Preparing for the European Sustainability Reporting Standards (ESRS): What companies need to know
September 10, 2023
The upcoming release of the final European Sustainability Reporting Standards (ESRS) is garnering major interest among businesses operating in Europe. In this post, we provide an in-depth understanding of ESRS, its relation to the Corporate Sustainability Reporting Directive (CSRD), and key steps to prepare for changes in the sustainability reporting requirements.
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What are the European Sustainability Reporting Standards (ESRS)?
The European Sustainability Reporting Standards (ESRS) are a new set of guidelines and standards that aim to align sustainability reporting for businesses operating within the European Union. The first set of ESRS was released in July 2023 by the European Commission, with sector-specific ESRS yet to be developed for later adoption. In January 2024, these standards will become effective for companies within the scope of the CSRD (reporting in 2025).
The standards set a framework for organizations to consistently report data on environmental, social and governance (ESG) metrics for the following purposes:
Improve the consistency and rigor of sustainability data collection and disclosure for both European Union (EU) and non-EU companies, expanding the scope, volume, and granularity of mandated data.
Implement a double materiality approach, necessitating companies to report on both impact (social and environmental) and financial materiality (e.g., how your cash flows, financial position and financial performance are affected).
Strengthen corporate accountability and transparency regarding social, environmental, and financial impacts.
ESRS vs. CSRS: What is the difference?
The Corporate Sustainability Reporting Directive (CSRD) supports the EU’s sustainable finance action plan by providing greater transparency into companies’ societal impacts and investment risks related to climate change. It replaced the Non-Financial Reporting Directive (NFRD) in April 2021, introducing mandatory sustainability reporting for organizations of certain categories. Under the proposed CSRD, the European Financial Reporting Advisory Group (EFRAG) advised the European Commission in developing the draft ESRS and collecting and addressing feedback.
The ESRS is a practical implementation tool of the CSRD. The CSRD sets a legal framework determining which companies need to report ESG information and when, while the ESRS further detail these reporting requirements. By adhering to ESRS, companies can ensure their reporting fulfills the regulatory obligations as outlined by CSRD.
Twelve Finalized European Sustainability Reporting Standards
The ESRS include 12 finalized standards, which span governance and strategy that address material sustainability topics, the impacts, risks and opportunities of these topics, and quantitative metrics and targets.
Cross-cutting standards: General
General, strategy, governance and materiality assessment
Workers in the value chain
Water and marine resources
Biodiversity and ecosystems
Consumers and end-users
Resource use and circular economy
Who will ESRS apply to?
Since the ESRS exist under the CSRD, a wide range of EU-based and non-EU-based companies will need to adhere to the reporting standards.
1. Large companies
Large companies include large Public Interest Entities (PIEs), which have >500 employees, and other large companies that meet two of the following criteria (for both EU and non-EU subsidiaries):
> 250 employees
> € 40 million net turnover (revenue)
> € 20 million total assets
2. Small- and medium-sized companies listed on EU-regulated markets
Most companies that have listed securities on a regulated market in the EU will need to report, which includes companies that are not EU-based. Listed small and medium-sized enterprises (SMEs) will also be subject to reporting requirements, except listed micro undertakings.
3. Non-EU parent companies
Other non-EU-based companies with substantial activity and presence in the EU will also need to report at a global level starting in FY2028 if they meet the following criteria:
Company/consolidated group generated net turnover > € 150 million in the EU for each of the last two consecutive years
AND ultimate parent company had at least one EU subsidiary that meets two of the large company criteria, if not…
THEN the ultimate parent had at least one EU branch that generated net revenue > € 40 million in the last year
Note that separate standards will be published and developed for SMEs and non-EU parent companies.
What is the timeline?
The phased introduction of required reporting by business models is detailed below:
Jan 1, 2024 (Report 2025): Large Public Interest Entities (>500 employees) and large companies listed on EU-regulated markets (>500 employees).
Jan 1, 2025 (Report 2026): Other large companies (includes large companies listed on EU-regulated market).
Jan 1, 2026 (Report 2027): Small and medium-sized companies (+ non-EU based SMEs) listed on EU-regulated market. (Micro-enterprises are exempt and others have the option to opt out of CSRD until reporting year 2029.)
Jan 1, 2028 (Report 2029): Ultimate non-EU parent companies with substantial activity and presence in the EU
To ease the transition to data collection and reporting, ESRS are also offering phased-in relief measures for companies, especially smaller ones:
All companies can skip disclosing the expected financial impacts of environmental risks in the first year and provide qualitative disclosure for the next two years.
In the first year, companies can exclude workforce-related disclosures, such as social protection, disability, illnesses, and work-life balance.
Companies with fewer than 750 employees can also skip disclosing Scope 3 greenhouse gas emissions and certain other workforce-related, biodiversity, value chain, community, and consumer disclosures in the first two reporting years.
As of October 17, 2023, the European Commission proposed delaying the deadline for adopting sector-specific standards from June 2024 to June 2026.
What are the ESRS disclosure requirements?
Mandatory disclosure information
Ten of the 12 ESRS standards are ESG topic-specific and have disclosure requirements on 1) governance, 2) strategy, and 3) impact, risk and opportunity management (IRO). Two of the 12 standards are general cross-cutting principles and disclosures with the same topic-specific disclosure requirements, and a fourth requirement of metrics and targets.
In previous versions of the ESRS, a list of mandatory data points for disclosure was required. In its final draft standards, however, all data points in the list are no longer mandatory. Companies will need to provide a table explaining either where all data points are shown in the sustainability statement, or if the data points are not material. The table below summarizes the disclosure requirements and whether they are mandatory to report.
Disclosure Requirements of ESRS
Cross-cutting standards: General
1. Governance (e.g., board composition, roles, responsibilities, diversity) 2. Strategy (e.g., how company strategy impacts sustainability) 3. Impact, risk and opportunity (IRO) management (e.g., how IROs were identified, and which topics were not included due to materiality assessment) 4. Metrics and targets (e.g., how they will be disclosed for the company’s material topics, agnostic of the industry)
Yes. All companies must report on how they prepared the sustainability statement, governance, strategy, and IRO management.
Topical standards: Environment
1. Governance 2. Strategy 3. Impact, risk and opportunity management across the value chain 4. Establish metrics and explain how to disclose targets for each topic
Companies can determine which data points are material for each topic. IRO information for each topic should cover policies, actions, metrics, and targets.
Topical standards: Social
Topical standards: Governance
Material impacts, risks and opportunities will need to be reported across the value chain—both upstream and downstream. This expands the reporting boundary from what is reported in your company’s financial statements to also include suppliers and customers.
Obtaining data may depend on the level of control your company has over the value chain and the contracts in place. If you cannot obtain data from your value chain, your company can estimate the data with reasonable information.
Double Materiality Assessment
To assess if a standard is material, companies need to perform a double materiality assessment on the company’s impact on sustainability and how sustainability-related matters affect the company. In other words, social, environmental, and financial impacts must be reported:
Impact materiality (social and environmental): Companies must report their real and potential impacts on people and the environment, including both positive and negative impacts over the short, medium, and long term. The assessment has a multi-stakeholder focus and covers the upstream and downstream value chain, with additional requirements specified in ESRS 1 General Requirements. Materiality will consider the likelihood and severity of the impact.
Financial materiality: Sustainability-related financial disclosures are required for factors that have likely and (potentially) sizable financial risks on the company’s short-, medium- and long-term development. Such metrics could include cash flows, financial positioning, financial performance, and other matters beyond the company’s control.
CSRD requires assurance of ESRS to evaluate and verify a company’s sustainability report for accuracy, reliability, and adherence to ESRS guidelines and reporting requirements. Companies will begin with limited assurance and then move towards reasonable assurance.
Limited assurance: This is an acceptable level of assurance that focuses on reviewing the process of information gathering, areas of potential material misstatement, and data at a more aggregated level. The auditor must conclude that they are not aware of any necessary material modifications with a negative conclusion such as, “Nothing was identified that indicated information is materially misstated.” This requires less scrutiny of the data sources and topics reported. Companies will need to provide limited assurance from the date of their initial reporting period, leading to reasonable assurance within two subsequent years.
Reasonable assurance: This means sufficient relevant evidence is provided to confidently say that the reported information is materially correct and prepared according to the reporting criteria (a positive conclusion). Metrics, disclosures, data sources, and accuracy must all be checked and confirmed. Following a feasibility assessment, the European Commission will adopt reasonable assurance standards in the reporting year 2028.
How companies should prepare for ESRS
1. Understand and assess CSRD scoping, reporting and exemptions
Evaluate your company’s structure to identify CSRD-applicable entities. Whether you are a parent company or a subsidiary, understand the CSRD’s scope for your entire structure and seek legal counsel as needed.
Examine reporting options and potential exemptions. Identify where exemptions can be utilized within your organization for CSRD reporting entities.
Understand how the ESRS differ from your company’s current reporting. Determine the optimal reporting approach to meet sustainability obligations and secure stakeholder support.
2. Conduct double materiality assessment
Initiate ESRS implementation at the chosen reporting level and define the reporting boundary (i.e., the value chain), understanding the scope and breadth of your value chain.
Conduct a double materiality assessment to determine which ESRS topics are necessary to report.
Establish governance structures, data models/policies, and roles/responsibilities needed to fulfill the reporting demands of ESRS. Support change management and training as needed.
3. Prepare for assurance
Ensure the quality and availability of your data and documentation is sufficient to enable assurance.
Proactively address issues before the formal assurance process begins.
How can Aligned Incentives help you get ready for ESRS?
Aligned Incentives provides a science-based sustainability platform that helps global organizations effectively measure, report, and mitigate environmental impacts while ensuring ESRS compliance.
Accurate double materiality assessment: Our AITrack platform, powered by a comprehensive database, delivers in-depth insights into your company’s entire value chain. Our process-based Life Cycle Assessment covers over 300,000 Scope 3 activities, enabling granular double materiality assessments at scale—not only for ESRS compliance but also to inform strategic investments.
Streamlined reporting: We offer flexibility to create tailored dashboards for diverse sustainability matters, including environmental and financial metrics. Our platform adapts to varying reporting needs, helping you efficiently meet ESRS requirements and those of other disclosures.
Efficient Assurance: The robustness of AITrack and our accounting system ensures auditability, traceability, and security. It offers detailed documentation down to the line-item level, simplifying the auditing and assurance processes and setting you up for success.