Navigating ESRS Adoption: A Constructive Academic Perspective

Posted by Thorsten Sellhorn - Nov 06, 2024
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by Axel Haller and Thorsten Sellhorn

The European Union’s recent push for mandatory sustainability reporting through the Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS) has sparked significant critical discussion within the business community. While concerns about the costs and complexity of these regulations are valid, a broader perspective highlights potential long-term benefits for companies and society. Below, we propose 10 key theses that frame this regulatory shift as a strategic opportunity for European businesses and provide constructive input to the ongoing discussion.

  1. Transparency Over Market Intervention
    ESRS serve as a transparency regulation, aiming to promote sustainable business practices without the direct imposition of bans or financial incentives. This approach, if implemented in the right ‚spirit‘,  supports informed decision-making and encourages corporate self-regulation while mitigating potential stricter future political or regulatory interventions via instruments other than transparency requirements.
  2. Transparency as a Catalyst for Change
    For transparency to effect meaningful change, disclosed information must be reliable, understandable, and accessible at low cost. Stakeholders—including investors and the public—can only drive sustainability if they have a clear view of companies’ environmental, social, and governance (ESG) performance.
  3. Predictable Pathway of Regulation
    The CSRD and ESRS did not emerge without warning. The EU has pursued corporate social responsibility for over 20 years, transitioning from voluntary measures to mandatory reporting. Companies had ample time to anticipate these changes and adapt their strategies, business models, governance structures, and management systems accordingly. At least the first-wave firms (large PIEs) should not be too surprised by the new reporting rules.
  4. Reporting Proportional to Impact
    Contrary to fears of overwhelming data requirements, the volume of reporting depends on a company’s self-assessed material impacts and risks. The double materiality assessment allows firms to prioritize significant topics, ensuring focused and relevant disclosures – and limiting the risk of overly costly and superfluous disclosures that nobody needs.
  5. Leveraging ESRS for Strategic Value
    ESRS reporting can—and should—be more than compliance; rather, it represents an opportunity for businesses to integrate sustainability into their core strategy and operations. The strategic use of ESG data can improve stakeholder trust and internal processes, helping create long-term value.
  6. Available Support Systems
    Resources from regulators, universities, and industry associations provide essential guidance for implementing ESRS. First-time mandatory adopters benefit from the accumulated knowledge and tools developed through collaborative efforts, as well as early adopters‘ pioneering. All this can help firms meet the practical management and reporting challenges efficiently.
  7. Avoiding Duplication of Efforts
    Concerns about overlapping standards (e.g., GRI, ISSB) are legitimate, but ongoing coordination aims to harmonize these frameworks. The ultimate goal is streamlined reporting that fulfills multiple obligations efficiently.
  8. The ‘Journey’ Perspective
    Adapting fully to ESRS will take time. However, companies must shift from viewing this as a temporary compliance challenge to be ‚struggled through‘ at minimal cost to embracing it as an essential transformation journey with great opportunities. The sooner the ‚journey‘ is completed, the earlier firms and their stakeholders will enjoy the internal and external benefits of greater ESG transparency.
  9. Greenwashing Risks and Vigilance
    Just as financial misstatements can undermine trust, “greenwashing” poses a reputational (and, increasingly, also a regulatory and litigation) threat. Companies must ensure transparent and substantiated sustainability claims to avoid potential backlash and scrutiny.
  10. Continuous Improvement
    Both companies and standards will evolve. Feedback loops from initial reporting cycles will lead to refinements in regulations, promoting an evidence-based approach that balances stakeholders’ needs with practical feasibility in the medium term.

As the ESRS framework becomes a standard part of corporate reporting, its true value lies in the shift it catalyzes towards sustainable business practices. Academics and practitioners alike should view this “journey” not merely as compliance but as a strategic step towards a resilient, transparent, and sustainable economic, ecologic, and societal future.

This blog post is the short form of an article entitled “Nachhaltigkeitsberichte nach ESRS: NurMut!” in the German-language professional journal DER BETRIEB, Vol. 77 (2024), Issue 44, November 2024, pp. 2711-2715.  

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