ESRS: A Guide to European Sustainability Reporting Standards
An in-depth guide on everything you need to know about the European Sustainability Reporting Standards (ESRS).
The EU Corporate Sustainability Reporting Directive (CSRD) mandates that companies within its scope report on their sustainability performance in accordance with the European Sustainability Reporting Standards (ESRS). These standards, developed by the European Financial Reporting Advisory Group (EFRAG), provide a comprehensive framework for companies to articulate their ESG (environmental, social, and governance) performance, facilitating informed decision-making among stakeholders and driving sustainable business practices across the EU.
In this article, we provide an insight into what the European Sustainability Reporting Standards (ESRS) are and what are some of their key features.
CSRD Timeline
- In April 2021, the European Commission adopted the proposal for a Corporate Sustainability Reporting Directive (CSRD)
- The directive came into force on January 5, 2023
- Companies will start reporting under the new CSRD rules for the 2024 financial year, with reports published the following year.
Key Features of ESRS
Double Materiality
Double materiality is a concept that emphasizes the two-way relationship between a company’s sustainability performance and its financial performance. It recognizes that a company’s ESG (environmental, social, and governance) issues can negatively and positively impact its financial performance. A simple example is that a company’s poor environmental performance could lead to increased costs and future risk alongside reputational damage. At the same time, strong social and governance practices could attract investors and customers.
As per the ESRS when assessing double materiality, companies should first look at their business’s impact on society and the environment. Suppose this impact is financially relevant, meaning it could affect the company’s cash flow, development, performance, or position in the short, medium, or long term. In that case, it is considered financially material. However, regardless of whether it is financially material, the impact is still important and should be captured by the impact materiality perspective.
An undertaking’s principal impacts, risks and opportunities are understood to be the same as the material impacts, risks and opportunities identified under the double materiality principle and therefore reported on in its sustainability statements.
ESRS 1- General Requirements, 3.3 Double Materiality
Reporting Areas
Governance
Governance disclosures are a crucial component of sustainability reporting, providing stakeholders insights into a company’s commitment to ethical and sustainable practices. These disclosures cover various aspects of corporate governance, including board composition, risk management processes, and stakeholder engagement initiatives.
The governance section of the ESRS standards contains disclosures about the governance structures, controls, and practices implemented to oversee and manage sustainability-related activities.
Strategy
According to the ESRS, the strategy section contains disclosures about how the company’s strategy and business model(s) intersect with its significant impacts, risks, and possibilities, including the plan for tackling them.
These disclosures aim to provide a clear understanding of the governance mechanisms, controls, and procedures established for monitoring and managing sustainability aspects. Additionally, they aim to provide information about how stakeholder interests and perspectives are considered in developing and implementing strategy and business model.
Impact, risk, and opportunity management
These disclosures aim to report on:
- the procedures used to identify critical sustainability impacts, risks, and opportunities; and
- the information included in the sustainability report based on the materiality assessment undertaken by the company.
Metrics and targets
The disclosures in this section aim to provide a clear understanding of the performance indicators used by the company to assess the effectiveness of its efforts to manage critical sustainability issues. They outline the specific information that must be disclosed when reporting on metrics and targets related to material sustainability issues.
Examples of disclosures in this section are:
- “Disclosure Content – Metrics DC-M – Metrics in relation to material sustainability matters
- Disclosure Content – Targets DC-T – Tracking effectiveness of policies and actions through targets”
Each of these disclosures provides a framework of how to report on metrics and targets, what those metrics will qualitatively look like, and if they have any validation, for instance for an external assuring body.
Stakeholders and materiality assessment
ESRS divides stakeholders into two main groupings:
- Affected stakeholders are individuals or groups who may be affected, either positively or negatively, by the actions of a company or its supply chain. These stakeholders may include employees, customers, suppliers, communities, and the environment.
- Users of sustainability statements are individuals or groups who use these reports to make decisions. These users may include investors, lenders, analysts, government officials, civil society organizations, and academics.
ESRS states that engaging with affected stakeholders is crucial for conducting ongoing due diligence and assessing sustainability materiality. This process involves identifying and assessing potential negative impacts, which helps companies determine the material impacts to be included in their sustainability reports. In other words, engaging with stakeholders is essential for companies to understand the broader impacts of their actions and make informed decisions about their sustainability reporting.
Sustainability due diligence
Sustainability due diligence is an ongoing process that helps companies identify, prevent, and address negative impacts on the environment and people related to their business. This includes impacts caused by the company itself and those linked to its operations, products, and services through its business relationships. The process prioritizes addressing the most severe and likely impacts, and this informs the assessment of material impacts for sustainability reporting. Identifying material impacts also helps companies identify potential risks and opportunities related to sustainability.
Although the ESRS states that they “do not impose any conduct requirements in relation to sustainability due diligence” they do facilitate sharing due diligence information in the form of disclosures. For example Disclosure Requirement GOV-4 – Statement on sustainability due diligence which states that “The undertaking shall disclose a mapping of the information provided in its sustainability statements about the sustainability due diligence process(es).”
