Sustainability reporting: the ESRS reporting standards

With the arrival of the European Corporate Sustainability Reporting Directive (the CSRD), many companies in Europe will be required to report on Environmental, Social and Governance (ESG) matters. Read more about the CSRD in our blog ‘Sustainability reporting: what is the CSRD?‘ To ensure an uniform application, the CSRD requires companies to follow the European Sustainability Reporting Standards (ESRS). Where the CSRD prescribes the who, what, where and when of reporting, the ESRS prescribes in detail how to report. In this blog, we take a closer look at the ESRS and their systematics.

Background of the ESRS

In the context of uniform application, the CSRD empowers the European Commission to establish directly applicable reporting standards: the ESRS. The ESRS will consist of two components: (i) the general standards and (ii) the sector-specific standards. The sector-specific standards are currently under preparation and are expected to be available around June 2024. The final draft version of the general standards is currently before the European Parliament and the European Council for approval. Although the European Commission has already revised the earlier drafts and diluted some of the obligations therein, the overall set remains profound and comprehensive (about 300 pages). As a result, companies that need to implement these standards would do well to address the matter promptly.

The ESRS in general terms

The final draft of the general standards consists of 12 reporting standards. The first two of these standards – ESRS 1 (general requirements) and ESRS 2 (general disclosures) – apply to all companies within the scope of the CSRD, regardless of the sector in which they operate and/or the sustainability topics they are required to report on. Among other things, ESRS 1 outlines (i) the general structure of the ESRS, (ii) the drafting conventions and fundamental concepts, (iii) the general structure of a sustainability statement, (iv) the general requirements for the information to be included in a sustainability statement, and (v) general explanations and an example of the mandatory materiality assessment (see below). ESRS 2 sets out the reporting requirements for information that companies must provide for all sustainability topics at a general level on the reporting areas governance and strategy, impact, risk and opportunity management, and metrics and targets.

This is followed by the ten topical standards, each defining the reporting standards for a specific sustainability topic. The topical standards may contain specific requirements that complement the general reporting requirements of ESRS 2. The ten sustainability topics are divided into the three ESG categories (Environment, Social, Governance). Five of these belong to Environmental, four to Social and one to Governance. The unpublished sector-specific standards apply to all companies within a specific sector. They address impacts, risks and opportunities that are likely to be material to all companies in a given sector and that are not, or not sufficiently, addressed in topical standards. Schematically, all this boils down to the following:

ESRS

Environmental standards (ESRS E1-E5)

ESRS E1          Climate

ESRS E2          Pollution

ESRS E3          Water and marine resources

ESRS E4          Biodiversity and ecosystems

ESRS E5          Resource use and circular economy

Social standards (ESRS S1-S4)

ESRS S1          Own workforce

ESRS S2          Workers in the value chain

ESRS S3          Affected communities

ESRS S4          Consumers and end users

Governance standards (ESRS G1)

ESRS G1         Business conduct

Examples of reporting requirements

The following serves as an illustration. Reporting requirement E1-5 (energy consumption and energy mix) describes the obligation to provide information on energy consumption and energy mix in MWh, disaggregated by total energy consumption from (a) fossil sources, (b) nuclear sources, and (c) renewable sources disaggregated by (i) biomass etc., (ii) purchased electricity, heat, steam and cooling from renewable sources, and (iii) self-generated renewable energy from non-fuel sources.

Reporting requirement E3-2 (water and marine resources) describes the obligation to report on (intended) measures regarding the consumption of water and marine resources and the resources allocated for the implementation of these measures, in which respect ‘resources’ are classified as those that (a) avoid, (b) reduce (c) recover or reuse water or (d) restore and regenerate aquatic ecosystems and bodies of water.

Materiality assessment and double materiality

Starting point for sustainability reporting under the ESRS is the materiality assessment. Companies within the scope of the CSRD must conduct a materiality assessment to determine which standards and reporting requirements are material in their case. This assessment is based on ‘double materiality’, meaning that companies must report on the one hand on the (financial) impact of sustainability factors on the company (also called the ‘outside-in perspective’ or ‘financial materiality’), and on the other hand on the impact the company itself has on the environment and society (also called the ‘inside-out perspective’ or ‘impact materiality’). A company is only required to report on topics that are material from one or both of these perspectives. Exception to this are the reporting requirements that follow from ESRS 2 (general disclosures). ESRS 2 is always deemed to be material and must therefore always be followed by any company falling within the scope of the CSRD.

Furthermore, the ESRS distinguishes between mandatory obligations and provisions that can be applied voluntarily. For example, all companies must conduct a materiality assessment, but they may share the results thereof.

In addition, some reporting requirements do not apply immediately in the first year the ESRS must be applied. For example, in the first year, all companies are allowed to leave out information on expected financial impacts related to water, biodiversity, resource use and other topics.