The European Union’s Corporate Sustainability Reporting Directive (CSRD) is bringing about a significant shift in how companies approach and disclose their sustainability efforts. At the heart of this change are the European Sustainability Reporting Standards (ESRS), which aim to standardise sustainability reporting, making it more transparent and comparable across businesses.

On 31 July 2023, the European Commission published the final versions of the European Sustainability Reporting Standards (ESRS). The ESRS specify the sustainability information that companies will need to report on in accordance with the Corporate Sustainability Reporting Directive (CSRD). 

What Are the ESRS Standards?

The ESRS are a set of mandatory guidelines that form the backbone of the CSRD framework. Adopted by the European Commission, the standards provide a structured approach to sustainability reporting, covering a wide range of environmental, social, and governance (ESG) aspects. The initial set comprises 12 standards, including two cross-cutting standards and ten topical standards. These standards are designed to enhance the quality, depth, and comparability of corporate sustainability reporting.

The ESRS applies to approximately 50,000 companies within the EU, as well as subsidiaries and branches abroad, and non-EU companies conducting significant business within the EU. This broad scope ensures that a large number of businesses contribute to the EU’s sustainability goals.

Objectives of the ESRS

The ESRS aligns closely with the EU Green Deal’s mission of achieving climate neutrality by 2050. Its objectives include:

●Transparency: To provide stakeholders, including investors, regulators, and the public, with detailed insights into companies’ sustainability practices.

●Accountability: To require companies to disclose their sustainability performance, impacts, and management practices, extending into supply chains and product life cycles.

●Integration: To embed sustainability disclosures into annual reports alongside financial data, raising sustainability reporting to the same level of importance as financial reporting.

By achieving these objectives, the ESRS aims to encourage businesses to proactively improve their sustainability management and align with EU-wide environmental and social goals.

Which Companies are Affected and When?

The CSRD and ESRS have a phased implementation approach depending on the size and type of the company:

• 2025 Reporting (2024 fiscal year):

Applies to companies already subject to the Non-Financial Reporting Directive (NFRD).

• 2026 Reporting (2025 fiscal year):

Extends to large corporations with at least 250 employees, €25 million in total assets, or €50 million in net sales.

• 2027 Reporting (2026 fiscal year):

Includes listed small- and medium-sized enterprises (SMEs) and certain financial institutions.

• 2029 Reporting (2028 fiscal year):

Covers non-EU companies with EU revenue exceeding €150 million.

This phased approach provides businesses with time to adapt and prepare for the increased reporting requirements.

Breakdown of the ESRS Standards

The ESRS framework includes two cross-cutting standards and ten topical standards, covering environmental, social, and governance aspects.

Cross cutting standards:

• ESRS1: General Requirements
• ESRS2: General Disclosure

Environmental Standards (ESRS E1–E5):

• E1: Climate change mitigation and adaptation strategies.
• E2: Management of pollution.
• E3: Protection of water and marine resources.
• E4: Biodiversity conservation.
• E5: Circular economy and resource efficiency.

Social Standards (ESRS S1–S4):

• S1: Workforce-related disclosures, such as diversity and well-being.
• S2: Impacts on workers in the value chain.
• S3: Community effects stemming from corporate activities.
• S4: Product and service impacts on consumers and end-users.

Governance Standard (ESRS G1):

• Addresses governance frameworks, anti-corruption measures, and stakeholder relationships, offering a lens into corporate accountability and oversight.

A brief summary of the objectives of each of these standards:

General Standards

(1) ESRS 1: General Requirements

• Sets the foundation for sustainability reporting, covering principles, methodologies, and materiality assessments.

(2) ESRS 2: General Disclosures

• Requires companies to report governance, strategy, risk management, and metrics, ensuring alignment with frameworks like TCFD and ISSB.

Environmental Standards

(3) ESRS E1: Climate Change

This standard focuses on how organisations impact climate change and how they adapt to it. Companies must report on:

• Their contributions to mitigating climate change in line with the Paris Agreement.
• Efforts to limit global warming to 1.5°C.
• Plans to transition operations toward a sustainable economy.

(4) ESRS E2: Pollution

ESRS E2 addresses the company’s role in preventing and reducing pollution. It requires reporting on:

• Impacts on air, water, and soil quality.
• Actions taken to prevent, mitigate, or remediate pollution.
• Plans for creating a toxic-free environment aligned with the EU’s Zero Pollution Action Plan.

(5) ESRS E3: Water and Marine Resources

This standard highlights a company’s effects on water and marine ecosystems, focusing on:

• Efforts to reduce water consumption and protect marine life.
• Contributions to clean air, clean water, and healthy biodiversity under EU initiatives.

(6) ESRS E4: Biodiversity and Ecosystems

Companies must detail their impact on biodiversity, including:

• Actions to protect and restore ecosystems.
• Their interaction with terrestrial, freshwater, and marine habitats.
• Consideration of indigenous populations and communities affected by these impacts.

(7) ESRS E5: Resource Use and Circular Economy

This standard focuses on sustainable resource use and waste reduction. Companies report on:

• Depletion of non-renewable resources and promotion of renewable resources.
• Steps toward a circular economy by minimising waste and maintaining resource value.

Social Standards

(8) ESRS S1: Workforce

ESRS S1 examines how a company’s activities impact its workforce. Reports must cover:

• Working conditions.
• Equal treatment and non-discrimination.
• Labor rights, such as preventing child labour.

(9) ESRS S2: Workers in the Value Chain

This standard extends workforce considerations to all workers within the company’s value chain. Key areas include:

• Working conditions and labour rights.
• Impacts of the company’s operations on value chain workers.

(10) ESRS S3: Affected Communities

Companies must assess their influence on local communities, particularly in high-risk areas. Reports should address:

• Economic, social, and cultural impacts on communities.
• Civil and political rights, including those of indigenous peoples.

(11) ESRS S4: Consumers and End Users

ESRS S4 shifts the focus to customers, examining:

• Impacts on consumer safety and inclusion.
• The information provided to end users.

Governance Standards

(12) ESRS G1: Business Conduct

This standard emphasises ethical business practices, requiring disclosures on:

• Corporate culture and anti-corruption measures.
• Supplier management and whistleblower protections.
• Political influence, lobbying, and animal welfare.

Key Concepts of ESRS

●Double Materiality: Companies must report on both how sustainability issues affect their financial performance and how their operations impact society and the environment.

●Value Chain Reporting: Companies must expand their sustainability reporting to include material environmental and social impacts throughout their value chain.

●Forward-Looking Information: Companies are required to disclose their plans and targets for improving their sustainability performance.

Challenges and Preparations for Compliance

Transitioning to ESRS compliance presents significant challenges:

●Gap Analyses: Companies need to identify areas where current practices fall short of ESRS standards.

●Internal Expertise: Teams need to be equipped with knowledge of the new reporting requirements.

●Integrated Reporting Systems: Data collection systems must align with ESRS electronic formats.

●Stakeholder Engagement: Dialogues with suppliers, investors, and affected communities must be established.

The Road Ahead

The ESRS is designed to ensure comparability of sustainability information and promote sustainable business practices, with the first set of ESRS standards published in December . Companies must prepare for the phased implementation, with reporting commencing in 2025 for some companies. The ESRS framework will expand to include sector-specific standards and simplified requirements for SMEs in the future. By taking a proactive approach, embracing the standards as a tool for growth, and not just a regulatory obligation, businesses can position themselves as leaders in the shift toward a sustainable economy. The ESRS serves as the implementation mechanism for the CSRD, with key aspects including:

1.Content Guidance: Outlining specific disclosures on environmental, social, and governance (ESG) topics.

2.Reporting Structure: Ensuring a consistent format for sustainability information, integrated into companies’ annual reports.

3.Alignment with International Frameworks: Leveraging existing standards like GRI, TCFD, and SASB to provide clarity and global compatibility.

Conclusion

The European Sustainability Reporting Standards (ESRS) are a cornerstone of the Corporate Sustainability Reporting Directive (CSRD), representing a transformative step in corporate sustainability practices. By establishing a comprehensive framework for ESG reporting, the ESRS not only ensures compliance but also pushes companies toward greater transparency, accountability, and alignment with the EU Green Deal’s climate neutrality goals.

While the transition to ESRS compliance poses challenges, it also offers significant opportunities for businesses to innovate, improve their sustainability management, and build trust with stakeholders. Companies that take a proactive approach—embracing the standards as a tool for growth rather than just a regulatory obligation—will position themselves as leaders in the shift toward a sustainable economy.

As sector-specific standards and additional guidelines are introduced, organisations must remain agile, and prepared to evolve alongside the requirements. Ultimately, the ESRS framework is not merely about reporting; it’s a catalyst for meaningful change, helping businesses contribute to a more resilient and sustainable future for all.

Your company’s journey to CSRD compliance starts now. Are you ready?