CSRD: What are the final European Sustainability Reporting Standards (ESRS)?

In the latest Corporate Sustainability Reporting Directive (CSRD) milestone, the European Commission (EC) has now published its final Delegated Act for the European Sustainability Reporting Standards (ESRS). 

Here, at a glance, are five of the most notable requirements of the final ESRS: 

• Comparability: The ESRS aims to bring specificity and comparability to externally reported sustainability information—by doing so, it raises the bar for sustainability information to the same level as financial information
• Detail: It increases the level of detail and scope relating to sustainability topics that organisations will, and can, now be assessed against 
• Double materiality: It requires firms to assess whether each disclosure requirement is material based on a double materiality assessment that covers both an organisation’s environmental and financial impacts
• Value chain: Organisations can’t just consider their own impact on the environment and society—they also need to report on their value chain 
• Integrated annual report: All disclosures deemed material need to be included in the annual report, which means that all information required within the ESRS will be presented alongside the annual financial report in a clearly identified sustainability statement 

CSRD and ESRS: The story so far 

The CSRD has the ambitious goal of requiring transparent, comparable and trusted sustainability reporting from over 49,000 EU-based companies as well as subsidiaries and global companies. To support this, the European Financial Reporting Advisory Group (EFRAG) was tasked with developing the ESRS, a set of standards detailing the reporting rules companies will need to follow to comply with the CSRD. 

With the support of volunteer working groups, EFRAG produced first an initial set of draft standards, which were reviewed following a consultation and handed over to the European Commission (EC). The EC then published its proposed standards. These were considered over a four-week consultation period. On 31 July, 2023, the commission adopted the standards with a final Delegated Act to turn the ESRS into EU law, requiring all EU member states to implement them. After a two month scrutiny period, the act will be finally published. 

What do the ESRS cover?

The ESRS are a set of 12 standards covering a range of environmental, social and governance (ESG) topics. The majority of the topics have survived throughout the drafting process. However, the standards have reduced the required volume of data points, shifted perspective on mandatory disclosures and aligned more strongly with other requirements—most notably, the Sustainable Finance Disclosure Regulation (SFDR), the International Sustainability Standards Board (ISSB), and Task Force on Climate-Related Financial Disclosures (TCFD) standards. 

Although the resulting final standards may be less ambitious than the first drafts, they remain a substantial improvement on the previous fragmented landscape. In particular, the differences between the approaches to voluntary reporting and comparable mandatory still leave companies with the need to check their existing programs against the finalised ESRS requirements. 

Common frameworks across all standards

The standards are structured around a common framework strongly informed by TCFD disclosure pillars and other existing standards:

• Governance: Governance is both an important disclosure topic and part of the overall process 
• Impact, risks and opportunities: Specifically material sustainability risks and opportunities that relate to the strategy and business model of an organisation 
• Policies, targets and actions: Impact and progress is demonstrated by setting targets and defining the actions and policies needed to achieve those targets—these form an important part of all applicable disclosures 
• Metrics: This is where the real detail comes into frame. The final ESRS define the metrics that need to be used to measure progress and help set those targets. It’s worth noting that both qualitative and quantitative information is considered important by stakeholders 

Additionally, a number of other key features can be found across the topics:

• Value-chain impact: The value chain is most frequently thought of when considering scope 3 GHG emissions. However, the ESRS also includes considerations for risks, opportunities and impacts—examples include workers in the value chain, pollution and water 
• The principle of double-materiality: Instead of following mandatory disclosures (except for general disclosures), companies will use this principle to determine what must be reported. More information about double materiality can be found here
• The phasing of certain disclosures: Phasing allows companies more time to bring in some of the more complicated areas of reporting like the value chain. It also means that  sustainability programs will need to be managed from their current to future states over a longer period. Specifically:
  • Companies with under 750 employees may omit scope 3 GHG emissions data and the disclosure requirements specified in the “own workforce” standard in the first year 
  • Several additional standards—biodiversity, value-chain workers, affected communities, consumers and end-users—can be omitted in the first two years. All companies can omit all disclosures on anticipated financial effects for the first year. For the first three years, they only need to report qualitative disclosures.
• The need for Interoperability between standards has been a firm focus throughout the development of the ESRS. The final version includes strong alignment with ISSB S1 and S2 and includes financial materiality as well as requirements for signposting of disclosures related to downstream regulations (i.e., SFDR). 

How will the final ESRS impact your business?

Overall, there is some relief to be found for companies, especially those below the 750 employee threshold. Certain areas of disclosure (e.g., pollution, water and biodiversity—all less commonly covered by existing data collection efforts) now account for the need for data collection and internal processes to mature. Additionally, with the optional phasing of some standards they also have more time to prepare. 

One word of caution: Several topics that are being phased in (particularly biodiversity and value-chain workers) are of increasing importance to investors. There are value-based advantages to phasing in early. 

Impact 1: There’s now more time to optimise your reporting and strategy 

There’s now greater scope for organisations to grow their reporting strategies over multiple years. In some cases, there are also fewer obligatory disclosures. As a result, the suggested amendments grant organisations something they undoubtedly need: more time. 

Companies focusing on compliance in the first year can now use this additional time to gain more confidence and consistency in their disclosures while building a roadmap to evolve their reporting strategy for future years. 

Equally, sustainability leaders and companies who are already looking beyond compliance can spend more time on their corporate sustainability strategy and goals while ensuring a consistent level of quality across all their disclosures. 

Impact 2: Double materiality has become more important than ever 

Double materiality takes centre stage within the ESRS. While this approach to determining what must be disclosed may grant some additional flexibility, it’s now all the more essential for organisations to follow a robust materiality assessment process as outlined within the ESRS.

It is also important to recognise that, despite other changes, climate and workforce disclosures will remain firmly in scope for many companies. Additional weight is now being placed on the input of stakeholders and investors, who will be scrutinising the rigour of the materiality assessment while turning to the assurance process for additional peace of mind concerning decisions about more market-sensitive topics. 

Impact 3: There’s now greater scope to achieve assurance readiness

Previously, assurance readiness had been flagged as a potential area of concern for some companies preparing to meet the first reporting deadline. With assurance standards and controls frameworks either new or still in development, many organisations felt that these requirements would be difficult to achieve in the time remaining. 

Companies now have the option to make better use of existing publications. Examples include: 

• The International Auditing and Assurance Standards Board’s (IAASB) proposed ISSA 5000 "Standard On Sustainability Assurance 5000, General Requirements For Sustainability Assurance Engagements" that is now open for comments
• Committee of Sponsoring Organizations of the Treadway Commission (COSO) has released new guidance on Internal Control over Sustainability Reporting (ICSR). Companies can use this additional flexibility to close existing gaps in their journey towards assurance readiness 

There’s no room for confusion about the ESRS and, in turn, the CSRD. All timelines, requirements and expectations are now clear. Only one question remains: Are you ready?