Demystifying ESRS: An introductory Guide to European Sustainability Reporting Standards and CSRD Disclosure Requirements
Looking to navigate the complex landscape of European sustainability reporting? This introductory...
9 min read
In an era where sustainability is paramount, understanding and complying with the EU Sustainability Reporting Standards (ESRS) and the Corporate Sustainability Reporting Directive (CSRD) is essential for businesses operating within the European Union. This comprehensive guide demystifies these frameworks, offering practical steps and insights to help your organization navigate and excel in sustainable reporting practices, ensuring transparency, compliance, and competitive advantage.
This article is aimed at sustainability practitioniers. An high-level article for business leaders can be found here.
Table of Contents
- Understanding ESRS and CSRD
- The Rationale Behind ESRS Implementation
- Detailed Breakdown of ESRS Standards
- Implementing ESRS in Your Organization
- Sector Coverage and Specifics
- Future Outlook of ESRS and CSRD
- Frequently Asked Questions (FAQ)
- Additional Resources and References
- About the Author/Consultancy Services
Understanding ESRS and CSRD
What are ESRS?
The EU Sustainability Reporting Standards (ESRS) are comprehensive guidelines designed to help companies across the European Union report on their sustainability efforts in a clear and consistent way. These standards are crucial for ensuring that sustainability reporting aligns with the goals of transparency and comparability, making it easier for everyone—investors, customers, and the public—to understand and compare how companies are addressing environmental, social, and governance (ESG) issues.
What is CSRD?
The Corporate Sustainability Reporting Directive (CSRD) is a law from the European Parliament and Council that expands existing rules, requiring more companies to provide detailed information about their corporate sustainability practices. The idea is to improve the quality and consistency of these reports, making the information more reliable and easier to compare. This directive plays a crucial role in shaping European Sustainability Reporting Standards and ensuring compliance with ESRS standards.
Differences and Interconnections between ESRS and CSRD
While the CSRD outlines who must report and why, the ESRS standards standardize how the reporting should be done. ESRS reporting is essential for fulfilling the legal obligations under the Corporate Sustainability Reporting Directive. By using ESRS standards, companies can ensure they meet the disclosure requirements set forth, thereby improving access to sustainable finance and enhancing their corporate sustainability reporting.
The Rationale Behind ESRS Implementation
The EU mandates that large companies and those listed on the stock market (except very small ones) share information about the risks and opportunities related to social and environmental issues. This transparency is crucial for investors, civil society, consumers, and others to assess a company’s sustainability performance. The double materiality principle ensures that companies consider both the impact of sustainability issues on their business and the impact of their business on society and the environment.
Current sustainability reports often lack important details, making it hard for stakeholders to trust the information or compare companies. By introducing European Sustainability Reporting Standards (ESRS), the EU aims to improve the quality of sustainability reporting under the Corporate Sustainability Reporting Directive (CSRD), helping companies communicate their performance more effectively and making it easier for investors to make informed decisions.
It is part of the EU Green Deal, similar to CBAM, EUDR and CSDDD.
Detailed Breakdown of ESRS Standards
The ESRS standards set the rules for what companies need to disclose about their ESG activities. The main goal is to create a comprehensive system for sustainability reporting, ensuring the information is clear, comparable, and useful to everyone. These disclosure requirements are vital for companies to meet the expectations of the CSRD.
EFRAG’s Role in Developing ESRS
EFRAG (European Financial Reporting Advisory Group) is responsible for creating the ESRS standards. Their role includes determining what information companies should disclose based on their industry. While EFRAG began drafting sector-specific standards in 2022, they shifted focus in 2023 to create general standards first. They plan to return to sector-specific standards in 2024, especially for industries with significant environmental and social impacts, including financial institutions. These sector-specific standards will have tailored reporting standards that align with both European Sustainability Reporting Standards and global benchmarks.
Key Information Covered by ESRS
ESRS standards cover a wide range of topics, including GHG emission reduction targets, energy use, water consumption, employee turnover, and human rights practices. These key data points help companies demonstrate how they manage their sustainability impacts.
- ESRS 1: General Requirements
- ESRS 2: General Disclosures
- ESRS E1: Climate
- ESRS E2: Pollution
- ESRS E3: Water and Marine Resources
- ESRS E4: Biodiversity and Ecosystems
- ESRS E5: Resource Use and Circular Economy
- ESRS S1: Own Workforce
- ESRS S2: Workers in the Value Chain
- ESRS S3: Affected Communities
- ESRS S4: Consumers and End Users
- ESRS G1: Business Conduct
Topics, Subtopics, and Sub-subtopics
The level of detail in ESRS varies from topics to subtopics, and sometimes even to sub-subtopics. The ESRS topics and subtopics help companies navigate the complexity of reporting by breaking down the requirements into manageable sections. This structure allows companies to address specific reporting elements in a systematic and organized way, ensuring that all relevant aspects of sustainability are covered comprehensively.
Implementing ESRS in Your Organization
EFRAG’s Guidance
To help companies implement the new sector-agnostic ESRS standards, EFRAG has released an Excel list of all the data points that should be reported. This guidance helps companies familiarize themselves and prepare their first ESRS reporting according to the standards.
Step-by-Step Implementation Process
Step 1: Analyze ESRS Requirements
- Understand the Standards: Familiarize yourself with ESRS standards and the necessary actions.
- Connect to Goals and Metrics: Align your company’s procedures, goals, and metrics with relevant ESRS standards.
- Read Topical Requirements: Review specific application requirements for each ESRS to ensure compliance.
Step 2: Assess Double Materiality
- Consider Impacts: Evaluate how your company’s activities impact people, the environment, and shareholder value.
- Assess ESG Relevance: Determine the relevance of ESG issues to your company.
- Derive Reporting Standards: Identify the appropriate reporting standards and requirements based on this analysis.
Step 3: Identify Gaps in Previous Reporting
- Conduct Gap Analysis: Review previous reports and frameworks to identify gaps.
- Data and Process Gaps: Identify missing data and issues in data collection processes.
- Documentation Gaps: Identify gaps in documentation and evidence collection.
Step 4: Set Up Processes for ESRS Data Collection
- Assign Responsibilities: Assign specific tasks and roles across various departments.
- Develop Collection Processes: Create efficient workflows for ESRS data collection and management.
- Implement Data Systems: Establish a system to manage and control ESRS data collection.
Sector Coverage and Specifics
ESRS standards apply to various industries, including manufacturing, finance, healthcare, and technology. The standards are designed to be flexible enough to address the unique challenges of each sector, ensuring comprehensive coverage. Sector-specific standards will follow soon, addressing the needs of different ESRS sectors.
Future Outlook of ESRS and CSRD
What’s Next for ESRS?
The ESRS standards will continue to evolve, with updates to keep pace with new sustainability challenges and global reporting practices. This may include revisions to the standards and additional guidance on new topics and specific sectors.
XBRL Taxonomy and Digital Tagging
A key aspect of modern standards is digital tagging, or creating an XBRL taxonomy. Under the CSRD, this digital taxonomy is required to tag reported information according to ESRS standards. The XBRL taxonomy will also support the creation of a European single access point (ESAP) for public corporate data. EFRAG will develop this taxonomy, ensuring that ESRS reporting remains at the forefront of global sustainability standards.
XBRL (Extensible Business Reporting Language) is a standardized language used for structuring business information in a machine-readable format. This digital framework allows for seamless information exchange between companies and stakeholders, ensuring that sustainability data is easily accessible and comparable across different platforms. The XBRL taxonomy being developed by EFRAG will provide companies with a systematic approach to tagging and reporting sustainability data, aligning it with global standards and enhancing transparency.
The taxonomy utilizes Extensible Markup Language (XML) as its foundation. XML is currently employed in financial reporting and serves as a method for structuring business information in a digitally accessible format.
How Will ESRS and CSRD Influence Global Reporting?
As ESRS and CSRD become more established, they are expected to influence global sustainability reporting standards, potentially leading to greater harmonization and comparability across countries.
What Should Sustainability Professionals Do?
Sustainability professionals need to stay informed about these evolving standards. This means keeping up with the latest developments, engaging with industry peers, and continuously enhancing their skills to meet the demands of sustainability reporting.
Frequently Asked Questions (FAQ)
What Are the Main Differences Between ESRS and CSRD?
ESRS provides specific guidelines for what companies need to report, while CSRD is the broader law that requires companies to use these standards. CSRD also extends reporting requirements to more companies and introduces digital reporting.
How Will CSRD Change Current Reporting Practices?
CSRD will require more companies to provide detailed sustainability information and present it in a digital format. This means companies will need to update their reporting practices and possibly invest in new tools and systems.
What Are the Challenges of Aligning with ESRS and CSRD?
The main challenges include gathering the necessary data, managing it effectively, and ensuring it meets the new standards. Companies may need to improve their internal processes and systems to comply with ESRS and CSRD.
Where Can Companies Get Help with ESRS?
EFRAG offers guidance and resources to help companies comply with ESRS. This includes a portal for technical questions and additional guidance on specific topics like double materiality and value chain reporting. You can always reach out to me as well.
Are ESRS Aligned with Global Standards?
Yes, the ESRS are closely aligned with global reporting standards like those from the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI). This alignment helps companies comply with multiple standards more efficiently.
Additional Resources and References
- European Financial Reporting Advisory Group (EFRAG)
- European Parliament and Council - Corporate Sustainability Reporting Directive (CSRD)
- Frequently Asked Questions about ESRS and CSRD
- EFRAG ESRS FAQ
Next Steps
If you're looking for expert guidance to navigate the complexities of ESRS and CSRD compliance, I can help. Whether you're just starting or need support in fine-tuning your sustainability reporting, my tailored consulting services ensure that your organization stays ahead in sustainability practices. Get in touch to discuss how we can work together to achieve your goals.
