How the newly approved ESRS will benefit financial markets

Over the summer, the European Commission announced the adoption of the European Sustainability Reporting Standards (ESRS). Even though it might increase the reporting burden for the companies, this was great news for stakeholders. We, at Datia, strongly believe that the positive impact of the common standards will certainly be felt by the financial markets and society as a whole in the years to come. 

But, the first question one may ask is: what actually are the European Sustainability Reporting Standards? 

‍Overview of the European Sustainability Reporting Standards

The ESRS are standards that define the reporting requirements of the Corporate Sustainability Reporting Directive (CSRD). In practical terms: they are standards to help companies communicate and manage their sustainability performance more efficiently. 

The main focus is to set the structure and disclosure requirements that companies, banks, and insurance companies in scope will need to report on, starting with the financial year 2024. 

In the first year, public companies with over 500 employees will be required to adhere to ESRS by disclosing specific sustainability information. This will ensure that companies based across the EU report comparable and reliable sustainability information. In the future, these requirements will also extend to smaller companies, with the scope of eligible companies expanding gradually in phased stages each year.

Benefits of ESRS to financial markets 

In very practical terms, the ESRS will help financial institutions with their own reporting as required by the Sustainable Finance Disclosure Regulation (SFDR). That is because the common standards include the principal adverse impact (PAI) indicators which already needed to be reported by investors in their first PAI statements by no later than June 2023. Investors will need to continue publishing PAI statements on a yearly basis and, thanks to ESRS, the quality of these reports will certainly improve moving forward.

For the 2023 PAI statements, FMPs were advised to publish regardless of data incompleteness. Learn about data coverage in Datia's latest analysis of published PAI statements.

The ESRS will also impact financial market participants in their strategic decisions. Here’s how:

1. Investors will more easily compare companies' ESG performance across industries and regions which will ensure and facilitate better decision-making by investors who prioritize ESG factors in their investment strategies.
   
   
2. Information asymmetry in the financial market will be progressively reduced. Investors can have greater confidence that the information disclosed by companies is consistent and comparable, decreasing the risk of hidden ESG-related issues, including greenwashing.
   
   
3. Companies will be able to make better risk assessments. By requiring companies to disclose their ESG risks and opportunities, investors can more accurately assess the long-term viability and resilience of their investments. This is particularly important as ESG risks (e.g., climate change, and supply chain disruptions) can significantly impact a company's financial performance.

Benefits of ESRS to companies 

Common standards are expected to help companies reduce reporting costs in the medium and long term, by avoiding the use of multiple voluntary standards as it is the case today. 

We, at Datia, also hope that the standardized sustainability reporting will encourage companies to innovate and find more efficient ways to operate, reduce waste, and manage resources, which in fact, can lead to cost savings and improved profitability over time. 

Moreover, companies that adhere to sustainability reporting standards will increase their chances of gaining better access to financing, since the financial markets will have an easier time assessing their sustainability metrics. 

Benefits of ESRS to society

Businesses of many industries and sizes that want access to European markets are expected to adopt the ESRS. This will encourage them to integrate sustainability into their operations and reporting, aligning them with broader sustainability goals. The ripple effect will hopefully be greater than just numbers in a report. Here’s why:  

1. For starters, meeting ESRS requirements signals that a company is taking its environmental and social responsibilities seriously, which can positively influence stakeholder perceptions, including customers, employees, and partners.
   
   
2. The existing challenges in the quality of sustainability reporting lead to a gap in accountability. As companies start delivering high-quality and dependable public reports, a culture of high public accountability might start to be established.
   
   
3. Focusing on sustainability reporting will encourage companies to consider their long-term value-creation strategies. After all, companies that perform well in ESG areas are often better equipped to navigate the challenges of a changing world and create long-term and sustainable value over time.

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We, at Datia, are looking forward to the next years of more reliable sustainability data that will empower the financial sector and general public to make better decisions for the planet and society. 

How Datia can help

At Datia, asset managers, asset owners, and wealth advisors can already have access to PAI indicators of 36,000+ globally traded companies. The indicators are presented with detailed information about the data origin, such as if the data was reported or estimated. If the data was reported, Datia provides you with links to the sources to ensure data transparency and traceability.
If you want to learn more about Datia's solutions to SFDR, book a call with our team of specialists.