The 2024 New European Sustainable Reporting Standards Framework: How will it affect the construction industry?
The History of Sustainable Reporting in the European Union
Over the years, there has been an evolution of sustainable reporting measures being adopted by the European Union. The first major framework adopted was the Non-financial Reporting Directive (NFRD) in 2014. The NFRD required certain companies to release non-financial disclosure reports along with their annual reports. This directive was not explicitly sustainability-oriented but was implemented to encourage transparency and responsible business practices.
The NFRD has since been replaced by the Corporate Sustainability Reporting Directive (CSRD), adopted in January of this year. The CSRD is a central sustainable standard reporting framework that looks to improve the measures of the NFRD. It aims to expand the regulations to apply to a broader range of companies as well as improve the accuracy, consistency and comparability of Environmental Social Governance (ESG) reporting.
The intention of the new directive is to ensure that companies have stricter sustainability standards by forcing them to report on specific sustainable measures and assessments they adhere to. Creating a system of reporting and accounting to replicate financial standards but for sustainable business practices.
The Criticisms of Current Sustainability Frameworks
Despite their positive intentions, sustainable reporting standards have been subject to much criticism. There are many differing reporting frameworks and the freedom to choose which to use has led to many standardisation and comparability issues. Assessing which company is making genuine positive changes has even been described by some as arbitrary.
Many frameworks have also been criticised for their vagueness and lack of quantitative target setting. The issue put forward with this is that vague reporting standards don’t inherently encourage sustainable business practices and allow companies to view corporate sustainability reporting as a competitive advantage rather than a social responsibility- in short, it promotes ‘greenwashing’.
How is the CSRD an Improvement on Current Frameworks?
The CSRD is certainly a step in the right direction. The framework will expand the pool of companies that qualify for reporting. Through this, the EU intends to make transparent sustainability measures more commonplace in the market. Increasing the specificity and number of quantitative targets outlined by the disclosure requirements will reduce the possibility of subtle reporting manipulation- less leeway for greenwashing. Finally, a unified framework for all European countries should help standardise sustainable reporting to improve the equality of social responsibility.
What's the next step for European Sustainability Frameworks?
The European Sustainability Reporting Standards (ESRS) is the 2nd stage of the CSRD, which comes into action at the start of the 2024 fiscal year. It applies to all ‘large companies’, which are defined as entities that meet 2 of the following 3 criteria: 1) More than 250 employees, 2) More than 40 million EUR in net turnover, 3) More than 20 million EUR in assets.
Any EU company that meets those criteria is required to file an annual report using the final ESRS guidelines, including disclosure of how sustainability influences their business, as well as the company’s impact on people and the environment. The framework is not yet finalised but includes 12 topic standards (5 environmental, 4 social, 2 cross-cutting and 1 governance).
What is the Likely Impact on the Construction Industry?
Every industry is likely to be impacted and not just European ones. The measures and subsequent adjustments made by many of the international businesses involved will undoubtedly affect businesses everywhere. For example, if a foreign company does not conduct business in line with ESRS regulations, then compliant companies are unlikely to work with them. This will naturally encourage all companies to follow suit as the market adapts, even those to which the ESRS does not apply.
In terms of how this will affect the construction industry, it’s likely to be significant. Many have expressed concerns over the scale of the challenge of complying with this new framework. KPMG, one of the ‘Big Four’ accounting firms, has stated that the majority of companies have a huge hurdle to overcome to be ready for these regulations.
Pollution, Resource use and The Circular economy are all topic standards in the ESRS that are particularly relevant to construction. For example, all companies will be required to disclose:
- The resource use and circular economy-related targets they have adopted.
- Policies implemented to manage material impacts, risks and opportunities related to resource use and circular economy.
- The pollutants that are generated or used during production processes or that are procured and that leave its facilities as emissions, as products, or as part of products or services.
These are only a few of the disclosure requirements in the framework and each one has an attached list of the intents and metrics associated with each measure. This is to ensure that the company is taking sufficient action to lower emissions, improve circularity and generally work within ecological thresholds.
The ESRS will accelerate the shift toward sustainable materials, building techniques and resource acquisition as major players in the industry are forced to adhere to specific standards. The services provided by Firstplanit, such as impact indexes, product lists and project planning, will be in demand more than ever as the construction industry seeks to limit and reduce its environmental impact in light of these new reporting standards.
Head to Firstplanit now to learn more about how we can help make your projects more sustainable.
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