European Sustainability Reporting Standards (ESRS)

Author: Melanie Bootsmann, September 02, 2024

1        Introduction

In 2014, the European Parliament Directive 2014/95/EU has been adopted, which leads to an obligation of public interest entities to provide information^1,2. However, said directive did not further specify a certain reporting form¹. As conclusion, large organisations decided to create non-binding reporting rules as solution for the missing definition¹.

At European level, several institutions are promoting better mechanisms to deal with present and possible future crises like social inequalities, or the preservation of the environment, since traditional accounting systems of public and private entities still fail to capture these issues into actual figures and narratives. Therefore, in order to face these challenges, several families of indicators have emerged.³

Nowadays, the idea of a “Sustainability Corporate Governance” is supposed to be realized in practice⁴. The Corporate Sustainability Reporting Directive now requires all companies to report in accordance with the European Sustainability Reporting Standards (ESRS), therefore solving the problem of the not defined reporting form⁵. Furthermore, it is supposed to lead to a harmonization of sustainability reporting across the European Union and to an increase in comparability and relevance of the information reported, as well as in completeness and reliability^4,5. This way it deals with the key criticisms of the current reporting practices of European companies. 

The CSRD regulates the new obligations’ scope of application and their context-regulations, including e.g. the disclosure and the external audit⁴. Since CSRD only broaches the reporting content, ESRS has been created to further concretize the demanded information⁴. ESRS will ensure standardization through creating a consistent and comparable sustainability reporting language across Europe^4,6. It is considered to be a crucial component of EU’s effort to standardise ESG reporting, representing the centre of the EU’s sustainability drive and propelling its ESG journey^7,8.

More precisely, ESG reporting is known as sustainability reporting with a focus on the environment, society and governance of the company. The covered environmental topics answer questions on how exposed an organization is and how it manages risks and chances concerning among others climate, scarcity of natural resources, pollution waste and more. It also describes how the organisation impacts the environment with its activities. Societal topics show the companies’ values and principles, the societal issues like labour and supply chain information, production quality and safety as well as human capital issues like employee health, safety, diversity, inclusion efforts and policies. Last, governance includes data on organisations’ corporate governance and information on the composition and diversity of the board of directors, executive compensation, bribery, corruption and more.¹

With the ESRS the organisation EFRAG has developed a literal guidebook of 10 approved final draft standards addressing all aspects of ESG, hence becoming a fixture of future legislation and showing what aspects on ESG will be focused on. ESRS will become standards for global ESG reporting, with also round about 10,000 foreign companies predicted to be affected by these rules.⁷

Accordingly, ESRS also furnish investors with insights into the companies’ sustainability impacts and therefore enriching their investment comprehension⁸.

The invention of the ESRS is still new, with the reporting standards being finished since July 2023 and starting to be applicable in 2024, the first reporting year, with few exempted companies having a later reporting start. There is only little literature on the reporting standards itself which deals with breaking down and explaining their creation, content and application. 

In this regard, after now having introduced the relevance of the ESRS, this work will start with a short definition of the CSRD and a longer one of the ESRS. After that, the entire development process will be explained, starting with the background information on the development and the introduction of the main participants, then following with the actual timeline and the further planning. Afterwards, this work will focus on the content and the structure of the ESRS by giving an overview of every individual standard. Last, the practical implementation will be explained. This also contains the materiality assessment, the LEAP-Process and information on the external audit of the sustainability report. 

The entire work is based on a literature review concerning the above-mentioned topics. The research itself will be done in a process including three phases. The first phase involves research on Google Scholar and Orbis plus, with the keywords being “European Sustainability Reporting Standards” and “ESRS”, as well as “CSRD” and “Corporate Sustainability Reporting Directive”. As mentioned, since the ESRS are still new and therefore there is only a limited amount of available literature, this will be done through a broad search without restrictions in time periods or specific scientific journals. The second phase of research will be done on the search platforms “EBSCO” and “Scopus”. The search on “EBSCO” includes an advanced search, scanning titles, abstracts and keywords for the terms “European Sustainability Reporting Standard” and “ESRS”. On Scopus, the carried out basic search focuses on the same terms. Again, there are no restrictions in time period and journals. The last phase focuses on the commentary “Haufe ESRS-Kommentar”. The majority of the following work concentrates on the content of said commentary, especially the chapters describing the content and the materiality assessment. 

2        Definitions

2.1       Corporate Sustainability Reporting Directive (CSRD)

The Corporate Sustainability Reporting Directive fully replaces the Non-Financial Reporting Directive (NFRD) and amends the Accounting Directive⁹. It obliges round about 50,000 European companies to perform a broad sustainability report and creates the framework for ESRS by determining the area of application of the later given standards and their obligations as well as the external audit of the generated sustainability reports^6,10. The CSRD also includes the development of the ESRS and their minimum requirements¹⁰.

2.2       European Sustainability Reporting Standards (ESRS)

ESRS is considered to be a reporting framework complementing CSRD¹¹. Therefore, they are based on its instructions and have to be applied as soon as the reporting obligation of CSRD arises^4,11. In that regard, while other standards rely heavily on voluntary compliance, ESRS enforces compliance with minimal manoeuvring space for companies, and consequently distinguishing themselves from other initiatives⁸. Furthermore, ESRS stands as a legal mandate⁸.

ESRS cannot be defined as a singular set of standards, since there are different versions of sets planned¹⁰. On the one hand, there are ESRS that have to be applied by large European companies subject to reporting¹⁰. On the other hand, there will be sector-specific ESRS to be applied by companies working a specific sector, ESRS for SMEs and ESRS as recommendations for companies not obligated to report, including minimum content for reporting by third-country companies in accordance with Art. 40a of the Accounting Directive in the version of the CSRD¹⁰. Therefore, ESRS are considered to be a system of different versions of ESRS⁴. SMEs are micro, small and medium-sized enterprises, consisting of enterprises employing fewer than 250 persons, having an annual turnover not exceeding 50 million euros and an annual balance sheet total not exceeding 43 million euros¹².

The newly developed ESRS are named Set 1 and include twelve standards independent from the companies’ sector⁴. The disclosure requirements in those address among others remuneration systems, working methods in the Management Board and Supervisory Board and integration of stakeholder interests in the corporate strategy and business model⁴. In general, ESRS includes specified information concerning the environment, social and human rights as well as the companies’ governance⁵. More specifically, environmental topics include e.g. climate change mitigation, greenhouse gas emissions, marine and water resources, pollution, ecosystems, biodiversity, resource use and the circular economy⁵. Governance topics include e.g. the management and supervisory bodies in relation to sustainability issues or ethics and corporate culture, including anti-corruption, whistleblower protection and animal warfare⁵.

Further standards are supposed to be adopted in the near future¹³.

3        The development of the ESRS

3.1       The development process

3.1.1      Background information

The European Commission (EC) has set very ambitious sustainability goals that it aspires to achieve. Given the range of the sustainability reporting standards and frameworks in the pre-COVID-19 ecosystems, it was thought that achieving these goals is only possible through EU’s own reporting standards. These standards are therefore tailored to the EU’s needs and demands. Additionally, for the first time, the EU is completely independent in the preparation and enforcement of those standards. Even though the EU already enforced the IFRS Accounting Standards prepared by the IASB in the field of financial reporting, and in the field of auditing the International Standards on Auditing prepared by IFAC’s International Auditing and Assurance Standards Board, namely with Directive 2006/43/EC on mandatory audits of financial statements, the EU only influences their content indirectly through various committees, forums and public deliberations. The decision to act independently for the first time emphasizes the EU’s autonomy. Furthermore, other major countries are reluctant to follow the EU’s example of standards enforcement. As above-mentioned, the EU has enforced different international standards. Other countries, such as the USA, China or India, may support the development and worldwide requirement of such standards, they do however not allow them to be used in their countries and have not required them for use in the last twenty centuries. As a consequence, it is unlikely that the EU will directly commit to the use of non-EU sustainability reporting standards and accordingly creates its own standards fitting its own independent needs.¹⁴

3.1.2      Participants in creating ESRS

3.1.2.1     EFRAG

The EFRAG, former European Financial Reporting Advisory Group, is responsible for the preparation of the ESRS⁵. EFRAG is a private association established in 2001 in Brussels, following a request of the European Commission to the private sector to contribute to the growth of International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB), and to provide the EC with technical knowledge and advice on accounting matters^3,5. It is funded predominantly by the EU and consists of different stakeholder organizations¹⁵. In detail, those include (I) Business Europe – European Business Federations, (II) the Federation des Experts Comptables Europeens (FEE), (III) the Comité European des Assurances (CEA), (IV) the European Federation of Financial Analysts Group (EFFAS), (V) the European Banking Federation (EBF), (VI) the European Savings Banks Group (ESBG), the European Association of Cooperative Banks (EACB), and (VII) the European Federation of Accountants and Auditors (EFAA)⁵. They support and contribute to EFRAG’s public interest mission and join EFRAG on a voluntary basis⁵. Additionally, EFRAG brings together experts from various backgrounds, including academia, business, and accounting professions³. Therefore, EFRAG is considered an independent advisory body, providing expertise on the development of accounting standards in the EU^3,15.

The advisory board’s structure consists of the EFRAG Supervisory Group, the EFRAG Technical Expert Group (EFRAG TEG), and the EFRAG Consultation Forum of Standards Setters (EFRAG CFSS). EFRAG’s Supervisory Board appoints the members of EFRAG TEG. In doing so, it achieves a broad geographical balance from prepares, accountants, users of financial statements and academics.⁵

Core activities include the upstream influence, meaning the contribution to the future shape of international financial reporting⁵. Additionally, it improves IFRS by providing European views on financial reporting⁵. This covers the phases from their inception to the revision of existing standards⁵. Moreover, EFRAG also gives endorsement advice by counselling the EC on whether the application of and compliance with IFRS agree with the criteria set out for use in Europe⁵. All in all, it has been instrumental in bringing international standards like the IFRS to the EU³. Now, EFRAG becomes a central part in enhancing public policymaking by developing sustainability reporting standards³.

Furthermore, the activities can be divided into two pillars. The first one deals with financial reporting and consequently working on the development or amendment of the IFRS and advising the EC on their endorsement, so that they contribute to the efficiency of European capital markets. The second pillar consists of sustainability reporting, which includes the development of draft versions of ESRS and related amendments⁵. The second pillar has been established during the development process of the ESRS and therefore will be explained further later on. 

3.1.2.2     Global Reporting Initiative (GRI)

De Villiers, La Torre and Molinari (2022) define GRI as “…an independent international organisation, established in 1997 as a joint initiative of the Coalition for Environmentally Responsible Economies, an American non-government organisation and the United Nations (UN) Environmental Programme” (p. 730)¹⁶. Its purpose was to set the first accountability mechanism to guarantee organisations adhere to responsible environmental principles which were then broadened to include social, economic and governance issues¹⁶. GRI has published a pilot version of a public supplement specifically to address the reporting needs of these organizations¹⁷. Specifically, the Sustainability Reporting Guidelines created by GRI are the first international framework for comprehensive corporate sustainability reporting with a particular focus on environmental matters^16,17. They are the result of co-operation between researchers, industry and consultants and the output of a multi-stakeholder approach¹⁷.

GRI Guidelines are the most used guidelines worldwide. This is reinforced by the fact that they are applicable to every kind of company, independent of their sector. In detail, those guidelines include reporting principles and step-by-step instructions on identifying relevant topics and their disclosure.¹⁸

3.1.3      Timeline

The following text describes the development of the first set of ESRS. An overview can be found in the first figure.

The foundation for the development of ESRS has been laid by the European Corporate Reporting Lab @EFRAG (European Lab) in 2020⁴. The entire process of the development of ESRS started with the EC launching a consultation on a possible revision of the NFRD which lasted from February 2020 to June 2020¹⁹.  In May 2020, the EC’s updated Work Programme included a possible publication of a legislative proposal to revise the NFRD²⁰. In this regard, the EC mandated EFRAG to carry out technical preparatory work for the development of possible European standards²⁰. Then, EFRAG established a dedicated task force to work on the elaboration of possible EU non-financial reporting standards^3,20.  Since this connects to the NFRD, the project task force has been named the Project Task Force on NFRD (PTF-NFRD)⁴. Said working group consists of stakeholders from various sectors such as companies, public sector managers, investors, and academics, who provide input and feedback³. That task force has been conducting research and engaging with stakeholders to identify the key sustainability reporting requirements and to develop a framework for reporting that is in line with the EU’s sustainability policy³. The PTF-NFRD has also been involved in consultations and workshops to ensure that the standards reflect the needs and expectations of all stakeholders³. By using a bottom-up approach, the working group ensures that the standards are robust and relevant to the needs of the market while promoting transparency and accountability in sustainability reporting³.

In November 2020, the working group of the European Lab publicized an interim report, followed by the final report in March 2021⁴. These reports mention a proposal of a roadmap for the development of a comprehensive set of EU sustainability reporting standards²¹. As a result, sustainability standards for the EU are seen as necessary to meet the political ambition and urgent timetable of the European Green Deal²¹. They should ensure the constancy of reporting rules at the core of the EU’s sustainability agenda²¹.

Following, on the 21. April 2021, there was a legislative proposal for a Corporate Sustainability Reporting Directive, the CSRD²¹. It should amend the reporting requirements given in the NFRD and extent the scope to all large companies and all companies listed on regulated markets with the exception being micro-enterprises^19,22. Additionally, CSRD introduces more detailed reporting requirements in accordance with the mandatory ESRS, as well as the obligation to audit the reported information²². While reporting, the companies now also have to digitally tag that information, so that the reports become machine readable and feed into the European single access point envisaged in the capital markets union action plan²².

Therefore, to ensure its own demands, the CSRD includes the obligation for the EC to develop a first set of ESRS with the deadline being the 30.06.2023¹⁰. Prioritized should be ESRS that apply to all major companies of the EU obligated to report under the CSRD¹⁰. This led to the creation of the Project Task Force on European Sustainability Reporting Standards (PTF-ESRS), commissioned by Mairead McGuiness and consisting of voluntary supporters of EU-member states^4,23. The PTF-ESRS was established dedicated to the preparation of technical advice on potential ESRS⁵. Later on, this group was also instructed to create ESRS and seek cooperation agreements with important European and international standard setters and initiatives like the GRI⁵. Furthermore, it was seen as important that the development included different kinds of stakeholders, such as companies, investors, the civil society, auditors, trade unions, scientists and standardization bodies¹⁵.

In May 2021, the EC officially commissioned EFRAG with the development of ESRS⁴. Following that, in June 2021, EFRAG started with a public consultation concerning the development process of the standardisation of European sustainability reporting⁴. Since June 2021, EFRAG PTF-ESRS subsequently started the preparation of exposure drafts of ESRS⁵. In July 2021, EFRAG also started a cooperation agreement with the GRI concerning a co-construction of the ESRS⁵. Thus, the technical groups of EFRAG and GRI came together to share information to establish sustainability standards⁵. Next, in Autumn 2021 during the project phase, EFRAG PTF-ESRS introduced a prototype for sustainability reporting which gained a lot of criticism concerning the amount and complexity of disclosure obligations planned²³. Shortly afterwards, in the first quarter of 2022, working papers were published as stakeholder-information⁴. In detail, those constituted of 24 ESRS working papers with round about 200 disclosure requirements, introducing the envisioned structure and content of ESRS²³.

The year 2022 also led to the launch of a new organisational and governance structure by the General Assembly of EFRAG. The new organisational and governance structure led to the creation of a sustainability pillar as part of EFRAG’s activities, next to the already existing pillar on financial reporting. This new structure should support the EFRAG in developing ESRS and realizing the demanded conditions in CSRD. In general, the sustainability pillar reflects the financial pillar in its structure. The sustainability pillar led to the creation of subject-related committees, such as the Sustainability Reporting Technical Expert Group (SR TEG) and the Sustainability Reporting Board (SR Board), similar to the Financial Reporting Board and Financial Reporting TEG already existing in the financial reporting pillar. Additionally, considering the number of different stakeholders now addressed in sustainability reporting, the membership range of EFRAG was widened. Now it also covers more different organisations, especially ones relating to the civil society, users, trade unions and science.²³

The SR TEG and the SRB are intended to take over the development of ESRS. In detail, SR TEG is supposed to work on further ESRS drafts with the support of the EFRAG Secretary. SRB then has to evaluate the created drafts and decide on their content for submission to the EC. Furthermore, the following development of ESRS was supposed to follow Due Process Procedures.²³

April 2022, EFRAG PTF-ESRS finished and launched 13 exposure drafts on ESRS as conclusion of its activities. Afterwards, the already established SRB and SR TEG took over the development process as mentioned above. Following, they started a public consultation with the drafts being open for comments until the 8^th of August 2022^4,5. The drafts relate to the first set of standards and therefore cover environmental, social and governance aspects as well as cross-cutting standards⁵. Incoming input and comments by stakeholders were uploaded on EFRAG’s website, with the exception being cases in which stakeholders requested confidentiality⁵. In total, the public consultation led to round about 750 statements from different stakeholders²³. Then, the EFRAG SRB, advised by the EFRAG Sustainability Reporting Technical Expert Group (EFRAG SRTEG), addressed the given feedback⁵. More precisely, in September 2022 EFRAG published a qualitative and quantitative analysis of the comments received which consists of several steps, starting with the development of core categories and themes based on the responses of the stakeholders, with the main categories being reservations, suggestions for improvement and support⁵. Furthermore, politicians also decided to ease the complexity and content of the standards⁴. Because of this, the Exposure Drafts underwent substantial changes, especially having led to a further simplification by having reduced the disclosure obligations to half the amount and reducing companies’ administrative expenses^4,24.

All in all, this could be described as carrying out the demanded Due Process Procedures. This covers the publication and the consultation as well as the public comment analysis, the finalization of Technical Advice to the European Commission, the submission to the EC and the post-implementation review.⁵

In November 2022, the explained process above led to the next draft of the first set of ESRS being finalized, consisting of twelve draft standards¹⁴. They were approved and supported by the ESRS SRB²⁵. Furthermore, Patrick de Cambourg, head of EFRAG’s sustainability board, expressed that the goal of wide acceptance and practical implementation could be achieved through the in ESRS given cross-sectorial content²⁵. Then, they were submitted to the EC²⁵. Consequently, the Commission consulted the Member States as well as various EU organizations¹⁵. This includes supervisory authorities, like the European Securities and Markets Authority, the European Banking Authority and the European Insurance And Occupational Pensions Authority, as well as the European Environment Agency, the European Union Agency for Fundamental Rights, the Committee of European Auditing Oversight Bodies and the Platform on Sustainable Finance¹⁵.

After being published in the Official Journal of the European Union on the 14^th of December 2022, the Directive (EU) 2022/2464 on sustainability reporting, the CSRD, became effective on the 5^th of January 2023, therefore mandating the adoption of ESRS as a Delegated Act^25,26.

In March 2023, the EC announced the next relating political objective¹⁰. EU Commissioner Mairead McGuiness demanded EFRAG to prioritize development of further guidelines concerning Set 1 of ESRS²³. At the same time, President of the Commission Ursula von der Leyen demanded to reduce the given disclosure requirements by a further 25%²³. Those changes were incorporated into the next version of ESRS and made available for another consultation²⁷. Since this period started on the 9^th of June 2023 and was supposed to be four-weeks long, ending on the 7^th of July 2023, the given deadline of adopting the final ESRS version within the end of June could not be met^4,15,28.  

The end of the consultation came with more adjustments to be made. Those led to every disclosure requirement of the thematical standards now being subjected to the materiality assessment. The materiality assessment has thus been further emphasized.²³

On the 31^st of July 2023, the final version of ESRS has been adopted and therefore becomes mandatory for all companies subjected to the CSRD²⁹. The ESRS were published on the official Homepage of the EC¹⁰. This is followed by a fourth month period in which the European Parliament and the European Council have the chance to object against the given draft of ESRS¹⁰. That step is also considered to be the last step in the actual development process²⁸. If there are no objections, they will become effective at the beginning of the business year 2024¹⁰.

Furthermore, in December 2023, EFRAG released three implementation guidance documents to support the implementation of ESRS as requested by the EC²⁶. Finally, in January 2024, the ESRS entered into force as a Delegated Act²³. In that regard, February 2024 followed with a political agreement between the European Parliament and the Council on postponing the adoption deadlines for certain ESRS¹⁹. Specifically, this refers to the deadline of sector-specific standards which has been postponed from mid-2024 to mid-2026³⁰.

3.2       Development of further planned sets of ESRS

Further development of ESRS has already begun alongside the development of the first set. On the one hand, this covers the development of Set 2 of ESRS which includes sector-specific standards as well as standards specifically for SMEs²⁸. The sector-specific standards particularly will be connected to the first set of ESRS which covers cross-sectorial standards²³. On the other hand, this means the adoption of application guidelines supporting the implementation including e.g. guidelines concerning the materiality assessment, the establishment of an official mechanism for a legally binding interpretation of the ESRS in the event of a question of interpretation or the extent of value chain information required under ESRS^13,28. Regarding this, EFRAG already published three implementation guidance documents³¹. The first two include guidance on the implementation of the materiality assessment and the value chain³¹. The third deals with a guidance on the implementation of detailed ESRS datapoints³¹.

EFRAG will continue to focus on set 2 of draft ESRS²⁴. This set will apply in addition to the current ESRS and will cover sectors such as textiles, information technology, electronics, pharmaceuticals, and biotechnology¹³. Specifically, they will create additional disclosure requirements related to topics particularly material for specific industries¹³. Furthermore, EFRAG is already in the development of ESRS for listed SMEs which should become effective on 1^st of January 2026 with an option of opting out for two years³².  

4        Structure and content

The published set 1 of ESRS includes the Act’s main text, twelve draft standards and a glossary of abbreviations and definitions²⁸. The draft standards cover all kinds of sustainability aspects¹⁵. Every standard also contains an Annex A with Application requirements²⁸. Additionally, the architecture of the standards follows the ‘three times three’ rule¹⁴. This means that there are three layers of reporting, three reporting areas and three reporting topics¹⁴. In this case, the term “three layers of reporting” refers to reporting information specific to all sectors, reporting information specific to a single sector and reporting information specific to an organization¹⁴.  The three reporting areas represent strategy, implementation and performance. Last, the three reporting areas covered are environmental, social and governance¹⁴.

In total, there are 82 disclosure requirements provided in the ESRS²³. The disclosure requirements can be divided into four categories which are policies, actions, targets and metrics²⁷. The thematic range of disclosure requirements is shown in the ESRS included list of topics⁶. This list is also to be used while performing the materiality assessment⁶. However, independent from the materiality assessment, companies will still have to deal with a broad range of sustainability topics⁶.

Disclosure requirements of the category metrics are defined at different levels of granularity. For example, ESRS E1-6 requires disclosure of the Gross Scopes 1, 2, and 3 and of the Total Greenhouse gas (GHG) emissions. Then, information concerning Scope 1 GHG emissions includes among others the following data points: The Scope 1 GHG emissions in metric tons of CO₂ equivalent, the percentage of Scope 1 GHG emissions from regulated emissions trading schemes as well as disaggregated information for the Group consolidated for accounting purposes on the one hand and for further invested companies on the other hand.²⁷

Below, the disclosure requirements will be labelled as e.g. ESRS E1-1, being the first Disclosure Requirement (DR) of ESRS E1, or ESRS S3-2, being the second DR of ESRS S3. However, sections of the individual standards will be labelled as e.g. ESRS G1.6, being the sixth paragraph of ESRS G1, or ESRS E2.5, being the fifth of ESRS E2. 

The following content, explaining the individual standards in detail, is primarily based on the Commentary on the European Sustainability Reporting Standards “Haufe ESRS-Kommentar 1. Auflage”.

4.1       Cross-cutting standards

4.1.1      ESRS 1 “General requirements”

The first cross-cutting standard focuses on the general requirements for preparing and presenting the sustainability report³³. Different from the other standards, ESRS 1 does not include disclosure requirements³³. ESRS 1 is supposed to convey the structure of the ESRS, introduces the principles they are based on as well as other foundations, describes general formal requirements for the report and explains phase-in regulations for first use of ESRS³³. Additionally, ESRS 1 explains the principle of double materiality which requests information concerning material impacts on environment and society as well as financial ones²³. However, further explanation concerning the materiality assessment will be given in the chapter about the practical implementation process, including the materiality assessment, of this work. 

Next, ESRS 1 includes further attachments. For example, Appendix B shows impacts concerning qualitative characteristics of information which presents definitions of classifications and terminology. It includes further description of some terms and differences between disclosure requirements and recommendations.³³

The first standard also demands that a company’s sustainability report includes all parts of its value chain. This means that additionally the reporting company has to address the impacts of the upstream and downstream economic activities, not differentiating between a direct or indirect connection to the company subject to reporting. Moreover, ESRS 1 introduces “incorporation for reference”. According to that, a company can reference other parts of reports done by them, as long as those parts are published at the same time as the sustainability report, undergo at least one audit review and meet the same requirements for the digitization of information. Integrated sustainability reporting allows references to other parts of the (Group) management report, the annual consolidated financial statements and to a possibly separately prepared governance or renumeration report.²³

4.1.1.1     Structure of the ESRS

ESRS’ designed structure is described in detail in ESRS 1. In general, the first set of ESRS includes two cross-cutting standards, being ESRS 1 and 2. They introduce general foundations of all required sustainability aspects and explain reporting in accordance with ESRS as a whole. The other ten standards are topical standards and can be assigned to three reporting pillars: Environmental, Social, and Governance. They specify certain disclosure requirements of the different sustainability aspects. Finally, there will also be sector-specific standards. Those are not yet finalized but should add disclosure requirements for companies working in specific sectors after completion. They are expected to allow a more detailed view on certain circumstances e.g. within an industry sector.³³

The general cross-cutting standards are always to be taken into account. Contrary, the topical standards are subject to a materiality assessment. Therefore, companies only need to include full reporting of a thematic standard if it is identified as material. Furthermore, sector-specific standards only apply to companies of the industry sector these standards refer to. ESRS 1 also includes in the section “Application Requirements” guidelines on reporting of company-specific information.³³

Next, ESRS 1 introduces the structure of the disclosure requirements given in the other standards. This structure will be reflected in the section “Disclosure Requirements” of ESRS 2 as well as in the topical and sector-specific standards. In detail, the disclosure requirements can be divided into four categories: (I) Governance (GOV), (II) Strategy and Business Model (SBM), (III) Impact, Riks and Opportunity Management (IRO) and (IV) Metrics and Targets (MT). First, GOV disclosure covers governance processes and the acts of controlling and monitoring. Second, SBM reflects the relationship of the reporting company with its material impacts, risks and opportunities. Third, IRO shows the processes of identifying impacts, risks and opportunities as well as materiality and manages sustainability matters. Last, MT disclosure is about measuring the company’s performance, including its set targets and its progress in reaching them.³³

Disclosure requirements are not the smallest unit of ESRS. They are structured into datapoints which represent the smallest unit of requested qualitative or quantitative information. Additionally, disclosure requirements include “Application Requirements”, supplementing them with additional necessary interpretations or obligations at datapoint level.³³

4.1.1.2     Further formal and content requirements for reporting

The Basis for Conclusions given in ESRS 1 explains that there might be further qualitative characteristics not explicitly featured in the ESRS but still to be considered by the company. Examples would be topics like “strategic focus and future orientation” or “Stakeholder inclusiveness”. Both are about the relationship between company and stakeholders. Another example would be the term “Connected Information” which refers back to the above-mentioned possible references and presents that the sustainability report should be connected with the financial one.³³

As already mentioned above, ESRS 1 demands the inclusion of the companies’ value chain and therefore the inclusion of every business partner. In detail, the extent of the value chain that needs to be assessed would include all direct and indirect customer and supplier relationships. Those have to be assessed for materiality concerning their impacts, risks and opportunities, similar as the reporting company itself. However, this has to be done only for impacts, risks and opportunities that arise directly or indirectly from the company’s business relationships.  Furthermore, the impacts, risks and opportunities must be assessed to the extent necessary to enable users of the report to understand them. If the information is identified as material, reporting the information relating to those partners of the value chain must be done in the extent requested from the specific standards. However, this would lead to the central problem of data availability (ESRS 1.68). ESRS 1 addresses that it won’t always be possible to obtain the necessary information needed for the materiality assessment and the further disclosure requirements. This problem increases because of e.g. contractual agreements, the degree of control exercised by the company over the business outside the scope of consolidation and the buying power. Then again, ESRS 1 also introduces a solution. First, the reporting company should demand reasonable efforts to obtain the needed data. For this, the company has to be in direct contact with its partners in the value chain. If this is not possible, the reporting entity should use sector averages and estimates created through resilient information available to the company at the time of reporting without leading to inappropriate costs or efforts (ESRS 1.AR17). Particularly, concerning disclosure requirements of strategies, measurements and targets, disclosure will only be demanded if such strategies, measures and targets exist and relate to the partners of the value chain (ESRS 1.71).³³

The report’s boundaries are in accordance with the CSRD Directive. Non-consolidated sustainability reporting according to Art. 19a of the CSRD Directive should include data incurred at individual company level for the reporting entity. According to Art. 29a, consolidated reporting covers data of the parent company and its subsidiaries. However, ESRS 1 does not answer if all subsidiaries are material for reporting or only those included in the parent company’s consolidated financial statements.³³

Equally important, ESRS 1 defines the reporting period as being the same length as that of the financial statements. If data is not available in time, the company has to use estimates. This later ties into the demand of ESRS 2. The company then must point out the use of estimates and take actions to ensure the timely availability of the necessary information for the next sustainability report. Furthermore, if the needed data is available at a later time, the company has to adjust the report’s sections using estimates with the actual data. Similarly, if circumstances, which are to be identified as material, occur after the balance sheet date but before the preparation of the sustainability report, the entity has to include them as quantitative information into the report. While disclosing metrics, ESRS 1 also plans the application of comparative periods. Additionally, the disclosure of quantitative data includes references to the situation of the comparative period prior to the current reporting period if such references are needed to understand the current reporting period. Moreover, there needs to be an emphasis of changes in the information.³³

In general, ESRS 1 promotes the principle of connectivity and connected information (ESRS 1.123). This intends connections between different kinds of information within the sustainability statement, a connection between the financial and sustainability statements and connections concerning different time periods. For example, connectivity leads to the increase of comprehensiveness by explaining current and future-oriented information with historical data (ESRS 1.74). The specific implementation of connectivity is part of the company’s creative freedom.³³

Concerning the formal design of the report, it is specified that the sustainability statement will be part of the management report but needs to be clearly separated from the report’s other parts. Additionally, the report should also be structured in such a way that the information is easy to read for both humans and machines. In detail, the report’s structure has to begin with the section “general information” and then follows in the given order with the sections “environmental information”, “social information” and “governance information” (ESRS 1.115). Further subdivisions are again part of the company’s creative freedom.³³

4.1.1.3     Protection of confidential information and phase-in regulations

ESRS 1 conveys that these European Standards protect information considered confidential, even if such information would be seen as material. More precisely, a company is not required to disclose classified or confidential information, especially if it concerns intellectual property. Definitions for classified information can be found in the Glossary of ESRS.³³

Next, this standard introduces phase-in regulations. Those regulations allow a simplification of the report’s content or the timing of reporting when applying ESRS for the first time. The specific time in which these simplifications are applicable begins on the date of the first reporting obligation in accordance with ESRS. Appendix C of ESRS 1 shows a list of disclosure requirements or even whole standards which are affected by these regulations. Moreover, only some phase-in regulations apply to all kinds of companies. A lot of disclosure requirements affected by phase-in regulations can only be used by SMEs. In general, companies can decide if they want to exclude certain topics in the first and in some cases even in the second reporting period. If a company decides to make use of phase-in regulations, it still has to make related separate disclosures, especially in case of materiality of an affected aspect. However, those alternative disclosures will be further explained in ESRS 2.³³

4.1.2      ESRS 2 “General disclosures”

ESRS 2 is the second cross-cutting standard. The included disclosure requirements are obligatory for reporting, independent from the materiality assessment. Additionally, they have to be applied to every individual sustainability aspect, since these general disclosures contribute to understanding the disclosed content of the sustainability report.²³

ESRS 2 is primarily structured in accordance with the reporting areas of ESRS, as already mentioned being the categories Governance, Strategy and Business Model, Impact, Risk and Opportunity Management and Metrics and Targets. For example, the Governance section of ESRS 2 would include disclosure on the structure, the composition and the distribution of work to answer questions such as through whom, when and how does the company discuss and decide on sustainability topics. Furthermore, ESRS 2 also demands disclosure of the company’s strategies as well as on the execution of the materiality assessment of the individual sustainability aspects. Especially included in those categories of ESRS 2 are “Minimum Disclosure Requirements” which are not disclosure requirements themselves but refer to those of the topical ESRS. They regulate what information must always be transmitted as a minimum while reporting on strategies, measures, targets and metrics. This ensures that the fundamental demands of CSRD concerning the content of reporting are fulfilled. Moreover, the section of ESRS 2 relating to metrics and targets does not have individual disclosure requirements. Only the Minimum Disclosure Requirements apply here.³⁴

An overview of the content of ESRS 2 can be found in the second figure.

Disclosure requirements of ESRS 2 are reflected in those of the topical standards, since the topical standards complement the requirements of ESRS 2. Particularly, ESRS 2 App. C shows which disclosure requirements of ESRS are affected and which connections are present. In detail, these connections between ESRS 2 and the topical standards work as following: If the explanations on the requirements, in accordance with ESRS 2, are also set out in the topical standards, they have to be included in reporting, independent from a materiality assessment. For further explanations, the decision must be made at the level of the topic-related ESRS. For example, complete information on ESRS IRO-1 has to be given, even if it would be considered as not material. In regard to ESRS 2 GOV-1, ESRS 2 GOV-3, ESRS 2 SBM-2 and ESRS 2 SBM-3, disclosure on the level of the topical ESRS only has to be made if the demanded information is deemed material.³⁴

4.1.2.1     Disclosure Requirements on the Basis for preparation

The first two disclosure requirements in ESRS 2 are general applicable obligations as part of the “Basis for preparation” of the sustainability report.³⁴

ESRS 2 BP-1 provides information concerning the amount and the content of the report’s information. This ties into ESRS 1 and includes the reporting boundaries, the inclusion of the value chain and the already mentioned protective clauses. First, as already mentioned, the reporting boundaries are based on the foundations of reporting, namely if it is a consolidated or a non-consolidated report. For example, in the case of consolidated reporting, there are additional disclosures for different constellations. For instance, it has to be stated that the parent companies and the subsidiaries are the same as the ones included in the financial statements’ scope of consolidation. Next, ESRS 2 BP-1 demands disclosure answering what extent of the value chain has been included in the sustainability statement. Furthermore, if the reporting entity used protective clauses, it has to inform about this fact in the report.³⁴

A list of specific circumstances, the reporting entity has to separately go into detail about, is given in ESRS 2 BP-2 since users of the report should be further informed about these circumstances to achieve a higher understanding. First, if the company deviated from the defined time periods in ESRS, the entity has to explain their used time periods and the reason for using them. Second, further explanations regarding used estimates while depicting the value chain needs to be given. In detail, this demands e.g. an identification of the used metrics and a description of the foundations of the creation, such as input sources and uncertainties. Third, sources of estimates and the certainty of results must be explained, therefore there must be included a description of the qualitative metrics and the monetary amounts highly subjected to uncertainties. Additionally, the company needs to provide insight into what those uncertainties, estimates and assessments might result from. Reasons could be e.g. the availability of data and measuring techniques. Last, the company must list the topics, subtopics, and sub-subtopics of ESRS 1.AR16 which are identified as material. This also demands a description of how the business model and the strategies regulate these aspects. Moreover, the company needs to describe targets relating to those aspects and the progress of achieving them as well as strategies concerning the sustainability matters and actions taken to identify, monitor and remedy actual or potential impacts connected to these aspects.³⁴

4.1.2.2     Disclosure Requirements on Governance

The first Disclosure Requirement of the Governance sector deals with the implementation of Art. 29b II c) of CSRD, closely connected to Art. 19a II c) of CSRD.³⁴

Article 19a II c) of the CSRD Directive dictates that the report necessarily needs a presentation of the roles of administrative, management and supervisory bodies in relation to sustainability issues and their expertise and skills in fulfilling those roles or their access to such skills. Complementing this, Article 29b II c) of CSRD stipulates that ESRS has to specify the information companies have to disclose in relation to their governance.³⁴

Therefore, ESRS 2 GOV-1 aims to give external report recipients an understanding of how much attention the members of the executive bodies devote to the various sustainability issues and what relevance these sustainability issues have within the company. Consequently, the content of reporting would be the composition of the above mentioned administrative, management and supervisory bodies. In that regard, one part of disclosure would be the percentages of gender shares, indicated by the ratio of female to male employees in the respective regarded body, and the promotion of women in management positions or the percentages according to other diversity criteria. Another part of disclosure would be the allocation of roles and responsibilities for overseeing the process for managing significant impacts, risks and opportunities, including the role of management in these processes, between the members of the different bodies.³⁴

ESRS 2 GOV-2 answers how administrative, management and supervisory bodies are informed about sustainability matters and how these matters are addressed during the reporting period. This especially conveys if these bodies were adequately informed and hence able to perform their duties. Furthermore, ESRS GOV-2 adds to the already requested information on roles and responsibilities regarding important sustainability issues, composition, expertise and skills. For instance, by whom and how often are the management, performance and supervisory bodies, including their respective committees, informed about material impacts, risks and opportunities, the implementation of due diligence in the area of sustainability and the results and effectiveness of the strategies, measures, metrics and targets adopted.³⁴

Next, the existence of incentive systems for the different bodies linked to sustainability aspects is subject of ESRS 2 GOV-3. In particular, this deals with incentives motivating sustainable actions.³⁴

Furthermore, the company has to disclose an overview of information included in sustainability reporting concerning the Due-Diligence-Process, as demanded by ESRS 2 GOV-4. Key elements of Due Diligence would be (I) the inclusion of Due Diligence in its governance, strategies and business model, (II) including affected stakeholders into all important steps of carrying out Due Diligence, (III) identification and evaluation of negative impacts, (IV) actions taken against those impacts, and (V) tracking the effectiveness of the taken actions as well as establishing effective communication. A more detailed description of the main aspects and steps of Due Diligence in accordance with ESRS is already given in ESRS 1.58ff., again showing how the demanded disclosure of ESRS 2 ties into the regulations given in ESRS 1. Moreover, ESRS 1 creates the foundation for disclosure requirements relating to Due Diligence of topical standards.³⁴

According to ESRS 2.30, the disclosure of the demanded information should be in form of mapping. Additionally, the key elements of Due Diligence refer to different kinds of sustainability matters and therefore will be described and disclosed in various parts of the report. Therefore, the reporting entity should include references between the actions taken concerning Due Diligence and their corresponding paragraphs.³⁴

Last, ESRS 2 GOV-5 deals with a description of the most important characteristics of the internal control and risk management systems concerning the company’s reporting. This would include e.g. the scope, main characteristics and components of the applied procedures and systems. Information of the company’s internal control processes helps to increase the authenticity and reliability of its sustainability reporting. Furthermore, information on independent and effective control systems supports the understanding of the design of the company’s overall processes. The information is also useful in evaluating the degree of achievement of operational objectives, such as the effectivity and efficiency of business activities and the adherence to laws and regulations.³⁴

4.1.2.3       Disclosure Requirements on Strategy and Business Model

The first disclosure requirement on SBM demands a depiction of the core elements of the company’s general strategy, if said strategy relates to sustainability. Additionally, ESRS 2 SBM-1 demands a description of its business model and value chain, focusing on the extent to which these are connected to sustainability-related impacts, opportunities and risks. Further descriptions of impacts, risks and opportunities the company is confronted with, will be later demanded through ESRS 2 SBM-3.³⁴

According to ESRS 2 SBM-2, the entity also must present its stakeholder-engagement. This demands an explanation on how the interests of stakeholders are represented by a company’s strategy and its business model.³⁴

As already mentioned, the third disclosure requirement on SBM demands a more detailed description of the impacts, risks and opportunities the company finds itself confronted with. This includes disclosure on how they are connected to the entity’s business model and strategy, therefore further adding to ESRS 2 SBM-1. In detail, the company has to explain the material impacts, risks and opportunities identified through the materiality assessment in accordance with ESRS 2 IRO-1 which later asks for more details on the process of this assessment. For this, an objective identification is considered necessary, describing the place of the impacts’ concentration in the business model, the economic activities and the value chain. Furthermore, ESRS expects disclosure on current and anticipated influence of these impacts, risks and opportunities on the company’s value chain, its strategy and its decision-making process as well as how the company reacts or plans to react to them. Last, the material impacts, risks and opportunities have to be more specified concerning their influence on society and humanity and in what timeframe they are to be expected. On the one hand, this would include the current influence on the company’s financial position, financial performance and its cashflows. On the other hand, this also covers material risks and opportunities resulting in a significant risk of a material adjustment to the carrying amounts of assets and liabilities recognized in the company’s financial statements in the next reporting period.³⁴

All information needed must be presented taking a Gross approach. Furthermore, all presentations have to be made prior to the effects of the strategies, measures and targets that address them since they also have to be presented separately with regard to their mitigation effects.³⁴

4.1.2.4     Disclosure Requirements on Impact, Risk and Opportunity Management

As already mentioned, ESRS 2 IRO-1 includes specifications on the materiality assessment to create further understanding on its execution. This requires a detailed description of the methodical approach and the individual steps of the materiality assessment. Here, ESRS 2 IRO-1 connects with ESRS 1. Further disclosure includes the entity’s process of identifying impacts, risks and opportunities and evaluating their materiality.³⁴

Next, ESRS 2 IRO-2 should establish an understanding of the disclosure requirements included in the report, by demanding the display of the disclosure requirements which have been included based on their materiality assessment. Additionally, the company also has to display which disclosure requirements have not become part of the report and name, why the topics are considered not material. The exception is ESRS E1 “Climate Change”. If the company considers ESRS E1 as not material, it has to explain this conclusion in more detail and add an analysis of conditions which would lead the company to consider this standard material in future reporting.³⁴

4.1.2.5       Minimum Disclosure Requirements

Every time a company evaluates a sustainability aspect to be material and consequently reports disclosure requirements on its strategies, measures, targets and metrics, the reporting entity has to take note of the Minimum Disclosure Requirements (MDR). They extent on the requirements of the reporting areas of the topical and sector-specific standard. They also have to be considered when reporting on company-specific information, similar to the way they are taken into account while reporting topical and sector-specific information.³⁴

However, not every datapoint given has to be disclosed every time but only when they are applicable, therefore when the specific circumstances apply or the information relating to such circumstances would be considered useful for decision making. Additionally. the MDR are subject to the regulations given in ESRS 1. Hence, if the MDR do not specifically label the datapoints with “if applicable”, the reporting company should include the requested information in reporting. If specifically requested disclosure requirements weren’t determined in regard to a sustainability aspect and therefore cannot be reported, the company must point this out and explain why such a determination has not been made.³⁴

The first MDR, ESRS 2 MDR-P, covers policies on dealing with sustainability matters. This includes a description of the key content of these strategies to create an understanding of the pursued policies to eliminate, limit or prevent actual and potential impacts, to deal with risks and to use opportunities. Additionally, the company must supplement this with contextual information. Next, ESRS 2 MDR-A demands information on the company’s actions and resources regarding material sustainability matters. In particular, the reporting entity needs to inform about the actions which were taken or will be taken to prevent, limit or eliminate actual or potential negative impacts, to address opportunities and risks and to achieve the goals and objectives of related strategies.³⁴

The following other two MDR are part of the category “Metrics and Targets”. ESRS 2 MDR-M deals with metrics in regard of material sustainability matters. Therefore, the company has to create an understanding of the metrics they used to track the effectiveness of their applied above-mentioned actions by explaining all of those used metrics, be it entity-specific ones or those taken from GRI, ISSB or ESRS. Then, ESRS 2 MDR-T covers the actual tracking of the effectiveness of the applied policies and actions by demanding disclosure on targets the company has set concerning material sustainability matters, particularly on measurable, result-oriented and scheduled targets. Every disclosure must be made for each of those targets individually. Furthermore, MDR-T also includes targets connected to the prevention or limitation of ecological impacts.³⁴  

4.2       Topical standards

In general, the topical standards are divided by their areas of reporting, being “Environmental”, “Social” or “Governance”. However, there will still be possible overlaps in content. For example, some environmental standards like ESRS E3, “Water and marine resources”, are connected to social standards like ESRS S3, “Affected communities”, because negative consequences resulting from marine resources are allocated to disclosure requirements of ESRS S3.³⁵

4.2.1      Environmental standards

There are five environmental standards: ESRS E1 “Climate Change”, ESRS E2 “Pollution”, ESRS E3 “Water and marine resources”, ESRS E4 “Biodiversity and ecosystems” and ESRS E5 “Circular Economy”. In general, there may be related disclosure requirements between the respected environmental standards. For the interpretation of such disclosure requirements the corresponding related disclosure requirements need to be used for audit. For example, the reporting requirements of ESRS E3 include relevant aspects connected to ESRS E2, such as microplastic and emissions into water, and to ESRS E5, such as waste.³⁵

ESRS E1 has the most potential reporting disclosure requirements. In comparison, ESRS E2, ESRS E3, ESRS E4 and ESRS E5 are far less detailed, with ESRS E3 having the least reporting requirements and therefore being the most compact of these standards. Apart from that, environmental standards have a similar structure with the only difference being the amount of disclosure requirements and related thematical metrics. The structure always includes the following aspects: (I) the process for identifying and assessing material impacts, risks and opportunities, (II) strategies, (III) measures and resources, (IV) objectives, and (V) the expected financial impact.³⁵

The phase-in regulations, introduced in ESRS 1, apply to all environmental standards except for ESRS E4. Additionally, the relevance of these standards is connected to the specific industry sector and company-specific particularities. For example, ESRS E5 will be more prominent in production than in the service sector. However, across companies in all sectors there will be individual disclosure requirements that are particularly prominent in the respective thematic standards and apply largely independent of the sector.³⁵

Publication of information resulting from environmental standards has to be done under the sector “environmental information” of the sustainability report. This sector also needs to include information from Article 9 of the Taxonomy Regulation ((EU) 2020/852). That would include information concerning the percentage of sales revenue resulting from products and services and connected to a company’s economical activities and information concerning investments and operating expenses related to assets and processes connected with economic activities.³⁵

4.2.1.1     ESRS E1 “Climate change”

ESRS E1 includes the subtopics “Climate change adaption”, “Climate change mitigation” and “Energy”.²³ More precisely, CSRD demands disclosure on how companies harmonize their business models and strategies with the set targets of the Paris Agreement and the European Climate Law, being in that case the decrease to net zero greenhouse gas emissions by 2050²³. The reporting therefore should include information about investment and financing plans, as well as levers concerning decarbonisation and ‘locked in emissions’²³. Hence, useful key data would include the Gross Scopes 1, 2 and 3, information on energy consumption and intensity indicators²³. Additionally, this demands disclosure on the use of renewable energy and energy efficiency as long as these topics are connected to the main topic of ESRS E1³⁶.

The entire disclosure requirements can be seen in the following figure. 

The above-mentioned terms “Climate change adaptation” and “Climate change mitigation” are specifically defined in Annex II of the ESRS. The latter term, “Climate change mitigation”, defines the process of reducing GHG emissions in harmony with the Paris Agreement. Accordingly, this covers the stop of Global Warming increasing more than 1,5°C in relation to preindustrial level. The first term, “Climate change adaption”, defines the process of adapting to the already existing and the expected climate change and its consequences. Furthermore, ESRS also defines renewable energy as energy not coming from fossil sources, being for example solar thermal energy, photovoltaics, or energy from biomass.³⁶

ESRS E1 includes physical climate-related risks and transition risks. Physical climate-related risks represent the physical consequences of climate change directly affecting the company’s strategy and business mode. Transition risks occur when the corporate strategy and the management are no longer in harmony with the changing regulatory political and/or social landscape on which the company bases its activities.³⁶

Concerning climate change the company must disclose information on how the company actually and potentially as well as positively and negatively influences climate change. This also includes the disclosure of metrics relating to energy use and Gross emissions. Furthermore, the reporting entity needs to report its current and future measures utilized or planned to reach the goals of the Paris Agreement. Accordingly, relating to climate change adaption the report should include its existing plans and internal capacities to implement them for adapting its business model and strategies towards a sustainable economy. Further disclosure requirements are based on (I) further actions addressing the prevention, limitation and elimination of potential and actual impacts as well as risks and chances, (II) their results, (III) the nature and scope of the most relevant risks and chances, (IV) the company’s influence of those, and (V) the resulting financial effects. In detail, the actions meant would be defined as actions contributing to reaching the set sustainability goals.³⁶

4.2.1.2     ESRS E2 “Pollution”

Pollution is one of the most central environmental topics since the pollution of air, water and soil endangers human health and environment. The definition of the term “pollution” as well as relating terms such as “emission” or “pollutant” are given in Annex II of the ESRS. Furthermore, subtopics of ESRS E2 includes air pollution, water pollution, soil pollution, pollution of living organisms and food resources, substances of concern, substances of very high concern, and microplastics. However, the subtopic concerning pollution of living organisms and food resources is not further defined in the standard itself. This topic will be later picked up in sector-specific standards. All other subtopics are discussed in ESRS E2, the Basis of Conclusions and the Glossary.³⁷

ESRS E2 includes concepts, measures, targets and key figures concerning air pollution, water and soil pollution and substances of (very) high concern²³. For example, key figures would give information on pollutant emissions and substances of concern, including sulphur dioxide, nitrogen oxides, nitrates and pesticides²³. In general, ESRS E2 tries to increase the understandability of pollution-related information in the sustainability report³⁷. First, the first paragraph of ESRS E2, ESRS E2.1, tries to inform the user on how the company influences the pollution of air, water and soil³⁷. Second, the report has to present the actions the company takes to prevent or limit actual and potential negative impacts as well as how the company deals with chances and risks³⁷. Third, it tries to show what plans and capabilities the company has concerning the adaption of its strategies and business model³⁷. This relates in particular to the transition to a sustainable economy and the need to prevent, control and eliminate pollution³⁷. Forth, the report should describe the nature, type and extent of the company’s risks and opportunities associated with the company’s pollution-related impacts and dependencies³⁷. In this regard, it should also give information on the prevention, abatement, elimination and reduction of pollution, including cases where these arise from the application of regulations, and how the company manages them³⁷. Fifth, the report details the financial consequences of the mentioned risks and chances for the company resulting from its pollution-related impacts and dependencies³⁷.

All these above-mentioned goals are addressed in individual or across several disclosure requirements (figure 4). For example, the disclosure of actions is required under the DR ESRS E2-2. The visualization concerning financial effects is given in ESRS E2-6.³⁷

All in all, the standards try to create an understanding for the most important measures taken and planned to reach the goals and specifications of the pollution-related strategy. While disclosing information, next to ESRS E2.16 to ESRS E2.19 and their connected annexes, the companies need to specifically follow the disclosure requirements defined in ESRS 2 MDR-A. Additionally, the companies can use the Directive 2010/75/EU on industrial emissions (IED) and the Taxonomy Regulation as reference points.³⁷

4.2.1.3     ESRS E3 “Water and marine resources”

ESRS E3 is with only five disclosure requirements the smallest environmental standard in volume (figure 5)³⁸. However, it has the most connecting factors³⁸. Subtopics of ESRS E3 include, among others, water withdrawals and consumption of water²³. Sub-subtopics are determined by ESRS 1, being “Water consumption”, “Water withdrawals”, “Water discharges”, “Water discharges in the oceans” and “Extraction and use of marine resources”³⁸.

Therefore, disclosures need to be made about the concepts, measures and goals concerning water usage, water discharge into water bodies and oceans, the conservation of habitats and the prevention of pollution of marine resources²³. Additionally, this demands data on the management of water usage in general as well as self-set duties to reduce water usage in regions dealing with high water stress²³. Furthermore, according to ESRS E3.2f. the sustainability aspects “water” and “marine resources” include the company’s relation to water in connection with its activities and its upstream and downstream value chain (ESRS E3.AR1), specifically concerning its impacts, risks and opportunities as well as the management of those³⁸. In detail, the reporting entity has to capture and report the location and the amount of water used for their activities, products and services as well as the water-related consequences the company causes or contributes to³⁸. This includes the risks concerning water that it is exposed to³⁸.

In particular, the disclosure requirements demand (I) the identification of material positive or negative impacts on water and marine resources, (II) information on the actions taken to prevent, limit or eliminate actual or potential negative impacts to protect water and marine resources and their results, (III) information on the company’s dedication to fulfilling the goals set by the European Green Deal and its commitment to a sustainable ‘blue economy’ and a sustainable fisheries sector, (IV) data on existing plans and capacities to implement strategies and business model(s) related to the global preservation and restauration of water and marine resources, (V) the identification of nature, type and amount of the company’s material opportunities and risks resulting from the effects and dependencies on water and marine resources, and (VI) information on financial impacts resulting short-, middle- and long-term from these chances and risks.³⁸

The term “Water” covers the surface water and the groundwater. The Glossary includes further terms such as “Freshwater”, “Wastewater” or “Water intensity”.³⁸

ESRS E3 is connected to other environmental standards. For example, relevant information for ESRS E1 would be physical risks resulting from water- and marine-related dangers, such as acidification of the oceans, saltwater intrusion, flooding or heavy downpours. Moreover, ESRS E3 is relevant to other standards like ESRS S3, dealing with the disclosure of material negative consequences for affected communities in relation to marine resources.³⁸

4.2.1.4     ESRS E4 “Biodiversity and ecosystems”

The fourth environmental standard covers “direct impact drivers of biodiversity loss”, including the subtopics “climate change”, “land-use change, fresh water-use change and sea-use change”, “direct exploitation”, “invasive alien species”, “pollution” and others²³. Furthermore, ESRS E4 deals with “impacts on the state of species”, such as the species’ population size and the species’ global extinction risk, “impacts on the extent and condition of ecosystems”, like land degradation, desertification and soil sealing, and “impacts and dependencies on ecosystem services”²³. Particularly important for the scope of reporting under ESRS E4 are the main drivers which contribute to the loss of biodiversity or the alteration of biodiversity and ecosystems³⁹. According to ESRS E4, these consist of climate change, pollution, changes in land, water and marine use, use and exploitation of natural resources and invasive alien species³⁹. These main drivers also create contact points to other environmental standards as well as to the social standard ESRS S3³⁹.

The definition of the term biodiversity or biological diversity is given in ESRS E4.3. According to this, these terms refer to the variability among living organisms from all sources, those being for example terrestrial, freshwater, marine and other aquatic ecosystems as well as the ecological complexes which they are part of.³⁹

All in all, the disclosure requirements, seen in the sixth figure above, first deal with the companies’ material positive and negative actual and potential effects on biodiversity and ecosystems as well as with the extent the companies contribute to the causes of harm to and loss of biodiversity and ecosystems. Furthermore, the reporting entities must present the actions they implemented for the prevention or limitation of actual and potential material negative effects and for the protection and restoration of biodiversity and ecosystems as well as their results. Additionally, the report also must show the companies’ plans and abilities to harmonize their strategy and business model with the topics given in ESRS E4, being for example the compliance with planetary boundaries, with the aspects of the EU Biodiversity Strategy for 2030 or with the EU Birds Directive and the EU Habitats Directive. Last, throughout this complete processes, the report must communicate understanding for the short-, middle- and long-term financial effects resulting from material opportunities and risks.³⁹

This environmental standard is designed to be principle-based because apart from one metric this standard does not include specific parameters necessary for disclosure. Some disclosure requirements of ESRS E4 are considered to be sustainability indicators within the meaning of the Disclosure Regulation. Therefore, they serve as an informative basis for sustainability-related reporting by financial market participants and are as a consequence especially of relevance. Those requirements would include the determination and evaluation of relevant negative effects, such as a list of key locations with negative impacts on biodiversity-sensitive areas, negative impacts on land degradation, endangered species and more. Additionally, they have to inform about guidelines and practices for the protection and preservation of biodiversity and ecosystems, being for example sustainable landscaping or restriction of deforestation.³⁹

Every disclosure requirement under ESRS E4 is subject to a materiality assessment. Aspects important for this evaluation include (I) the already mentioned direct drivers for loss and biodiversity, (II) impacts on nature and (III) impacts and dependencies on ecosystem services.³⁹

4.2.1.5     ESRS E5 “Resource use and circular economy”

The last environmental standard includes the inflow, use and outflow of raw material in relation to a company’s products and services²³. Additionally, it deals with the topic of waste and the reporting entity’s contribution to reducing the use of natural, non-renewable resources, to the regenerative production of renewable resources and to the regeneration of ecosystems²³. Therefore, key data on ESRS E5 would be the amount of used raw material and waste as well as the company’s waste quantities, each of those in accordance with the principles of the circular economy²³. Next to the consumption of raw material and the circular economy, ESRS E5 also covers the transition towards the decision to not extract non-renewable raw materials and to applicate procedures on preventing waste generation, also including environmental pollution generated through waste⁴⁰.

The entire demanded disclosures of this standard can be seen in the following figure.

In general, ESRS E5 often asks for disclosure on the use of raw material. This specifically relates to the use of non-renewable raw material. Otherwise, this term as well as others like “Circular economy” and “Waste hierarchy” are still defined in Annex II of the ESRS’ part of the Glossary.⁴⁰

Similar to the other standards, the disclosure requirements demand reporting of the following information. The company must inform on (I) its material positive and negative, actual and potential impacts, including e.g. the efficient use of raw material, avoiding the depletion of non-renewable resources, and the sustainable acquisition and use of renewables. Regarding this, the disclosure also needs to cover (II) the actions taken to avoid or limit those impacts concerning the circular economy and the raw material use as well as their results. Those actions could be those of decoupling economic growth from the use of materials and dealing with risks and opportunities. Furthermore, the report needs to include (III) the company’s actions and capacities relating to adapting its strategy and business model to the principles of the circular economy. Those principles would be e.g. the minimization of waste, the preservation of the highest possible value of products, materials and other resources, and their efficient use at production and consumption. Also important is information on (IV) the traits, nature and amount of relevant risks and chances connected to a company’s impact and dependencies on the use of raw material and the circular economy. Adding to this, the company must depict how it deals with those. Last, the report must inform about (V) the financial impacts of those risks and chances resulting short-, middle- and long-term for the company because of its dependencies and impacts.⁴⁰

Particularly critical are the disclosure requirements of ESRS E5 for resource inflows, including resource use, resource outflows, related to products and services, and waste. The requirements in relation to resource inflows also refer to information on the circulatory capability, taking into account renewable as well as non-renewable resources. Disclosure on resource outflows includes information on products and materials.⁴⁰

Based on the disclosure requirements of ESRS E5-4, the reporting company has to determine the physical flow as well as used resources and materials which then should lead to an evaluation of the change from a “business-as-usual-scenario” towards a circular economy system (ESRS E5.5). In detail, a “business-as-usual-scenario” describes an economy in which limited resources are extracted to manufacture products which are used and then discarded. This term also can be seen as a linear production or as “take-make-waste”. A circular economy however should lead to preserving the value of technical and biological resources, materials and products.⁴⁰

Depending on the result of the materiality assessment, disclosure requirements would further include (I) a description of the used procedures to identify and evaluate the above-mentioned impacts, risks and chances, (II) strategies, (III) measures and means, (IV) goals concerning the circular economy, (V) resource inflows, (VI) resource outflows and (VII) above-mentioned financial effects. Metrics and targets are included in the content of disclosure according to ESRS E5-3 to ESRS E5-6. Data about resource inflows should create an understanding on a company’s consumption of raw material relating to its activities and its upstream and downstream value chain. Accordingly, information on outflows shows how a company supports the circular economy and which strategies it pursues in connection to the reduction and management of waste.⁴⁰

4.2.1      Social standards

Opposite to the environmental standards, which use the Taxonomy Regulation as a reference point for the structure of the given sustainability aspects, the social standards were not created with such a regulation as reference point. Social standards are stakeholder oriented. They are similar in structure. Additionally, with few exceptions, the explanation of the given content is word-by-word the same for every of those standards. Therefore, they are extremely user-friendly. More precisely, their structure is based on the Sustainability Due Diligence Process. The disclosure requirements are according to its phases, starting with the engagement and then leading into a circular flow, consisting of assessment, integration and action, tracking and communication. For example, the engagement is fulfilled with ESRS S1-4.DR2, followed by ESRS 2 SBM-2 and SBM-3 for the assessment, ESRS S1-4.DR1, 3, and 4 for integration and action, and ESRS S1-4.DR5 and ESRS S1.DR 6ff. for tracking. Reporting in accordance with ESRS serves the purpose of the last phase, being the communication.⁴¹

Individual groups can fall under several of different stakeholder categories and therefore be subject to reporting under several of these social ESRS. This represents the connection of the social standards with each other. Hence, ESRS demands an integrated perspective to efficiently describe this connection.⁴¹

The standards ESRS S1 and ESRS S2 deal specifically with worker protection, ESRS S3 with “Affected communities” and therefore with the respect for human rights, and ESRS S4 with “Consumers and End-users” and the protection of those. Under normal circumstances, ESRS 2 IRO-1 needs to be covered in reporting of each of those standards, independent from a materiality assessment. However, that is not the case for social standards. Concerning those, ESRS 2 SBM-2 “Interest and views of stakeholders” needs to be covered regardless of a materiality assessment since social stakeholders focus on stakeholder involvement. Its process of reporting is taken from ESRS 2 and is equally transferable for all stakeholder groups. Therefore, it requires no further specifications in the individual social standards. The company only needs to specify for each standard that the described stakeholder-group is material.⁴¹

The social standards of set 1 are not finalized with their publication. Except for ESRS S1, they are still missing metrics which address the covered sustainability aspects. These metrics are supposed to be added with later ESRS sets or with sector-specific standards. However, missing metrics in ESRS S2 to ESRS S4 are still supposed to be identified in a materiality assessment individually for the company and added to the report.⁴¹

Moreover, social standards are affected by the phase-in regulations. SNEs can postpone reporting of ESRS S1 by one and ESRS S2, ESRS S3 and ESRS S4 by two years. All other companies can only postpone reporting of those by one year. This possibility allows companies more time to gather the necessary data and create the required reporting processes and structures since that can be rather complex and connected with multiple questions of interpretation, especially in connection with the information requirements of the social standards.⁴¹

4.2.2.1     ESRS S1 “Own workforce”

ESRS S1 includes 17 disclosure requirements (figure 8)²³. This standard covers the company’s own workforce which is one of the most relevant groups of affected stakeholders⁴². According to ESRS S1.4 this group includes employees as people in an employment relationship with the company and non-employees⁴². This either can be people with contracts with the company to supply labour or people provided by the company’s primarily engaged employment activities⁴². Both categories are to be reported⁴². However, non-employees are not subject to the control of the reporting company⁴².

The reporting entity discloses (I) the company’s relevant impacts on their own workforce, (II) the action taken to prevent, limit or eliminate actual or potential negative impacts and their results, (III) relevant risks and opportunities the company is exposed to because of its impacts and dependencies on its own workforce and how the company regulates those and (IV) the company’s financial effects resulting from those risks and chances from a short-, middle- and long-term perspective.⁴²

This social standard has three subtopics, those being “Working conditions”, “Equal treatment and opportunities for all” and “Other work-related rights”. The first primarily references the Universal Declaration on Human Rights as well as other international and European frameworks. Therefore, topics dealt with are the right to work and the fundamental rights in the world of work, such as adequate working conditions, compliance with (maximum) working hours, rest periods and vacation periods, equal pay for equal work and more. For example, the sub-subtopic “secure employment” is based on the “Tripartite declaration of principles concerning multinational enterprises and social policy” (MNE-Declaration) which deals with providing employees with stable employment relationships and topics such as employment stability and social security. The second subtopic includes five different sub-subtopics. It ensures equal and non-discriminatory access to general and professional education, employment, career development and the exercise of powers without discrimination on the grounds of sex, racial or ethnic origin, nationality, religion or belief, disability, age or sexual orientation. For example, “Gender equality” and “equal pay for work of equal value” is also based on the Universal Declaration on Human Rights. According to the European Social Charter, it is a company’s duty to take warranty or support measures addressing, among others, the following aspects: (I) Access to employment, protection against dismissal and occupational reintegration, (II) career counselling, job training, retraining and professional rehabilitation and (III) employment and working conditions. Last, the third subtopic again is mostly based on the Universal Declaration of Human Rights. As an example, the sub-subtopic “Child labour” includes elimination of child labour and accessibility of free and ensured education. The term “Child labour” is further defined in Annex II of the ESRS.⁴²

4.2.2.2     ESRS S2 “Workers in the value chain”

The second social standard shows the material impacts on the workers of the value chain connected to the company’s business activities and value chain. In detail, ESRS S2 includes all value chain workers upstream or downstream of the value chain which are influenced or could be influenced by the company. Specifically targeted are (I) workers for outsourced services at the company’s operating site such as security staff, (II) employees of the company’s supplier and therefore working under the conditions of the supplier, (III) workers of another downstream company which receives the company’s products or services, (IV) workers of equipment suppliers regularly maintaining said equipment and (V) workers extracting raw materials used for the creation of components of the company’s products.⁴³

As seen in the ninth figure above, the disclosure is similar to ESRS S1, only specified towards the “workers in the value chain”. Therefore, this again demands information (I) on the relevant impacts on identified workers in the value chain, (II) on the actions taken to prevent, limit or eliminate those as well as their results, (III) on the material risks and opportunities the company is exposed to because of their impacts and dependencies on the workers of the value chain and how the company controls these (IV) and on the resulting financial effects. Currently, ESRS S2 is still missing disclosure requirements to complete reporting of the above-mentioned data, since there are no disclosure requirements on metrics. Furthermore, impacts, chances and risks are extremely dependent on the specific circumstances of the company’s value chain, such as the type of activities in the upstream and downstream value chain as well as the location of those activities. Therefore, the current requirements in ESRS are less specific and will be complemented by future standards with more sector- and company-specific demands.⁴³

The Application Requirements concerning ESRS 2 advice to display fundamental aspects and specific aspects connected to short-term relevant impacts separately. This points out the short-term reactions to events and grievances, like e.g. the initiatives taken for health and safety at work following the pandemic.⁴³

4.2.2.3     ESRS S3 “Affected communities”

Affected communities are those influenced by the company’s operations or by its upstream or downstream value chain. ESRS S3 specifically addresses affected communities regarding their ecological, social, cultural and political rights. Additionally, ESRS S3 sets a reference to the rights of indigenous people, consequently putting special emphasis on them as a group of the affected communities.²³

In comparison to the other social standards, ESRS S3 has the broadest understanding of stakeholders, since ESRS S3 includes every kind of stakeholder that has not yet been addressed in one of the other social standards. This means ESRS S3 covers every stakeholder except the company’s own workforce, its workers in the value chain and the consumers and end-users.⁴⁴

Again, the disclosure requirements, seen in the tenth figure, demand information (I) on the material impacts on affected communities in locations, in which such impacts are most likely and most difficult, (II) on the actions taken to prevent, limit or eliminate actual and potential negative impacts, (III) on the relevant risks and opportunities the company itself is exposed to because of its dependencies and impacts on affected communities (IV) and on the financial effects resulting from those chances and risks in a short-, middle- or long-term perspective. The disclosure requirements of ESRS S3 especially highlight impacts, risks and chances concerning indigenous people. This includes actually as well as potentially affected indigenous people. An important factor for identifying indigenous groups would be a sense of indigeneity or a tribal affiliation. However, actual lists with more criteria for defining an ethnic group as indigenous is missing in ESRS.⁴⁴

As in ESRS S2, the disclosure requirements of ESRS S3 recommend that the listed sustainability aspects be presented separately from the special facets of reportable sustainability aspects connected to relevant short-term impacts. As in ESRS S2, this will show the short-term reaction of companies to grievances.⁴⁴

4.2.2.4     ESRS S4 “Consumers and end-users”

According to the general business management doctrine, companies’ usual strategies are customer oriented. This means that they create potential use for their customers which needs to be larger than the potential use of the individual influential factors used in the production process. However, because of social trends, this doctrine starts to shift. Companies could for example start to focus less on sales orientation and more on other operational bottlenecks. A shortage of skilled workers could result into companies having to reduce their quality and quantity of products. Changes in social structures could also lead to political decisions such as the restriction or prohibition of individuals’ free use of services which then would lead to the termination of business models. An example would be the discussion about limiting or prohibiting the use of perpetuating chemicals like PFAS. Current social trends also lead to a high level of legal protection of consumers against companies.⁴⁵

The objective presentation of one’s own business model with its positive and negative effects on consumers and end-users becomes of further importance because of these social trends.⁴⁵

ESRS S4 includes disclosure requirements on information-related impacts for consumers and end-users, on consumer safety and on the access to the products and services²³. They can be seen in detail in figure 11 above. The company should explain the strategies it follows to identify and manage relevant actual and potential impacts on consumers and end-users⁴⁵. Consequently, especially important are strategies relating to (I) information related effects on consumers and end-users, (II) the personal safety of end-users and consumers and (III) the social inclusion of end-users and consumers⁴⁵. The reporting entity would for example have to give a description of the customer groups that rely on accurate and accessible product-related information²³. Furthermore, this demands e.g. a description on the accessibility of information, the personal safety of consumers, on child production as well as on non-discrimination, responsible marketing practices and more⁴⁵. In particular, this standard tries to create an understanding for these impacts connected to the company’s business activities and its value chain⁴⁵. For this, the company needs to give insight into its products and services⁴⁵. As structured in the other social standards, ESRS S4 too demands general disclosure about (I) the relevant positive and negative actual and potential impacts, (II) the actions taken for prevention, limitation and elimination of negative ones, (III) the material chances and risks relating to the company’s impacts and dependencies on consumers and end-users and (IV) the resulting financial effects⁴⁵. These disclosures fulfil the general demand of ESRS S4 that the reporting entity must describe its actions on end-users and consumers⁴⁵. This also requires a connection with the financial presentation in the annual financial statements and in other parts of the management report, especially in the opportunity and risk report⁴⁵.

However, the fourth social standard does not include disclosure on the unlawful or improper use of the company’s products and services since the company is considered to not be responsible for the actions of their customers.⁴⁵

ESRS S4 can be used by companies’ managements as a guide concerning the relationship between the reporting company and the end-users. For this, the effects on the affected persons need to be analysed. Based on this, the entity then must take measures to mitigate the negative effects and evaluate their effectiveness. In this context, the company should also identify its opportunities and risks.⁴⁵

4.2.3      The Governance standard

Most information concerning the reporting company’s governance is already demanded in the Disclosure Requirements of ESRS 2. Additionally, there is only one more topical standard relating to its governance, being ESRS G1 “Business conduct”.²³

4.2.3.1 ESRS G1 “Business conduct”

This standard specifies disclosure requirements about the corporate policy as stated in Art. 29b II c ii) to v) of CSRD. While creating the ESRS, EFRAG’s focus was on the topics specifically named in CSRD. Therefore, there is a possibility that not every relevant subtopic for corporate policy or those included in other regulations like GRI is covered by ESRS G1. Furthermore, other aspects not included in ESRS G1 but still relating to the company policy might already be covered by other standards like ESRS S4 and privacy policies. However, this standard is still created with other regulations in mind, such as the EU-Whistleblowing-directive, the NFDR and the OECD-Guidelines. In conclusion, the structure, content and the wording of ESRS might be similar to those regulations.⁴⁶

ESRS G1 is the only reporting standard without any kind of phase-in regulations for disclosure requirements. Therefore, coming first reporting year, all companies have to report all disclosures identified as material.⁴⁶

As shown in the following figure, ESRS G1 includes six disclosure requirements. 

They address, among others, corporate guidelines²³. Moreover, they try to create an understanding for the company’s strategy relating to its processes, procedures and performance in relation to its corporate policy⁴⁶. This concentrates (I) on the corporate ethic and culture, including corruption and bribery, as well as the protection of whistleblowers and animal welfare, (II) on the management of the relation to suppliers, including payment practices, and (III) on the company’s activities and duties concerning its political influence and its lobbying activities⁴⁶. 

The section ESRS G1.6 demands descriptions of procedures used to identify material impacts, risks and opportunities relating to the company policy. Hence, the company must disclose every criterion used in its materiality assessment. This requirement connects to the disclosure obligations under ESRS 2 IRO-1. Key components of this demand would be the evaluation of related risks while considering the company’s business model and activities, the geographical location of activities and the risks of corruption, bribery and similar actions. A risk assessment helps to evaluate potential problems and to shape strategies and procedures against them. Regarding this, companies should publish information concerning the evaluation to show how it realized the risk assessment. In turn, this allows stakeholders to evaluate the completeness of the assessment and to draw conclusions about the appropriateness of the company’s strategies, procedures, measures and resources.⁴⁶

The disclosure requirement ESRS G1-1 focuses on the disclosure of strategies concerning the corporate culture. One part of the corporate culture is the unwritten law, being generally recognized rules which can only be seen through the attitudes and actions of employees and employers. The other part would be set through internal mission statements, guidelines or codes of conduct. First, the disclosure should answer how the company supports its corporate culture as well as in what manner it establishes, develops, evaluates and supports it. For example, the company must describe how administrative, management and supervisory bodies are involved in said process of shaping, monitoring, promoting and evaluating corporate culture. Then, the company should describe the extent to which it has strategies regarding the evaluation of impacts, risks and chances connected to its corporate culture and to what extent it can decrease negative and increase positive impacts and monitor and control associated risks and chances.⁴⁶

Section ESRS G1.10 is part of ESRS G1-1. It generally demands the description of mechanisms, strategies and examinations regarding (I) concerns about possible unlawful behaviour, (II) corruption and bribery, (III) the protection of whistleblowers, (IV) the protection of animals and (V) the availability of internal organizational training. If a company does not have such mechanisms or strategies, it must state this fact and explain if it still plans to introduce such. In case it does, the company must describe the set timeframe of introducing them. Additionally, in accordance with this disclosure requirement, the company should name the functions within the company which might be the most endangered regarding possible bribery and corruption.⁴⁶

Moreover, disclosure requirements of ESRS G1-1 guarantee that financial service providers receive the information needed in regard to the Sustainability Finance Disclosure Regulation (SFDR). This is covered by ESRS G1.10(b) and (d) which request information on sustainable impacts and risks of financial service providers’ investment portfolios through e.g. missing measures for protection of whistleblowers or missing strategies regarding the fight against corruption and bribery.⁴⁶

The Application Requirement (AR) ESRS G1.AR1 specifies aspects to be considered for determining the content and the extent of disclosure relating to the corporate culture. Furthermore, even though the concept and improvement of the corporate culture cannot be captured in qualifiable key figures over time and therefore cannot be compared with other companies on a temporary or inter-company basis, companies still must include disclosure of quantitative data as long as it is deemed useful. It is also important for external addressees of the report that the company discloses how its management defines the topics of ESRS G1 relating to its corporate culture. This helps them to evaluate how a company formulates, supports and controls those topics in its organization. Information on this also includes the “tone at the top” which determines the purpose and strategy of the company as well as guides it on how to deal with important and sensitive topics. ESRS G1.10 helps in disclosing this mentioned “tone at the top”.⁴⁶

Following, ESRS G1-2 fleshes out the demanded information on the management of the relationship toward suppliers. Metrics and targets concerning the company’s governance can be found in ESRS G1-4, ESRS G1-5 and ESRS G1-6. For example, ESRS G1-6 demands disclosure of data relating to payment practices, especially with focus on delayed payment to SNE.⁴⁶

5        Practical Process of Implementation

Sustainability reporting is based on the (Sustainability) Due-Diligence-Process. Through this process a company identifies, prevents, mitigates, remedies and accounts for their relevant actual and potential, positive and negative impacts on humanity and the environment in connection with its economic activities (ESRS 1.59). This includes the company’s business activities and its business relations as well as its products, services and its value chain. Furthermore, this process reacts to changes in strategies or in the company’s business model, its activities and business relationships as well as in the operational context, in purchasing and in sales activities. ESRS does not mandate the execution of the Sustainability Due Diligence. However, the materiality assessment is still based on this process which makes it relevant for the reporting entity.³³

Nevertheless, ESRS does still set certain requirements concerning reporting. These refer in particular to the formal and content requirements specified in the cross-cutting standards ESRS 1 and ESRS 2^33,34. Therefore, this information has already been given in the relating chapters above. 

Moreover, ESRS 1 also demands the reported information to fulfil the following characteristics: These include relevance (ESRS 1.QC1 to QC4), a truthful presentation (ESRS 1.QC5 to QC9), comparability (ESRS 1.QC10 to QC12), verifiability (ESRS 1.QC13 to QC15) and comprehensibility (ESRS 1.QC16 to QC29). Truthfully presenting the information means that the presentation must reflect the reality. Therefore, completeness, neutrality and freedom of error are deemed to be an important part of this characteristic. This includes the full display of information concerning the considered risk, impact or chance to create complete understanding, leaving out any biases in selecting and disclosing information and being accurate in reporting which does not just refer to the freedom of error but also to the inclusion of descriptions and the identification of used estimates, prognoses and proximity values. Additionally, comparability of the report describes the possibility of comparing the given information with information of earlier reports as well as with reports of other companies. Therefore, the reporting entity has to be consistent in its applied methods as well as in its formal display of information.⁴⁷

Last, the disclosure requirements of ESRS relate to other EU legislative acts³⁴. Regarding this, ESRS 2 has given a list of the specific datapoints and the corresponding legal acts for which these datapoints form the basis³⁴. This includes disclosure requirements of ESRS 2 itself as well as of the different topical standards³⁴. Different from those topical requirements given in the list, the included datapoints of ESRS 2 have to be disclosed without reservations³⁴. The legal acts which reporting under ESRS forms the basis for are the SFDR, Pillar 3, the Benchmark Regulation and the EU Climate Law³⁴. Another connection that will be given is between CSRD and the Corporate Sustainability Due Diligence Directive (CSDDD)⁴⁸. While CSRD demands reporting in accordance with ESRS which also includes information on the company’s value chain, CSDDD will formulate actual regulations relating to the fulfilment of Due Diligence the company has to adhere to^33,49. These regulations include obligations concerning the company’s activities, the activities of subsidiaries and the activities of companies in the reporting entity’s value chain which they maintain business relationships with⁴⁹. Furthermore, CSDDD also adds regulations concerning the liability for breaches of the obligations⁴⁹. In general, CSDDD is in line with CSRD⁴⁸. Therefore, both are to be applied by the companies falling under both scopes of application. Moreover, the obligations of CSDDD can be used for questions of interpretation regarding reporting according to CSRD³³.

All in all, there is a general connection between other EU legislation and reporting under ESRS. They might even build upon each other. For example, the company must fulfil Due Diligence under CSDDD and publicises its efforts in this regard through the sustainability report in accordance with CSRD. Moreover, the other EU legal acts do not affect the sustainability reporting in the way that the reporting entity would have to deviate from the described implementation and demands of CSRD and consequently ESRS.  

The materiality assessment, which will be explained in the following, is a big part of sustainability reporting and the determination of relevant information. Following up on this, ESRS 1 App. E shows a possible way for companies to transition from the results of this assessment to the content of the sustainability report.³³

5.1       The materiality assessment

The materiality assessment is a fundamental instrument to identify and evaluate relevant impacts, risks and opportunities which should be disclosed in reporting in accordance with ESRS (ESRS 1.25)³³. Most disclosure requirements are subject to a materiality assessment²⁷. Furthermore, this assessment creates a certain flexibility in reporting since its result will indicate whether the certain inspected item has to be included in the company’s sustainability report or not^4,27. In most cases, information has to be disclosed if it is considered material²⁷.

To comply with the reporting obligation in accordance with ESRS, the company must undertake a double materiality evaluation. The double materiality was first introduced by NFRD and has also been adopted by CSRD and consequently by ESRS. In detail, CSRD requires companies to include information necessary to understand the impacts of the company’s activity on sustainability matters and the information necessary to understand how sustainability matters affect the company’s financial performance in their annual management report. The double term indicates that materiality has two dimensions: The impact materiality and the financial materiality. ESRS will guide the implementation of this obligation to disclose information.⁹

Impact materiality is often also named “Inside-Out” because the relevant considered effects have an outward impact¹¹. It represents the impact of companies’ business processes or their supply chain on the environment, on the society and on the humans¹¹. This dimension of materiality provides criteria that guide the reporting company in the process of selecting and disclosing information of these impacts⁹. The second type of materiality, the financial materiality, is in turn known as “Outside-In” since the effects are inward-looking¹¹. Financial materiality is present when sustainability topics have an impact on the success, cash flows, credit availability or conclusion of insurance policies¹¹. In this regard, it does not matter whether the company has those financial impacts because of its own actions or because of developments outside of its influence¹¹. A sustainability matter is deemed to be material from a financial perspective when such a matter triggers or could trigger those financial effects⁹. For example, there could be a financial loss resulting from climate-change related phenomena⁹.

According to ESRS, there is an interrelationship between both dimensions of materiality⁹. Impacts on the environment or people may also affect the company financially⁹. As an example, if the reporting company undermines the working conditions or other rights of supply chain workers, it might lead to reduced costs and/or a higher risk of labour-related litigation⁹. However, for a concept to be material, it only needs to either meet the criteria or the impact materiality or the criteria of the financial materiality³³. Even though there are long-term interdependencies between both dimensions, ESRS emphasizes that the impact materiality must be assessed independent from the financial materiality³³.

In general, ESRS does not mandate how the materiality assessment process has to be designed since there would not be one specific process that would fit all types of economic activity or organisational structure. However, the process should take the requirements of ESRS 1 and the requirements concerning the materiality assessment in ESRS 2 IRO-1, IRO-2 and SBM-2 into account. Furthermore, the company’s assessment has to reflect the impact and the financial materiality perspectives as well as their interrelationship.⁵⁰

A possible materiality assessment process in accordance with the demands of the ESRS is given by EFRAG. Here, EFRAG first proposes that the company develops an overview including its business relationships and activities, the context in which these take place and an understanding of the affected stakeholders. This includes for example an analysis of the company’s business plan, its strategy, its financial statements and other information concerning investors, information on the company’s activities and their geographical locations, its products and services and its value chain and business relationships. Additionally, the company could analyse its relevant legal and regulatory landscape and create an analysis of existing stakeholder engagement initiatives as well as a mapping of its affected stakeholders.⁵⁰

The next step, in accordance with ESRS, would be the identification of the reporting entity’s impacts, risks and opportunities^33,50. For this, the aspects listed in ESRS 1.AR16 could be useful since it delivers a list of sustainability aspects that need to be examined for materiality^34,50. Relating to this, EFRAG advices on three different approaches which a company may follow⁵⁰. Those would be either (I) a screening of the given list in ESRS 1 and completing it with entity-specific aspects, (II) a creation of a list of impacts, risks and opportunities and aggregating it following the structure of ESRS 1.AR16 or (III) by starting with the sustainability matters as informed by existing reporting and comparing these to the given list of ESRS 1.AR16⁵⁰.

Then comes the assessment and determination of the material impacts, risks and opportunities⁵⁰. First would be the examination according to the identified aspects’ impact materiality⁵⁰. For this, the company has to set objective criteria itself³³. To assess materiality, the company applies scales whose gradation is chosen by itself³³. This also demands the identification of qualitative and quantitative thresholds to differentiate between the relevant and irrelevant aspects^33,50. Criteria for the impacts would be for example relating to the severity or, in case of potential ones, in relation to the likelihood of occurrence⁵⁰. In general, the company can apply different scales for different kinds of sustainability aspects, such as social or ecological ones³³. Scales differentiate materiality on the basis of maximum values and of the average value of all analysis criteria by setting different threshold values³³. And throughout the complete process, the company has to proceed methodically³³. Following, it is recommended to go through the created list of impacts and apply the determined criteria for severity⁵⁰. For actual negative impacts, EFRAG advices the criteria to be scale, scope and irremediable of character⁵⁰. For potential ones, EFRAG includes an estimation of the likelihood and maps it to the relevant time horizon⁵⁰. Similarly, positive actual impacts would be examined according to their scale and scope, and potential ones also for their prohability⁵⁰. All in all, sustainability aspects are considered to be material on an ecological and social level when actual or potential, positive or negative, short-, middle- or long-term impacts on the environment or people occur in the context of the company subject to the reporting obligation (ESRS 1.43)³³.

EFRAG also includes the stakeholders into the materiality assessment since double materiality can also be reflected in the relationship between the company and the stakeholders³³. Consequently, the report should also include aspects considered as material by the stakeholders^33,50. Therefore, after the affected stakeholders were identified, the company should determine sustainability aspects suitable for stakeholder inclusion and determine the extent of their inclusion³³. This stakeholder inclusion is then carried out by chosen methods of the company, leading to feedback for the materiality assessment³³. Furthermore, the company should analyse the given feedback to identify the most important aspects and prioritize them for assessment³³. Last, the feedback should be included into the assessment³³. However, even though the stakeholder inclusion is strongly recommended, it is not mandatory³³.

After the impact materiality, the aspects have to be evaluated concerning their financial materiality⁵⁰. For assessing these, the company again has to set thresholds as mentioned above, however this time based on the financial effects in terms of the performance, the financial situation, cash flows and access to and the cost of the capital used⁵⁰. In general, the company evaluates financial materiality through its connected risks and chances resulting from dependencies on natural, social and human resources³³. The assessment itself is based on their likelihood of occurrence and the potential magnitude of their financial effects short-, medium- and long-term⁵⁰. Throughout this process, the reporting entity can use the list of identified impacts, risks and chances which it has already created for the evaluation of the impact materiality⁵⁰. Especially important is also the identification of information deemed as relevant for main users of financial reporting to make decisions concerning the provision of raw material relevant for the company³³. Then, it must be evaluated whether material financial effects derive from these identified impacts⁵⁰. All in all, information is financially material if omitting, misstating or obscuring that information could be expected to influence the decisions made by primary-users of financial reporting on the basis of the company’s sustainability statement⁵⁰.

Generally, while evaluating aspects for their materiality, the company cannot just analyse on its own level. An advised procedure would be to first carry out a Top-down analysis, consisting of an analysis on the level of the reporting company, followed by a Bottom-up analysis, consisting of the subsidiaries carrying out materiality assessments on their own and then having those aggregated. Afterwards, the Top-down analysis would be complemented by the Bottom-up analysis for a plausibility assessment. This would result in the completion of another fundament of the materiality assessment. Moreover, in both cases of materiality the company needs to take the full range of possible consequences and their possibility within this range into account. Therefore, the materiality assessment should include a risk-adjusted evaluation. This means that impacts, risks and chances with a low possibility of occurrence and high potential harm and those the other way around need to be included. Last, qualitative metrics demand a Gross presentation. According to this, reactions/measures already taken regarding negative impacts or risks should not be further included to prevent the adding up or offsetting of information which would distort the result und neutralize the impacts.³³

Concluding the materiality assessment, the reporting entity should gain a list of material risks, impacts and opportunities. The reporting of this information will be done on the basis of ESRS 2 IRO-1, ESRS 2 SBM-3 and ESRS 2 IRO-2.⁵⁰  

Since ESRS also expect to include the value chain in accordance with ESRS 1 in its mentioned extent, EFRAG has also already developed further guidance on how to meet this demand, also tying into the guidance concerning the materiality assessment.⁵¹

All in all, the materiality assessment in accordance with ESRS has not yet been carried out, since the first reporting period started with the year 2024 which means the first reports will be published in 2024. However, as an example, the company BASF already prepared its report of the year 2022 in accordance with the principle of double materiality^[1] which will be the applied method for the coming sustainability reports⁵².

5.2       The LEAP-Approach

The LEAP-Approach was created by the Taskforce on Climate-related Financial Disclosures (TNFD) and has now been adopted by the ESRS³⁷. This approach describes the materiality assessment specifically recommended for the sub-subtopics of the environmental standards³⁷. In detail, companies should quantify potential future financial effects in accordance with the recommendations of TNFD⁵³. Even though the application of the LEAP-Approach is voluntary, it is still seen as the best practice³⁷.

The general structure of this practice is always the same for the environmental standards, just specifically tailored to the respective subtopics of the environmental standards. The following example shows the application of this approach for the assessment of ESRS E2. Accordingly, the first phase would demand a localisation of the contact points of the company’s own activities and its value chain with the environment. Then, the company has to analyse the dependencies and impacts connected to the topic pollution. In the third phase, relevant risks and chances should be evaluated. Last, the reporting entity should prepare and then report the results of the materiality assessment.³⁷

5.3       External audit

After creating the final report, carrying out a mandatory audit of the sustainability report is deemed important to ensure reliability, relevance and usefulness for decision-making⁵⁴. Furthermore, a mandatory audit leads to the reduction of the publication of false or misleading sustainability information⁵⁴. In detail, ESRS demands the external audit of sustainability reporting in accordance with CSRD. In particular, the topics subject to external audit include (I) the compliance of the sustainability report with legal requirements, (II) the compliance of the report with adopted standards regarding Art. 29b or c of CSRD, (III) the materiality assessment, (IV) the digital display of the sustainability report in accordance with Art. 29d of Directive 2013/34/EU as amended by CSRD and (V) the report in accordance with Art. 8 of the EU Taxonomy Regulation⁴⁷.

According to CSRD, this external audit can be carried out by statutory auditors or audit firms. On the one hand, CSRD recommends that companies resort to a wide range of different independent providers of confirmation services since only concentrating on statutory auditors might endanger the independence of those auditors and increase the cost of their services. Particularly, the independence of auditors might be influenced because the audit fee of auditors of financial and sustainability reporting will increase and lead to an increased financial dependency on the reporting companies. Additionally, the costs of services might increase because of the statutory auditors gaining more market strength.⁵⁴

On the other hand, hiring statutory auditors might lead to a higher quality of the audit since the simultaneous audit of the financial report might lead to an increase of the consistency and coherence with the sustainability report. CSRD demands that the auditors should be subject to the same auditing standards for the audit of the sustainability report as for the audit of the financial report. Furthermore, providers should also be subject to standards in line with the Statutory Audit Directive. Both requirements lead to the aforementioned coherence between the financial and the sustainability report. For the audit of the financial report, the auditor already has to gain an understanding of the company’s business activities, its economic environment and its processes concerning reporting and monitoring. Therefore, these auditors also have the information needed for the audit of the sustainability report. This leads to a more cost-efficient audit since the necessary information is already at hand and does not have to be gathered twice.⁵⁴

All in all, CSRD chooses to include the right of choice for the Member States of the EU to allow other providers of confirmation services next to the auditing profession. It only has to be ensured that the chosen auditors have the necessary knowledge relating to the audit of the sustainability report.⁵⁴  

6        Conclusion

In conclusion, the European Sustainability Reporting Standards are introduced as a reporting framework as part of the Corporate Sustainability Reporting Directive¹¹. Therefore, all companies that fall under the scope of CSRD are obligated to report information in accordance with the ESRS⁴. 

Currently, there is only one set of ESRS. Those were developed by EFRAG, a private association originally contributing to technical knowledge and advice on accounting matters⁵. They include two cross-cutting standards and ten topical standards, covering different topics concerning the environment, the society and the reporting company’s governance³³. While the first cross-cutting standard ESRS 1 does not include any kind of disclosure requirements, it introduces the general structure of this released set and further depicts the formal requirements for preparing and presenting the report³³. The following standards then introduce the disclosure requirements³³. ESRS 2 depicts those that are always obligatory for reporting and concretizes the materiality assessment as well as other parts of ESRS 1³⁴. Following, the ten topical standards include disclosure requirements whose inclusion in the report depends on the results of the demanded materiality assessment³³. To fulfil the individual disclosure requirements, ESRS gives datapoints which further concretize the demanded information the company must disclose³³.

All disclosures concerning the topical standards depend on the materiality assessment, an instrument to evaluate and identify the material impacts, risks and opportunities²³. This includes the assessment of the sustainability topics relating to their impact and their financial materiality, therefore complying with the concept of double materiality⁹. In general, ESRS does not mandate how the materiality assessment must be carried out step-by-step⁵⁰. However, EFRAG released a guidance document describing the steps that can be taken to successfully perform the assessment⁵⁰. 

As already said, the current set of ESRS is only part of many ESRS still to come. Development of a second set of ESRS has already started, focusing on sector-specific standards and standards for SMEs²⁸. Those standards will add to the already existing cross-sectorial standards of the first set of ESRS²³.  

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^[1] For this, the company identified all topics which the company has potential or actual impacts on as well as those that affect the company’s performance. First, BASF started with an analysation of external data and developments. This includes the activities of customers and rivals, relevant standards and regulations and other relevant sustainability-related topics. Through this, the company identified 48 relevant topics. Second, those were further prioritized based on their relevance for the chemical industry and the demands and expectations of stakeholders. After that, BASF evaluated the impact and the financial materiality. The impact materiality covers possible and actual, positive and negative impacts of activities along the three stages of creating value, being the activities upstream in the value chain, the company’s own production and its activities downstream in the value chain. The criteria for the evaluation were scale, scope and likelihood. The financial materiality includes the assessment according to the topics’ potential financial impacts on BASF. This would include an analysis of the sustainability aspects’ spatial impacts, such as the effect on local business units or regions, and the effect on BASF’s production, employees, set goals and reputation. The results help BASF to better understand its stakeholders demands and expectations and allows to derive strategically important topics for the business success. All in all, BASF considers topics to be material if they are either material on a financial as well as on a sustainability level or material within the meaning of GRI according to which a topic is already material if it is material on a sustainability basis. Therefore, twelve topics were identified as material, being, among others, trash, adaption to climate change, biodiversity and business ethics.52            BASF-Gruppe. BASF-Bericht 2022. (2023).

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