The European Sustainability Reporting Standards (ESRS) provide a guide toward better sustainability reporting for organisations.  As of Q2 2024, the preliminary observed practice and challenges in implementing these standards have been presented by EFRAG in a study published in July 2024.

Objectives of the Study

The primary objective of this study is to present preliminary observed practices and challenges related to the implementation of ESRS for the 2024 reporting year.  Specifically, this report synthesises the approaches observed, and the main challenges faced by the undertakings in a selected number of larger companies across several sectors.  The term “undertaking” refers here to companies participating in interviews, including 28 large European-headquartered organisations cut across financial and non-financial sectors.

Key Observations

Improved Cross-Functional Collaboration

This is one of the key deliverables expected from CSRD reporting.  There has been increased collaboration across Sustainability, Finance, Risk, IT, and business units.  This collaboration forms a very critical part of the integration of sustainability within the core business strategy and its comprehensive reporting.

Standardisation of ESG Reporting Processes

The initiative of standardising ESG reporting processes has been highlighted, especially in relation to the data quality controls similar to financial reporting.  About 90% of the companies have started initiatives to enhance data quality controls and realised that it is a prerequisite for assurance preparation.

Other Capabilities and Resources

Implementing ESRS has involved the need for acquiring incremental capabilities and resources, such as full-time equivalents (FTEs), knowledge, data, and technology.  For this reason, many organisations have made transformations in their information technology, with about 85% recognising doing so for this end.

Ownership Models for ESG Reporting

The ESG reporting process’s ownership model is undergoing debate in most organisations. Approximately 65% of the companies have relocated the ownership to one clear function, such as the Chief Sustainability Officer (CSO) or Chief Financial Officer (CFO).  Around 35% co-leadership with shared responsibilities between functions – for instance, CFO responsible for reporting and CSO responsible for Double Materiality Assessment.

Key Challenges in ESRS Implementation

The following key challenges in the implementation of ESRS, as per the report, are being faced by organisations:

Double Materiality Assessment

1. Objective Evidence-Based Approach: Informed by data, stakeholder engagement, and expert judgment, this approach is constrained by data availability, interpretation, and possibly too much information.
2. Judgment-Based Approach: Underpinned by stakeholder inputs and internal contributors, taking a judgment-based approach may result in a broader range of topics but runs the risk of divergent views at the same time.

Datapoints

1. Understanding Materiality: The materiality of information exercise, which directs efforts towards assessing material datapoints, is not fully understood by all participants. The resultant gap can be ineffective reporting.
2. Phase in Communication: While the phase-in approach will enable organisations to stagger the preparation efforts, the impact of such phase in needs to be communicated effectively to avoid confusion.
3. Data Coverage vs. Quality: Disclosure of all datapoints if the possible levers identified by EFRAG are not applied will increase reporting efforts and may conceal material information, thus decreasing data quality through additional coverage requirements.

Value Chain

1. Segmented Approach: Each highly segmented approach is riddled with a challenge. Segmented approach involves analysing production stages across various business lines, balancing aggregation and granularity, and utilising sector-specific guidance for differentiated value chain and detailed assessments of individual Integrated Reporting Objectives (IROs).
2. High Level Aggregation Approach: High-level aggregation can result in a limited assessment due to the lack of sufficient details about the IROs. It may also provide an oversimplified view of the value chain, not representative of the business’s full complexity and sophistication.
3. Extended Value Chain Approach: Reaching beyond the direct business relationships (Tier 1) including additional tiers can bring along a few challenges, such as limited data availability for financial institutions and problems with retrieving and implementing data in the case of non-financial institutions.
4. Direct Business Relationships Approach: Taking into account business relationships at only the Tier 1 level could be potentially ESRS non-compliant in the sectors of non-financial origin, overlooking the intricacies of the value chain, and missing material IROs associated with indirect relationships.

ESG Reporting Organisational Approach

1. Upskilling Needs: There exists a significant need for upskilling within departments leading ESG reporting. This includes increasing knowledge related to internal controls and content on ESG.
2. Governance and Coordination: Clear governance structures and forums have to be set up for proper communication and decision-making between the different functions involved in ESG reporting.

Conclusion

ESRS implementation is indeed a significant measure towards increased sustainability reporting within the European undertakings.  Though the study tends to accentuate some very promising trends, such as better collaboration and an overall focus on quality data, it also confirms that, on the part of organisations, there are often obstacles to this transition.  Addressing these challenges through upskilling, proper governance, and clear communication will become critical in successful ESRS implementation.  As organisations continue to navigate this evolving landscape, the insights of this report shall prove a great asset in enhancing sustainability practices and reporting standards.