The European Sustainability Reporting Standards (ESRS) are a crucial component of the Corporate Sustainability Reporting Directive (CSRD), aiming to standardise sustainability reporting across the EU. By adhering to the ESRS, organisations deliver consistent and comprehensive details on their sustainability efforts. Read more in this article about the different types of standards and how to become CSRD-compliant.
What are the ESRS?
The CSRD demands that organisations report on a wide range of sustainability and social-related information. You can consider the ESRS the backbone of this directive; the structured framework with standards and guidelines that companies must follow to meet the reporting requirements of the CSRD. They ensure all organisations report in the same consistent way on their global sustainability practices (on environmental, social and governance aspects).
The aim of this standardised reporting is transparency and accountability, enabling stakeholders to make informed decisions based on reliable sustainability and social data. So the implementation of ESRS under the CSRD significantly enhances the depth and comparability of sustainability reports, promoting greater corporate responsibility and contributing to the EU's broader environmental and social objectives.
All ESRS explained
There are three different types of ESRS:
- cross-cutting standards
- sector-specific standards.
- topical standards
Cross-cutting standards
At the core of the ESRS framework are the two cross-cutting standards: ESRS 1 and ESRS 2. These standards are mandatory and universal for all companies. All sustainability matters covered by the sector-specific and topical standards have to be reported according to ESRS 1 & 2.
ESRS 1: General requirements
This standard describes the foundational requirements for reporting under CSRD. It includes the architecture of ESRS standards, how to report, drafting conventions and the general requirements for preparing and presenting information.
ESRS 2: General disclosures
ESRS 2 details disclosure requirements on what and how to report. The structure to be followed for all sustainability matters that need to be reported is introduced: governance, strategy, impact, risk and opportunity management and metrics and targets.
Sector-specific standards
The sector-specific standards are not yet published. These standards will encourage further comparison between organisations and are estimated to go live in June 2026 as of 28/08/2024. Latest updates are to be found here. These standards will address unique impacts, risks and opportunities relevant to organisations in certain sectors.
As an example, the sector-specific standard for Oil and Gas companies (currently under development) may add further requirements regarding oil spills prevention, environmental restoration, resource extraction and subsurface risks.
In the meantime, companies prepare themselves by basing their reports on the general ESRS standards and other relevant frameworks (GRI, ISSB), as well as analysing published reports from competitors.
Topical standards
The ESRS framework includes ten topical standards across the three ESG categories: Environmental, Social, and Governance. A company's reporting obligations on these standards are determined through the Double Materiality Analysis (DMA).
Back to the Oil and Gas companies and the previously mentioned potential environnemental impacts. The topics that these companies may find mandatory to report on in current environnemental ESRS topical standards could be ESRS E1 (Climate Change) ESRS E2 (Pollution), ESRS E3 (Water and Marine Resources), and ESRS E4 (Biodiversity and Ecosystems). These standards address the mentioned impacts, while sector-specific standards under development will provide more detailed guidance on these industry-specific issues.
Double Materiality Analysis (DMA)
The DMA is a key step in the whole CSRD journey. But why is it called double materiality? Because two perspectives are considered:
- an inside-out (impact) perspective: what effect does the company have on the environment and society?
- an outside-in (financial) perspective: which developments might have an effect on the financial performance of the company?
For example, a manufacturing company may need to assess both its impact on the environment through plastic waste (inside-out) and how external factors, like stricter regulations, might affect its financial performance (outside-in).
Only topics that are found to have an impact and that influence financial performance should be included in the reporting. This focus on what is relevant for the company is an essential part of CSRD and helps companies avoid focusing too narrowly on certain irrelevant issues and ignoring other important ones.
The DMA requires a comprehensive assessment that begins with identifying relevant topics using various sources, including the ESRS and other frameworks like the GRI and ISSB. These topics are then evaluated using multiple parameters. For actual and negative impacts, materiality is based on the severity of the impact, while for positive impacts, materiality is based on the scale and scope. For potential impacts, materiality also includes consideration of their likelihood.
A final score is calculated for each topic, with materiality determined based on predefined thresholds. This process should involve both internal and external stakeholders to accurately assess the company's impact across all identified topics.
The outcome of the DMA is often presented in a materiality matrix or diagram like the one below from Decathlon’s 2022 Materiality Assessment, making it easy to compare the materiality of each topics.
The next steps after identifying your material topics
After the Double Materiality Analysis to identify the topics to report on, the next step towards CSRD compliance is the gap analysis. This step is about comparing the current state of your sustainability practices with the CSRD requirements to know what you need to do to become compliant.
By pinpointing these gaps, your organisation can prioritise the efforts, allocate resources more effectively, and develop targeted initiatives to close the identified gaps. This not only helps your company comply with the ESRS under the CSRD, but also strengthens your overall sustainability strategy. After that, 2 main steps need to be taken:
- Drafting a roadmap. Based on the gap analysis, this step is about translating the gaps into an actionable plan that aligns with your business processes and structure for everyone to understand easily
- Starting implementation. Time to put the plan into action. Every CSRD team uses this roadmap to plan activities and monitor the progress through time with all required stakeholders.
Data processes need to be set up so that reporting is consistent and verifiable throughout the years. A CSRD software can be introduced, depending on your company’s needs. A concept CSRD report is made and verified to ensure audit readiness the year before the public one needs to come out. Finally, you publish your compliance CSRD report which will be audited, and then you repeat the process every year. CSRD compliance is not a one-time thing.
Whether you manage the whole process internally, or rely on the expertise and experience of external consultants, the approach you take needs to be tailored-made to meet your specific needs and ensure compliance with CSRD requirements.
Our tip regarding the CSRD
To report on all material topics for CSRD compliance, you will need insights and data from your organisation and supply chain to support your sustainability ambitions and strategy.
And data-collection requires time, so our biggest tip is; don’t let the CSRD be something that overtakes you. Start on time, and save yourself from last-minute work and a lot of stress.
Do you need to be CSRD compliant from 2026 on? Start in Q3/Q4 of 2024 to be ready to start collecting all data over 2025.
Our experts can guide you through the double materiality and gap analysis processes and support you all the way to the publication of your first CSRD-compliant report. We also assist our customers in calculating their company's carbon footprint and developing a comprehensive long-term carbon transition plan, as required by the CSRD.
Read more on how an LCA and Carbon Footprint can help you towards your CSRD compliance: https://www.hhc.earth/knowledge-base/how-an-lca-and-carbon-footprint-help-you-with-the-csrd
Source: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202302772
