On July 31, 2023, the European Commission (EC) adopted the first set of European Sustainability Reporting Standards (ESRS). 

Developed by the European Financial Reporting Advisory Group (EFRAG), these standards are now the go-to for all companies subject to the Corporate Sustainability Reporting Directive (CSRD).

They guide businesses through what to report on in terms of environmental, social, and governance (ESG) topics and are built on the Corporate Sustainability Reporting Directive (CSRD).

Update June 2024: EFRAG releases new ESRS explanations

In June 2024, EFRAG released a significant update to their Q&A on the ESRS. This includes 44 new technical explanations, bringing the total to 68, which addresses common and complex questions raised by stakeholders regarding the implementation of ESRS. This is part of EFRAG's ongoing efforts to make it easier for organizations to navigate the ESRS requirements.

The new explanations are designed to help stakeholders better understand the ESRS framework, focusing on practical implementation issues. They are organized to reflect Disclosure Requirements and are searchable through a newly introduced ‘key terms’ index, making it easier for users to find specific guidance related to their needs.

You can access EFRAG's updated explanations here or via their ESRS Q&A Platform, aiming to facilitate a smoother adoption of sustainability reporting practices across Europe.

Quick recap: What is the CSRD?

Building on the foundations of the Non-Financial Reporting Directive (NFRD), the CSRD was developed to provide better transparency regarding businesses' sustainability impacts and to give stakeholders a more well-rounded understanding of a company's activities.

While the NFRD covered around 11,000 large companies across the EU, the CSRD has expanded this scope to nearly 71,000 businesses including all large and publicly listed companies – even listed SMEs.

The wider scope and inclusivity of the CSRD reflects a growing recognition of the role businesses play in tackling global sustainability challenges. It signals a shift to a business environment where transparency, accountability, and proactive engagement in sustainability are no longer just nice-to-haves, but non-negotiable aspects of running a business.

Why does it matter?

For businesses, understanding the ins and outs of the CSRD and ESRS is for much more than just regulatory compliance and avoiding penalties. It’s also a major opportunity to enhance your brand’s appeal to customers and investors, boost your company's reputation, and support global sustainability goals.

In this article, we’ll cover everything about the ESRS, from its objectives and key topics to its connection with the CSRD. We’ll also provide some useful resources, identify who it impacts, and go through the essential requirements to comply with these standards. 

We’ll also compare ESRS to other global reporting standards and address some common challenges businesses might face during this transition. So, let’s dive in.

History and development of ESRS

Adopted by the EU in 2014, the journey towards ESRS began with the NFRD. This directive was the EU’s first major step in requiring large companies to report on their environmental and social impacts. 

It became clear over time, however, that the NFRD suffered several shortcomings. This led the European Commission (EC) to review the directive in 2019 and issue a consultation to gain stakeholder feedback about potential amendments. 

On January 21, 2021, the consultation released the Implementation Appraisal of the NFRD outlining the flaws to be addressed:

• Non-financial information lacks comparability and reliability.
• Overlapping legislation causes reporting confusion and extra costs.
• High demand for common reporting standards, digitalization, and stricter audits.
• Need for companies to reveal materiality assessment processes.
• Suggesting uniform transparency through management report disclosures.
• Advised NFRD to expand to cover all listed and private companies, with scaled requirements for SMEs.

Around the same time, the EC also requested advice from the EU financial authorities (EBA, EIOPA, and ESMA) on KPIs and methodologies to link the NFRD reporting to the EU’s Taxonomy rules. It also asked EFRAG to develop a proposal for sustainability reporting standards for companies in the EU.

Replacement of NFRD by ESRS

On April 20, 2021, the EC proposed the CSRD to address the limitations mentioned above. It aimed to extend the scope of sustainability reporting to more companies and increase the level of detail and comparability of reported information.

The ESRS were developed to provide a concrete framework for the reporting requirements outlined in the CSRD. These standards were designed to replace the general and somewhat ambiguous NFRD guidelines with a clear set of standards for sustainability reporting in Europe.

Role of EFRAG in formulating ESRS

Established in 2001, EFRAG is a private association known for its role in advising on EU financial matters. It was tasked by the EC to develop the ESRS.

To ensure the standards addressed the needs of all relevant parties, EFRAG consulted with various stakeholders including businesses, investors, and civil society organizations. It then presented draft standards that underwent a public consultation process which allowed for feedback and refinements. 

On July 31, 2023, the final set of standards was adopted by the EC marking a huge milestone for corporate sustainability reporting in Europe. EFRAG will continue to develop and refine the ESRS to ensure the standards remain relevant and effective. 

Key objectives of ESRS

The ESRS has several objectives aimed at transforming how businesses report on ESG matters.

1. Standardized and measurable ESG reporting

The primary objective of the ESRS is to standardize ESG reporting across companies. By creating a consistent framework, it’s easier to measure and compare ESG performance across different organizations.

This standardization creates a level playing field for all businesses. Assessing companies on a consistent set of criteria opens up new opportunities for sustainable development and investment.

2. Enhanced transparency and comparability

The ESRS enhance sustainability reporting by making it more transparent and comparable. By offering detailed reporting guidelines, companies now have explicit instructions about the ESG data they must disclose, encouraging higher levels of transparency.

3. Informed decision-making

The enhanced quality of reporting under the ESRS provides stakeholders with access to more reliable information about a company’s sustainability performance. This helps investors and consumers make more informed decisions.

Overview of CSRD

As we learned above, the CSRD is a regulatory framework aimed at enhancing the consistency and transparency of corporate sustainability reporting in Europe. Let’s take a look back at its history and purpose:

• Origins: The CSRD evolved from the NFRD which was the EU’s first step towards mandatory reporting of non-financial information for large companies. 
• Purpose: Its purpose is to address the limitations of the NFRD by expanding the scope and depth of sustainability reporting. It aims to give stakeholders including investors, customers, and the public a more comprehensive understanding of a company’s environmental and social impacts.
• Expanded scope: Unlike the NFRD which was only relevant for large public-interest entities, the CSRD extends to all large companies and all companies listed on regulated markets in the EU (we’ll go into who exactly the CSRD impacts below).
• The guiding law for the ESRS: The CSRD acts as the legal framework for the ESRS. Mandated under the CSRD umbrella, the ESRS provides the detailed requirements companies must follow to comply with these new reporting standards.

If you’re interested in learning more about the CSRD, you’re in the right place. From expert insights to simple steps to achieving compliance and helpful tools and workflows, we’ve got everything you need to fast-track your CSRD compliance.

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Scope and applicability of ESRS

The ESRS – through the CSRD framework – will be phased in gradually based on company size, revenue, and location. Here’s an overview of the timeline:

Timeline of CSRD (and subsequently ESRS) implementation

• Large companies already reporting under the NFRD will transition to CSRD standards starting in 2024 (reporting in 2025).
• Large companies meeting two of the following criteria must comply with the CSRD in 2025 (reporting in 2026): 250+ employees, €50m+ net turnover, €25m+ total assets.
• Listed small-to-medium enterprises (SMEs) that meet two of the following criteria must comply with the CSRD in 2026 (reporting in 2027): small-sized (50-249 employees, €10-50m net turnover, €5-25m total assets) or micro-sized (10-49 employees, €900k-10m net turnover, €450k-5m total assets).
• Third-country undertakings must comply with the CSRD by 2028 (reporting in 2029).

Geographic scope

The ESRS was designed to apply to companies based in the EU. The standards also apply to multinational companies with significant operations or listings in the EU. This means the ESRS extends globally, influencing many countries worldwide.

Sector scope

The ESRS applies to companies across all economic sectors, from manufacturing to finance to services or technology. 

While the initial focus is on large publicly listed companies, certain provisions extend to SMEs. The ESRS also includes public interest entities such as banks and insurance companies given their large social and economic impact.

ESRS reporting framework and principles

The ESRS framework covers a broad range of topics – 12 to be exact – to ensure companies report on crucial sustainability aspects in a standardized way. Here’s an overview of its 10 primary topics, 2 cross-cutting standards, and entity-specific aspects:

10 topical standards

The first set of ESRS contains 10 topical standards focusing on environmental, social, and governance matters. 

Environment topics

• Climate change: Addressing greenhouse gas (GHG) emissions, climate risks, and mitigation strategies.
• Pollution: Reporting on waste management, emissions, and pollution control measures.
• Water and marine resources: Covering water usage, conservation, and impact on aquatic ecosystems.
• Biodiversity and ecosystems: Including impacts on ecosystems and biodiversity conservation efforts.
• Resource use and circular economy: Focusing on sustainable resource use, recycling, and circular economy practices.

Social topics

• Own workforce: Addressing issues related to human rights protections in business operations.
• Workers in the value chain: Including employee rights, labor standards, and workplace conditions.
• Affected communities: Covering ethical business practices, anti-corruption measures, and compliance.
• Consumers and end-users: Relating to product safety, customer satisfaction, and consumer rights.

Governance topics

• Business conduct: Encompassing corporate governance structures, board responsibilities, and stakeholder engagement.

2 cross-cutting standards

It also contains two cross-cutting standards, ESRS 1 and ESRS 2, which lay the foundation for effective reporting across all sectors. They offer comprehensive guidelines for companies to structure sustainability reports.

ESRS 1: General requirements

ESRS 1 describes the minimum reporting requirements so that it’s easy to understand a company’s impacts, risks, and opportunities related to ESG aspects. This covers topics such as governance, strategy, business model, risk management, and company objectives.

It also outlines other information required about a company and its organization, what information is not yet mandatory to report, and what is meant by double materiality (more on this soon).

ESRS 2: General disclosures

ESRS 2 details the disclosure requirements for preparing a thorough sustainability statement and applies to all companies.

It requires information on governance structures, strategies, materiality assessments, and performance indicators and targets, including the value chain coverage.

What is double materiality?

Not all ESRS topics have to be included in a company’s annual sustainability report – only those that are material to a company. A topic can be material from an impact or financial perspective. 

The ESRS defines double materiality as “the union of impact materiality and financial materiality.” As such, it’s a principle that evaluates sustainability topics from these two perspectives:

1. Impact materiality (inside-out): How a company's actions impact the environment and society.
2. Financial materiality (outside-in): How environmental and social issues affect the company's financial health.

A sustainability topic (i.e. one of the 10 ESRS topics or an entity-specific topic) meets the double materiality criteria if it is material from either the impact perspective, the financial perspective, or both perspectives.

The ESRS includes a methodology on how double materiality should be assessed. 

1. Companies must first define their relevant ESG topics and identify the impacts, risks, and opportunities (IROs) along the entire value chain. 
2. They then need to assess the IROs based on the ESRS’s assessment processes.
3. Finally, they must identify which topics are material. Using a materiality matrix (shown below) can help companies visually prioritize and clarify the significance of various sustainability topics. Results should then be included in the company's ESG strategy and reporting.

Ultimately, double materiality is about balancing how a company influences and is influenced by sustainability issues. This dual-lens approach is crucial for comprehensive and meaningful sustainability reporting.

Coming later: Sector- and SME-specific standards

As of now, the ESRS doesn’t include sector-specific standards. EFRAG is expected to introduce sector-specific standards as part of the second set of ESRS, although their publication has been delayed by two years and is now anticipated around mid-2026. These will provide more detailed and relevant reporting content for different industries.

There are also no specific standards for SMEs in the current ESRS framework. Future updates will likely address this gap, offering SMEs a more practical and proportionate approach to sustainability reporting. There are also voluntary standards in the works for non-listed SMEs.

Digital format and accessibility

The CSRD requires companies to publish and file annual reports in a digital format under the guidelines of the European Single Electronic Format (ESEF). 

The ESEF prescribes the use of XHTML (eXtensible HyperText Markup Language), and for the CSRD specifically, the use of inline XBRL (eXtensible Business Reporting Language). This combination ensures reports are readable by both humans and machines.

Companies must digitally ‘tag’ sustainability information according to XBRL’s categorization system. With over 1000 data points across a range of categories – from GHG emissions to water & energy consumption to pollution, etc. – the system makes it easier to reference and analyze data.

This recent PowerPoint from EFRAG provides a clear introduction to Inline XBRL and how it's used (slides 12 and 14-15). Good to know: technical guidelines for implementing the machine readability of ESRS statements are currently in the works.

Enhancing transparency and accessibility

The shift to digital reporting formats is a major step toward making sustainability reporting more transparent, accessible, and useful. Take a look at some of its advantages:

• Better data processing: The machine-readable aspect of iXBRL makes processing and analyzing data more efficient. This is particularly valuable for investors and regulators who deal with large volumes of reports.
• Improved accessibility: The human-readable factor of XHTML ensures reports are accessible to a wider audience such as stakeholders who may not have the relevant financial or technical expertise.
• Comparability and analysis: The standardized format makes it much easier to compare reports across various companies and sectors. This can enable more effective benchmarking and analysis of sustainability performance.
• Integration with technology: Digital reporting in the iXBRL format aligns well with modern technology such as data analytics tools, improving the overall utility of reported information.

Integration with international reporting standards

Let’s explore how the ESRS compares to other global reporting frameworks like the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) Standards.

The Global Reporting Initiative (GRI)

The GRI is a globally recognized framework for sustainability reporting that guides businesses in disclosing their economic, environmental, and social impacts. 

Both ESRS and GRI offer a well-rounded framework for sustainability reporting covering a wide range of ESG matters. ESRS is more prescriptive and tailored to EU regulations, whereas the GRI is more flexible and adaptable for global use.

Sustainability Accounting Standards Board (SASB) Standards

The SASB Standards are a collection of industry-tailored guidelines developed based on consultations with businesses and investors. They focus on uncovering sustainability aspects that are financially material across 77 industries. 

Both ESRS and SABS Standards aim to make sustainability reporting more useful for investor decision-making and emphasize materiality. 

ESRS is broad in scope and includes detailed requirements on social and governance issues. SABS Standards are more narrowly focused, and zone in on the industry-specific sustainability topics that directly impact financial performance.

Unlike GRI and SASB Standards which are voluntary and globally focused, the ESRS are mandatory for certain EU companies under the CSRD. 

Challenges and criticisms

While the ESRS looks promising in terms of creating more responsible corporate practices in Europe, adapting to these standards is no simple feat. Here are some challenges companies might face along with some criticisms of the ESRS in its current state:

• Rapid implementation timeline: The deadline to adapt to the CSRD (and ESRS) is approaching fast – some companies are required to comply as early as this year! This swift transition can be overwhelming, especially for businesses new to sustainability reporting. Download our free CSRD cheat sheet to start your compliance journey today.
• Investment in sustainability teams: Reporting under the CSRD is complex and requires employees with specialized knowledge and skills. Building or expanding your sustainability team requires financial investments which can be particularly tricky for smaller companies. 
• Unfinalized standards: As of now, the ESRS are not yet finalized. The second set which will include sector-specific standards is expected to be adopted by the EC by June 2026. The incomplete status can make it hard for companies to fully prepare their reporting strategies. This means businesses must remain agile and adjust their processes once the final standards are published.
• Complexity and scope: The CSRD and ESRS are intricate frameworks that cover a wide range of topics. This can be overwhelming for companies, particularly those new to such detailed reporting requirements.

Embracing the future with ESRS

As we wrap up our deep dive into the ESRS and CSRD, it’s clear we're stepping into a new era of corporate responsibility in Europe. Embracing these directives means more than just ticking boxes for compliance. It’s about redefining how businesses think and act about sustainability.

While adjusting to these new standards might seem daunting at first – from hiring sustainability experts to digital reporting and keeping up to date with evolving regulations – the payoff is huge.

Businesses have the chance to boost their reputation, attract eco-conscious customers and investors, and really make a difference in our world. 

It's not just about the bottom line anymore. It's about being part of a cleaner, more responsible business environment.