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.
Download a 5-page summary in our resource center.
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:
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.
The ESRS include 12 finalized standards, which span governance and strategy that address material sustainability topics, the impacts, risks, and opportunities of these topics, as well as quantitative metrics and targets.
| Cross-cutting standards: General | ||||||
| ESRS 1 | General requirements | |||||
| ESRS 2 | General disclosures (Governance; Strategy; Impact, risk, and opportunity management; Metrics and targets) | |||||
| Topical standards | ||||||
| Environment | Social | Governance | ||||
| ESRS E1 | Climate change | ESRS S1 | Own workforce | ESRS G1 | Business conduct | |
| ESRS E2 | Pollution | ESRS S2 | Workers in the value chain | |||
| ESRS E3 | Water and marine resources | ESRS S3 | Affected communities | |||
| ESRS E4 | Biodiversity and ecosystems | ESRS S4 | Consumers and end-users | |||
| ESRS E5 | Resource use and circular economy | |||||
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.
Large EU-based companies, including parent companies, that meet at least two of the following criteria annually over the past two consecutive years (covering both EU and non-EU subsidiaries):
Most companies that have listed securities on a regulated market in the EU will need to report, including companies that are not EU-based. Listed small and medium-sized enterprises (SMEs) will also be subject to reporting requirements, except listed micro-enterprises.
Other non-EU-based companies or consolidated groups with substantial activity and presence in the EU, qualified by generating over € 150 million in net turnover annually for the past two consecutive years and meeting one of the following criteria:
Note that separate standards will be developed and published for SMEs and non-EU parent companies.
The phased introduction of required reporting by business models is detailed below:
To ease the transition to data collection and reporting, ESRS are also offering phased-in relief measures for companies, especially smaller ones:
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 | Mandatory? | |
| 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.
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:
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.
Companies can prepare for ESRS disclosures by following the steps outlined below and referencing the official implementation guidance, Q&A, and Initial Observed Practices documents.
Aligned Incentives provides a science-based sustainability platform that helps global organizations effectively measure, report, and mitigate environmental impacts while ensuring CSRD-ESRS compliance.
Schedule a free consultation 🡲
