Sustainability Reporting: the ESRS Standards

The ESRS standards are the sustainability reporting standards developed by EFRAG (European Financial Reporting Advisory Group), a private, not-for-profit organisation established in 2001. EFRAG is the European Commission's technical advisor for the development of reporting standards, initially for financial reporting and from 2020 also for sustainability reporting. Its role has been expanded with the development of the European Sustainability Reporting Standards (ESRS). The EU adopted the first delegated act in July 2023 and the complete package comprises 12 standards covering disclosure requirements for qualitative and quantitative data, totalling around 1,200 data points. The reporting requirements are governed by the CSRD (Corporate Sustainability Reporting Directive) and cover all ESG (environmental, social and governance) areas.

These requirements are based on existing sustainability reporting standards and frameworks (e.g. GRI and TCFD) and take into account other EU regulations (e.g. SFDR). The aim is to align the ESRS with the requirements of the ISSB standards where they address the same issues. In addition to the phased implementation of the CSRD, the Directive recognises that although the reporting requirements cover both the company's own operations and its value chain, it may be difficult to obtain the same level of information for the entire chain from the outset. Therefore, value chain reporting can be phased in over a period of three years. For information that is not available, the company should indicate whether it is trying to obtain it and base the reporting on, for example, available internal information, explaining why some information is not available for a period of time and what measures are being taken to obtain it.

The ESRS consist of general cross-cutting standards that apply to all aspects of sustainability, and thematic standards that define the disclosure requirements for a specific ESG topic. Ten thematic standards have been adopted in the first delegated act. The sector-specific standards will be published between 2024 and 2027. Thematic disclosure requirements must be reported if an area is considered material, with the exception of some cross-cutting requirements (ESRS 2), which are always considered material. Terms used in the ESRS include "shall disclose" to indicate a disclosure requirement, "may disclose" to suggest voluntary disclosure, and "shall consider" when referring to resources or methodologies to be considered where applicable.

The ESRS require a company to provide information on the impacts, risks and opportunities related to ESG issues, including the company's impact on the environment and how ESG issues affect the company's development, performance and financial position. Specifically, impacts are the positive or negative sustainability impacts associated with the company's activities, based on an assessment of materiality in relation to the company's sustainability impacts (materiality of impacts). Risks and opportunities are the sustainability-related financial risks and opportunities arising from dependencies on natural, human and social resources, identified through a financial materiality assessment.

ESRS 1 does not contain direct disclosure requirements, but describes the structure of ESRS and defines general principles for reporting. The first is dual materiality and has two dimensions: the materiality of the company's impact on sustainability issues (impact materiality) and the impact of sustainability issues on the company (financial materiality). An ESG issue is material if it meets the criteria for one or both dimensions. The second is due diligence, which is the process of identifying, monitoring, preventing, mitigating and reporting on how the company manages actual and potential negative impacts on the environment and people related to its activities. Finally, sustainability reporting must cover the company itself, as reported in the annual report, including information on material impacts, risks and opportunities related to the company through its direct and indirect relationships along the value chain.

ESRS 1 defines mandatory reporting requirements. These must always include all disclosure requirements of ESRS 2 and those of the thematic standards related to requirement IRO-1 (description of processes for identifying and assessing material impacts, risks and opportunities), regardless of the outcome of the materiality assessment. If, after conducting a materiality assessment, a company considers an ESG topic (e.g. climate change) to be immaterial and therefore decides not to report under all ESRS requirements, it may provide a brief explanation of the conclusions of its materiality assessment, including a forward-looking analysis of the conditions that may lead the company to consider that ESG topic (e.g. climate change) to be material in the future.

The ESRS Sector Standards provide disclosure guidelines for specific environmental issues. ESRS E1 - Climate Change sets out requirements for the disclosure of climate risks and the mitigation and adaptation strategies adopted by companies. ESRS E2 - Pollution focuses on air, water and soil pollution and requires information on the use of high-risk substances. ESRS E3 - Water and Marine Resources sets out criteria for disclosure on the use and protection of water and marine resources. ESRS E4 - Biodiversity and Ecosystems requires companies to disclose impacts on terrestrial, freshwater and marine habitats, including ecosystems and species, and to consider local and indigenous peoples. Finally, ESRS E5 - Resource Use and Circular Economy requires companies to disclose data on resource efficiency, material circularity and sustainable waste management to promote a more circular economy.

EFRAG has developed a voluntary sustainability reporting standard for unlisted SMEs (VSMEs), which represent 99.8% of all companies in the European Union. EFRAG's work on this voluntary standard for unlisted micro, small and medium-sized enterprises is outside the scope of the CSRD Directive: it is driven by the market need for a common reference point to help SMEs meet the increasing demand for sustainability data from business partners and to reduce the barriers to entry for sustainability reporting by unlisted SMEs. Its modular approach allows for greater proportionality, with simplified language and differentiated reporting requirements. The modules cover different aspects of sustainability, with disclosures ranging from environmental and social impacts to corporate governance, and are designed to be easy to use for micro-enterprises.

3Bee Ecosystem's XNatura platform supports companies in non-financial reporting and in developing an effective e-Strategy to achieve environmental goals. Starting with a double materiality assessment, we accurately identify material issues: financial materiality is analysed in a company-specific manner. On the other hand, impact materiality is examined by considering the intensity, extent and irreversibility of impacts, both current and future, again by analysing specific cases. Finally, non-material issues are justified by detailing policies, actions and objectives for a transparent and strategic approach. With objective, transparent and continuous data, we help companies develop sound strategies for environmental protection and remediation in line with ESRS standards. Want to know more?