5.2 European Sustainability Reporting Standards (ESRS)

On July 31, 2023, the first set of European Sustainability Reporting Standards was adopted by the European Commission. They were developed by the European Financial Reporting Advisory Group (EFRAG) and are sector-agnostic standards. These standards are mandatory for all companies subject to the CSRD, regardless of the sector in which they operate. 

The architecture of these sector-agnostic standards consists of two general standards and ten thematic standards (covering environmental, social, and governance topics). In the coming years, additional standards will be issued, including sector-specific standards, as well as standards for small and medium-sized enterprises and for third-country companies. This architecture is shown in the figure.

ESRS 1 (“General Requirements”) establishes the fundamental principles that must be observed when reporting in accordance with the ESRS, but it does not contain any specific disclosure requirements itself. This standard specifically outlines the structure of the ESRS, explains the conventions for preparing reports, and sets out the underlying policies and general requirements for preparing and presenting sustainability-related information.

ESRS 2 (“General Disclosures”) specifies which key information must be provided, regardless of the sustainability aspect being considered. This standard is binding for all companies that are subject to the CSRD. ESRS 2 defines the disclosure requirements relating to the general information that companies must provide about all material sustainability aspects in the reporting areas of governance, strategy, management of impacts, risks and opportunities, as well as metrics and targets.

The thematic ESRS each cover a specific sustainability topic and are organized into themes, sub-themes, and, where applicable, sub-sub-themes. The ESRS do not require companies to disclose all of these standards by default. Instead, the principle of double materiality serves as the basis for reporting sustainability information. The materiality assessment involves identifying and evaluating impacts, risks, and opportunities by engaging relevant stakeholders, as well as determining the material sustainability aspects, which also come with corresponding disclosure obligations. In general, these disclosure obligations include information about the strategies, measures, and resources the company has used in relation to the identified sustainability aspects. In addition, the company must provide information about its metrics and targets associated with the respective material sustainability aspects. If an impact, risk, or opportunity is not adequately covered by the ESRS, the company must provide company-specific information on the matter. 

A sustainability aspect is considered “material” under the European standards if it meets the criteria for impact materiality, financial materiality, or both.