporting requirements. In addition, there is an Annex A with definitions of the terms used and an Annex B with binding application guidelines.

Environmental standards comprise 5 ESRS (e.g. climate change). The standards require 150 KPIs for environmental issues in the CSR Report.

Social standards comprise 4 ESRS (e.g. affected communities) and 49 KPIs.

Governance standards comprise 2 ESRS and deal with governance, risk management and internal control, and business conduct. 18 KPIs were defined for quantitative information.

Are the ESRS consistent with the GRI standards?

The main structure of the ESRS has obvious similarities with GRI. Furthermore, EFRAG and GRI have announced that they will work together to enhance international convergence in this field.

What is important for audit firms and their clients?

Audit and advisory services for CSR reporting offer a new market for small and mid-sized audit firms. However, if auditors are willing to enter this new market, they must invest a lot of resources to gather expertise in this new audit field. In the future, auditors who want to review CSR reports will be required to regularly attend CSR-related training. Moreover, the accreditation procedure in Germany obliges upcoming auditors to take a CSR- reporting specific exam.

Published: Auditing, Reporting & Compliance Newsletter, No. 08, Autumn 2022 l Photo: Blickfang - stock.adobe.com