What are the ESRS?

In 2022, the European Financial Reporting Advisory Group (EFRAG) released its first set of ESRS. In December 2023, the ESRS were published in the Official Journal of the European Union and accepted by the European Commission as legally binding.

The ESRS cover a wide range of environmental, social, and governance issues, including climate change, biodiversity and human rights. They provide information for investors on the sustainability impact of the companies in which they invest. The standards take into account the International Sustainability Standards Board (ISSB) requirements and the content of the Global Reporting Initiative (GRI) to support interoperability between European Union (EU) and global standards, and to avoid unnecessary double reporting by companies.

The ESRS detail the metrics and responses that business, or undertakings, must provide in their sustainability statement to align with the CSRD disclosure requirements. CSRD compliance is being phased in from 2024 through 2029, and is based primarily on Non-Financial Reporting Directive (NFRD) legacy or company size.

Learn more about CSRD.

The ESRS framework spans two cross-cutting standards and ten topical standards, encompassing 160 disclosure requirements, each with their own datapoints and application requirements.

Cross cutting standards include ESRS 1: General Requirements and ESRS 2: General Disclosures. These are considered mandatory for all organizations reporting under ESRS, regardless of their materiality assessment (the process of determining which disclosures are material to an undertaking).

ESRS 1 includes the framework details for sustainability reporting, drafting conventions, key terms and general prerequisites for creating and presenting sustainability-related information. While there are no specific disclosures to be made under this standard, these guidelines establish the requirements with which undertakings need to comply for the reporting of other sections.

ESRS 1 also outlines the process to be followed by companies to carry out their materiality assessment; and how to determine which specific disclosures are relevant to their business and operations.

ESRS 2 sets out disclosure requirements for the information that organizations must provide at a general level across all ESRS material sustainability topics in broad areas such as governance, strategy and risk. This disclosure sets out minimum disclosure requirements regarding policies, actions, metrics and targets.

The 10 topical standards are divided in three sections—environment, social and governance—and correspond to specific sustainability topics, better understood as sustainability domains that might be impacted by an undertaking’s business activities.

Environment :

• 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:

• ESRS S1—The undertaking’s own workforce
• ESRS S2—Workers in the undertaking’s value chain
• ESRS S3—Affected communities
• ESRS S4—Consumers and end users

Governance

• ESRS G1—Business conduct

All ESRS—cross-cutting standards and topical standards—are organized into specific disclosure requirements which define the information that undertakings are required to disclose and report.

Each disclosure requirement is composed of different paragraphs containing datapoints that break the disclosure down into detailed elements. There are over a thousand datapoints in all, helping to provide a granular understanding of the information being requested in the DRs.

Application requirements offer detailed guidelines on how to meet specific disclosure requirements and datapoints. Application requirements carry the same authority as other sections of the ESRS and provide essential instructions for compliance.

None of the topical standards (or their related disclosure requirements and datapoints) is mandatory. Companies make a determination of which to respond to based on their materiality assessment—a process of determining which standards and disclosures are material to the organization.

CSRD reporting is based on the concept of double materiality. Organizations must disclose information on how their business activities affect the planet and its people (called impact materiality), and how their sustainability goals, measures and risks impact the business's financial health (called financial materiality).

For example, in addition to requiring an organization to report its energy usage and costs, CSRD requires it to report emissions metrics that detail how that energy use impacts the environment, targets for reducing that impact, and information on how achieving those targets will affect the organization’s finances.

If a company wishes to exclude a disclosure requirement or datapoint it must explain the decision with specific reference to the outcomes of their materiality assessment. EFRAG is currently developing additional guidance on how companies can perform their double materiality assessments.

In addition to the sector agnostic standards drafted in the ESRS, EFRAG is tasked with developing information that undertakings should disclose depending on their sector of activity.

In February 2024, the European Parliament agreed to postpone the deadline for adopting sector-specific European Sustainability Reporting Standards (ESRS) by two years. Sector specific ESRS are expected to be released by June 2026, which does not impact the CSRD effective dates.

With two cross-cutting standards, 10 topical standards, and over 1,000 data points companies looking to report against the ESRS are facing a data challenge. The is exacerbated by the fact that ESG data is more diverse and held in more disparate systems than other forms of corporate data such as financial data. Locating, capturing and managing ESG data for ESRS disclosure is a serious undertaking and requires diverse stakeholder engagement and fit-for-purpose technology.

You can find updates on ESRS reporting requirements on the EFRAG website, which includes implementation guides and a FAQ section.