What are the European Sustainability Reporting Standards?
The European Sustainability Reporting Standards, or ESRS for short, mark a milestone in Europe’s drive to increase transparency and consistency in sustainability reporting (CSRD ). Born out of pressure from public opinion, investor demands and the need to meet global climate targets, these standards provide a consistent basis for assessing and reporting companies’ environmental, social and governance (ESG) performance. These standards were defined by EFRAG, the European Financial Reporting Advisory Group, which is also responsible for defining the International Financial Reporting Standards (IFRS) in addition to the ESRS.
The main elements of the ESRS include:
- 12 ESRS guidelines: These relate to specific information that must be included in reports to provide a clear overview of a company’s sustainability efforts.
- Comparability: The standards ensure that data is comparable across different companies and sectors.
- Clarity and consistency: With the ESRS, stakeholders can be sure that the information is recorded and presented according to a defined, consistent framework.
Why are the European Sustainability Reporting Standards important for Europe?
The importance of the ESRS goes far beyond mere reporting obligations. They are part of the Corporate Sustainability Reporting Directive (CSRD) and a key instrument that helps Europe to consolidate its role as a pioneer in sustainability and responsible business conduct.
With the“European Green Deal“, the European Union has an ambitious action plan to make Europe the first climate-neutral continent by 2050 . To achieve this, European countries must reduce their net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. The energy industry (37%) and the I ndustry in Germany (20%) will be responsible for over half of Germany’s greenhouse gas emissions so it is obvious thatcompanies must be held accountable to achieve these ambitious but very important targets.
Due to the EU Taxonomy and the ESRS provide companies with clear guidance on what information they should disclose and how it should be presented. This makes it easier for regulators to monitor progress towards the Green Deal targets and ensure that companies are doing their part to achieve them.
In addition, the data provided by ESRS can be used to assess the impact of the Green Deal on the European economy, identify potential barriers and take appropriate support measures.
In short, while the Green Deal outlines the “what” and “why” for a more sustainable Europe, EFRAG’s ESRS provide the means to the “how” by providing clear, consistent and comparable data on companies’ sustainability efforts.
What is particularly relevant for companies with regard to ESRS?
How are the European Sustainability Reporting Standards structured?
There are three categories of ESRS:
- General standards
- Thematic standards (environmental, social and governance standards)
- Sector-specific standards (affected industries)
🌎 General standards
The general standards ‘ESRS 1 General Requirements’ and ‘ESRS 2 General Disclosures’ apply to the sustainability aspects covered by topic-related and sector-specific standards.
They describe the general requirements for a sustainability report (e.g. structure and presentation) as well as the general disclosure requirements in relation to the company’s material sustainability aspects. The principle of“double materiality” is used to determine whether a topic is considered material for a company. We have summarized the materiality analysis process in 4 steps in an article.
📂 Topic-related standards
The topic-related standards deal with specific sustainability topics and are divided into topics and sub-topics and, where applicable, further sub-sub-topics. They may specify special requirements that go beyond and supplement the “ESRS 2: General Disclosures”. These specific requirements must also be followed by companies.
🏭 Sector-specific standards
Sector-specific standards apply industry-wide and address aspects such as impacts, opportunities and risks that are not sufficiently considered in topic-specific standards. They offer a deep insight into the most important topics in an industry and promote greater comparability between companies.
In January 2024, EFRAG announced that the introduction of sector-specific ESRS will be postponed by 2 years until June 2026, including sustainability reporting by companies from third countries. Sector-specific standards are to be introduced for the following industries Oil and gas; Coal, quarrying and mining; Logistics and road transport; Agriculture, farming and fishing; Automotive and motor vehicles; Energy production and utilities; Food and beverages; Textiles, accessories, footwear and jewelry.
What are the twelve ESRS standards?
ESRS 1 sets out the structure of the European Sustainability Reporting Standards, explains the requirements for their preparation and the underlying concepts. It also defines basic requirements for the preparation and presentation of sustainability-related information. The reporting period for a company’s sustainability statement is the same as the reporting period for the company’s annual financial statements.
ESRS 2 defines the requirements for information that a companymust generallyprovide on all material sustainability aspects of the following areas in the sustainability report : Governance, strategy, impact management, risks and opportunities as well as key figures and targets.
The ESRS E1 standard defines a company’s disclosure requirements in relation to its impact on climate change, efforts to limit global warming to 1.5 degrees in accordance with the Paris Agreement and adaptation strategies to actual and expected climatic changes.
It also contains disclosure requirements on how companies deal with their greenhouse gas emissions (Scope 1-3 emissions) and the associated risks, as well as the obligation to provide information on the company’s energy consumption and energy mix.
This section covers the company’s actual and potential impacts on air, water and soil pollution. It highlights the company’s actions and strategies to prevent and mitigate such pollution and adapt to a sustainable economy. The standard also considers the financial implications of these environmental impacts. It also includes information on substances of concern that the company produces or uses and their potential impact on people and the environment.
The main objective of this standard is to enable users to recognize the actual and potential impacts of the company on water and marine resources. In addition, companies should present their measures to mitigate negative impacts and protect these resources.
The standard also requires a description of how a company adapts its business strategies in line with sustainable water use. Finally, companies should provide information on material risks, opportunities and financial impacts arising from their relationship with water and marine resources. For “water”, the standard refers to surface and groundwater and for “marine resources” to their extraction and use as well as the associated activities.
The ESRS E4 standard aims to require companies to clearly state in their sustainability reports how they affect biodiversity and ecosystems. Both positive and negative impacts, including the company’s role in the loss of biodiversity, should be taken into account. The company should also present its measures to mitigate these impacts and restore biodiversity.
The business strategy is expected to be in line with various global and EU biodiversity directives. Companies should also report on their material risks and opportunities and their financial implications in relation to biodiversity. The standard considers the company’s relationship with different habitats and ecosystems. In this context, “biodiversity” refers to the variability of organisms and their ecosystems.
ESRS E5 is about the company’s impact on resource efficiency, the use of renewable resources and the prevention of depletion of non-renewable resources. Companies should report their actions and their results to mitigate negative impacts in this area, including measures to decouple economic growth from the use of materials.
The standard emphasizes the need to adapt business strategies to minimize waste and maximize resource efficiency. The “circular economy” describes a system that maximizes the value of products and materials by promoting their use optimization, reuse and recycling. It is designed to help companies master the transformation from a linear to a circular economy.
This standard stipulates that the company must report on the positive and negative influences of the company on its own workforce, measures taken and their results, as well as risks and opportunities. The focus is on the social aspects of (i) working conditions, (ii) equal treatment and opportunities for all, and (iii) other labor-related rights such as child and forced labor. Companies should explain how they address these factors and what material risks or opportunities they present.
The ESRS S1 standard refers only to the company’s workforce, including non-employeesbut not to external workers in the value chain.
The standard defines disclosure requirements for companies to make the impact of their business activities on workers in their value chain transparent. Companies should explain their approach to assessing and addressing impacts on working conditions, equal treatment & opportunities and other labor-related rights. The standard applies to all workers in the value chain who are not part of the “own workforce”.
This area sets out how companies impact affected communities through their business activities. Businesses must set out their approach to addressing impacts on (i) economic, social and cultural rights of communities, (ii) civil and political rights of communities, and (iii) specific rights of indigenous peoples, as well as the opportunities and risks of dependence on these communities.
Affected communities are individuals or groups who live or work in the same area that is or could be affected by the company’s activities or its value chain.
The ESRS S4 standard sets disclosure requirements to help users understand an organization’s impact on consumers and/or end users in the context of its business, products and services. Companies should explain their approach to issues such as (i) information-related impacts on consumers and/or end-users (e.g. privacy, freedom of expression), (ii) personal safety (e.g. health and safety, personal security and child protection), and (iii) social inclusion of consumers (e.g. non-discrimination, access to products and services and responsible marketing practices). Misuse of the products by consumers is not part of this standard.
The main objective of the ESRS G1 standard is to provide clear guidelines for companies so that the strategies, processes and performance in the area of corporate policy can be understood in the sustainability report. In particular, the following three main areas of corporate governance are considered:
(i) Corporate ethics and culture, e.g. the fight against corruption, the protection of whistleblowers
(ii) The management of supplier relationships, especially with regard to payment practices
(iii) The way in which companies exert political influence and the resulting obligations, including lobbying.
Can I download the ESRS as a PDF?
Yes, the European Sustainability Reporting Standards (ESRS) are available as a PDF download in23 languages on the website of the European Commission. The most July 31, 2023 published version of the ESRS are hidden behind the “Annex – C(2023)5303“. We have the direct link to download the ESRS in German. We would also like to point out that the document comprises 282 pages and is not particularly user-friendly.
Note: The translation into German is not yet final and may cause additional ambiguities that are better represented in the English version. It is therefore advisable to refer to the English version if in doubt.
EFRAG has published a list of all ESRS data points as an Excel file as well as further CSRD guidance to support companies in implementing the directive.
Are the ESRS standards final?
EFRAG had published a revised version of the 1st set of ESRS and asked for feedback again from June 9, 2023 to July 7, 2023. After the European Commission received over 600 responses and comments, these were revised and simplified once again.
On July 31, 2023, the Commission presented the Delegated Act on Set 1 of the European Sustainability Reporting Standards (ESRS). Although the official publication in the EU Official Journal and thus the formal entry into force is still pending, the ESRS standards are final and now for the first time set out binding criteria for sustainability reporting in the EU . Companies that are obliged to report in accordance with the Corporate Sustainability Reporting Directive (CSRD) must comply with these standards.
Structure of the ESRS sustainability statement
ESRS requires companies to dividetheir sustainability statement into four parts:
- General information
- Environmental information
- Social information, and
- Governance information.
As the information in the individual sections is not necessarily mutually exclusive, the company may refer to information that has already been provided in another section of the report in order to avoid duplication.
The information provided in the sector-specific ESRS is organized by reporting area and, if applicable, by sustainability topic. If the company provides material company-specific information, it presents it together with the most relevant non-sector-specific and sector-specific disclosures.
Source: Appendix 1 “European Sustainability Reporting Standards (ESRS)”
When presenting sustainability data, it should be noted that it must be possible to distinguish between information required by the ESRS and other data contained in the management report. In addition, the format of the CSRD sustainability report must be accessible to both human readers and machine-readable systems.
In order to meet this wealth of requirements, there are numerous software solutions that can support the creation of a sustainability report. A PwC study presents the preferred tools.
ESRS conclusion and outlook
The introduction of the ESRS marks a turning point in the way European companies report on their sustainability initiatives. These standards are not only a tool for transparency and responsibility, but can also serve as a catalyst for positive change in the business world. The ESRS are an elementary component of the CSRD and therefore a relevant building block for achieving the goals of the Green Deal.
By following these guidelines, companies can not only improve their own sustainability efforts, but also build trust with stakeholders, increase their attractiveness to financial investors and strengthen their market position. Overall, the introduction of the ESRS demonstrates Europe’s commitment to a more sustainable future and sets a benchmark for other regions around the world.
