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Introduction to Environmental and Social Responsibility Standards (ESRS)




European Sustainability Reporting Standards (ESRS) represent a significant regulatory development within the European Union (EU), aimed at standardizing sustainability reporting practices.


Developed under the auspices of the European Financial Reporting Advisory Group (EFRAG), the ESRS provide a structured framework for companies to disclose their environmental, social, and governance (ESG) performance under the Corporate Sustainability Reporting Directive (CSRD).


The European Sustainability Reporting Standards (ESRS) represent an effort to formalize and standardize sustainability reporting across corporate entities.




European Sustainability Reporting Standards (ESRS) for reporting under the CSRD



Reporting under the mandate of the Corporate Sustainability Reporting Directive (CSRD), must adhere to ESRS. All companies that fall under the CSRD reporting requirements (see here who needs to report under CSRD) must follow the ESRS.


By aligning reporting practices with ESRS, companies can enhance the reliability, comparability, and relevance of sustainability disclosures, facilitating informed decision-making and fostering investor confidence.



Key Components of ESRS


As of Q2 2024, the ESRS encompass 12 sets of standards addressing various aspects of your company's sustainability performance.


The cross-cutting standards encompass two sets of general standards


  • General Principles (ESRS 1)

  • General Strategy, Governance, and Materiality Assessment Disclosure Requirements (ESRS 2)


The Issue Specific Standards encompass 10 sets of reporting standards on e

Environmental, Social, and Governance issues.


The standards on Environmental Performance are:


  • Climate Change (ESRS E1)

  • Pollution (ESRS E2)

  • Water and Marine Resource (ESRS E3)

  • Biodiversity and Ecosystems (ESRS E4)

  • Resource Use and Circular Economy (ESRS E5)



The standards on Social Performance concern:


  • Own Workforce (ESRS S1)

  • Workers in the Value Chain (ESRS S2)

  • Affected Communities (ESRS S3)

  • Consumers and End Users (ESRS S4)


The one standard set concerning Governance deals with


  • Business Conduct (ESRS G1)









Collectively, the adopted standards contain over 1200 data points for reporting, although after reporting on the cross-cutting standards companies can opt out of all immaterial issue-specific topics except for Climate Change (ESRS E1)


Sector-specific standards for industries like Oil & Gas, Mining, Agriculture, Textile, Coal, Energy Production, Food and Beverage Production, and Motor Vehicles Production were also initially proposed. The European Parliament has recently approved a two-year extension for the development of the sector-specific ESRS.


An extension was also granted to those standards applicable to non-EU companies.


The extension aims to assist companies in adapting to the issue-specific ESRS requirements, before introducing the sector-specific ones.



Development and Authority of ESRS


ESRS are developed by EFRAG, a recognized independent standard-setting body. EFRAG collaborated with a diverse range of stakeholders, including businesses, investors, regulators, and civil society organizations, to ensure the robustness, relevance, and inclusivity of the standards.



Applicability of ESRS


ESRS apply to companies falling within the reporting requirements of the Corporate Sustainability Reporting Directive (CSRD), including:


  • Large Companies: Regardless of their listing status, large companies operating within the EU are mandated to comply with CSRD reporting requirements and adhere to ESRS.

  • Publicly Listed SMEs: SMEs listed on stock exchanges must also adhere to ESRS if they meet specific criteria, such as exceeding a specified balance sheet total.


How to Apply ESRS and Report under the CSRD?


In line with the new Corporate Sustainability Reporting Directive (CSRD) and its associated European Sustainability Reporting Standards (ESRS), companies across the EU that meet certain criteria are required to publish sustainability reports by 2026.


Below are the essential steps to prepare a comprehensive sustainability report that aligns with ESRS requirements.


1. Define the Scope and Time Horizon of Your Report


Ensure that your sustainability report's scope and time horizon match those of your financial reports. Additionally, include information about your company's impacts, risks, and opportunities throughout its full value chain. Define which parts of the value chain are within the report's scope and establish time horizons for short-, medium-, and long-term considerations.


2. Conduct a Double Materiality Assessment


Perform a double materiality assessment to identify the sustainability topics pertinent to your company. This assessment involves understanding both the external impacts (impact materiality) and the financial risks and opportunities (financial materiality) associated with sustainability issues. Utilize the ESRS framework and EFRAG's guidance to ensure objectivity and transparency in your assessment.


3. Complete a Data Gap Analysis


After identifying material topics, conduct a gap analysis to determine whether your company collects all required data for reporting. Review the ESRS requirements and assess your existing ESG reports, if applicable. Establish processes to gather missing data and ensure compliance with reporting standards.


4. Collect Data on Material Topics


Initiate data collection based on the results of your gap analysis. Follow ESRS instructions for reporting each indicator, including units, granularity, and comparability requirements. Adjust existing data collection processes or develop new ones to meet ESRS standards, particularly for disaggregated data and comparator years.


5. Prepare Reporting on Indicators


Structure your reporting into qualitative and quantitative indicators. Describe company policies, action plans, and metrics in line with ESRS Minimum Disclosure Requirements (MDRs). Provide qualitative assessments of financial risks and opportunities, transitioning to quantitative estimates from 2028 onwards. Follow ESRS guidelines for reporting formats and ensure alignment with financial data.


6. Structure Your Report According to ESRS Requirements


Format your report for machine-readability, anticipating EFRAG's ESRS digital taxonomy. Organize the report into sections covering General Information, Environmental Information, Social Information, and Governance Information. Refer to ESRS Appendix D and Appendix F for detailed examples of report structures. Maintain transparency and clarity in reporting to facilitate comparability and understanding.


7. Ensure the Report Meets Qualitative Characteristics of Information


Adhere to qualitative characteristics outlined in ESRS Appendix B, ensuring relevance, faithful representation, comparability, verifiability, and understandability of information. Strive for accuracy, neutrality, and consistency in reporting to enhance the report's credibility and usefulness to stakeholders.


Writing an ESRS report in compliance with EU legislation CSRD is a meticulous process requiring thorough planning, data collection, and adherence to reporting standards.


By following these steps and maintaining a commitment to transparency and sustainability, companies can prepare impactful reports that contribute to their ESG goals and stakeholder engagement initiatives in compliance to the CSRD regulations.



How can we help?


Whether you are a reporting company or a small company looking to start reporting sustainability to meet customer requirements, you can reach out to us.


 

Contact us at info@u-impact.com.

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