Sustainability Reporting: ESRS Environment

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The European Sustainability Reporting Standards (ESRS) offer companies a framework for reporting on environmental, social and governance (ESG) issues. They are 12 standards, drafted by the European Financial Reporting Advisory Group (EFRAG), and are mandatory for all companies subject to the Corporate Sustainability Reporting Directive (CSRD). The ESRS specify the information that an organisation must disclose about its material impacts, risks and opportunities related to sustainability. The standards were adopted as a delegated act by the European Commission in July 2023, coinciding with the entry into force of the CSRD in January 2024.

The CSRD requires companies operating in the EU to report on sustainability issues. Proposed by the European Commission in 2021, the directive replaces the Non-Financial Reporting Directive (NFRD) with the aim of improving the quality, consistency and comparability of sustainability information. The ESRS provide the operational details necessary to meet the requirements for CSRD disclosure, introducing specific disclosure requirements for a broad spectrum of sustainability topics, organised around the ESG criteria. The ESRS comprise two cross-cutting standards, applicable to all sustainability issues, and ten topic-specific standards. In particular, within the environment theme, there is a specific standard dedicated to biodiversity: the E4 standard.

The ESRS Environment, are divided into Environmental standards (E1, E2, E3, etc.) and provide a framework for companies to manage their environmental impacts. Each standard has a specific role in defining the information to be disclosed about materials, risks and opportunities related to environmental, social and governance issues. The ESRS sets out the information required for reporting, clarifying the structure of the standards and the interaction between the disclosure requirements. General Transversal Standards:
ESRS 1: outlines the structure of the ESRS and establishes general principles for reporting, such as materiality assessment and value chains. It does not include direct disclosure requirements;
ESRS 2: defines how companies should communicate policies, actions and objectives. It applies to all ESG topics and sets out the data to be reported on business model, strategy, impacts and risk management.

The ESRS standards set out requirements for the disclosure of information on the impacts, risks and opportunities IROs (Impacts, risks, opportunities) associated with ESG.

ESRS E1 (Climate Change): applies to most companies and covers climate change adaptation and mitigation.
ESRS E2 (Pollution): companies must provide information on the pollution of air, water, soil or food resources.
ESRS E3 (Water and marine resources): covers water consumption, water withdrawals and discharges, and the extraction and use of other marine resources
ESRS E4 (Biodiversity and ecosystems): companies must consider their impact on biodiversity loss, animal species, and the extent and condition of ecosystems.
ESRS E5 (Resource use and circular economy): This standard covers resource flows, inputs and outputs, related to products and services.

ESRS S1 (Own workforce): this standard requires companies to provide information about working conditions, equal treatment and opportunities, and diversity among their employees.
ESRS S2 (Workers in the value chain): companies must also address the working conditions, treatment and opportunities of workers in the value chain.
ESRS S3 (Affected Communities): This standard concerns the rights of local communities, which are affected by the activities of companies.
ESRS S4 (Consumers and end users): The personal safety, privacy and social inclusion of consumers and end-users must also be considered.
ESRS G1 (Business Conduct): The last thematic standard concerns corporate culture, with factors such as political engagement, active and passive corruption, animal welfare, and the practice of whistleblowing.

The ESRS E4 (Biodiversity and Ecosystems) defines the requirements for disclosure of the company's impacts on terrestrial, freshwater and marine habitats, ecosystems and populations of related fauna and flora species. The standard requires the company to provide clear information in its sustainability report, specifically:
- how the company affects biodiversity and ecosystems, considering any action taken by the company to prevent or mitigate actual or potential negative material impacts and to protect and restore biodiversity and ecosystems, and to address risks and opportunities;
- the company's plans and capacity to adapt its strategy and business model;
- the material risks, dependencies and opportunities related to biodiversity and ecosystems and how the company manages them;
- financial effects on the enterprise in the short, medium and long term.

A key aspect that distinguishes the E4 standard from others on biodiversity, such as the GRI standard 101, is the concept of double materiality. Indeed, according to the E4 standard, companies must report on two aspects. On the one hand, they must consider their potential or actual impacts, positive or negative, on natural ecosystems; on the other hand, they must examine the dependencies and risks arising from biodiversity or its possible loss. Another key theme is the hierarchy of action, which provides guidance to companies on how to mitigate their impact on biodiversity. A first step is to reduce, when possible, the impact within their own operations and supply chain.

ESRS offers companies a number of benefits, such as improving to pursue ESG goals by favouring an approach based on the integration of sustainability into corporate strategies. This can lead to an improvement in the ESG performance of companies, which over time allows them to achieve a competitive advantage. Furthermore, ESRS requires companies to provide information in a transparent and comparable manner. This can help investors, consumers and other stakeholders make informed decisions about companies. In addition, ESRS can foster the development of new businesses by enabling companies to enter new and sustainable markets, access finance on favourable terms, and improve their performance and competitive position. Finally, companies that provide clear and transparent information about their impacts on sustainability can reduce risk and litigation.

In addition to the phased introduction of CSRD, which will apply from the financial year 2024, the directive also takes into account the difficulties in finding information on the entire value chain. Therefore, value chain reporting can be phased in over a period of three years. For information on the value chain that is not available, the company must indicate whether it is trying to obtain it and rely, for example, on available internal information. The company must also indicate why certain information is not available for a specific reporting period and what measures will be taken to obtain it for future reporting. This mainly concerns ESRS S2 - ESRS S4, as they deal with external factors.

The ESRS contain reporting requirements that the reporting company must comply with. Specific criteria and indicators of "what" to report on each topic are defined in the standards. However, the ESRS do not specify in all situations 'how' the disclosure must be prepared. This is the background to the XNatura Platform by 3Bee Ecosystem, the first platform that enables companies, municipalities and nature parks to monitor their impacts and dependencies on nature, biodiversity and climate. Based on objective, transparent and continuous data, the XNatura Platform enables the development of robust strategies for environmental protection and regeneration. Want to know more?