03. European Sustainability Reporting Standards (ESRS)

Overview. ESRS are the detailed, mandatory standards that operationalize the EU’s CSRD. They define what must be disclosed, how materiality is determined (double materiality), and how to structure metrics, targets, policies, and action plans across Environmental (E), Social (S), and Governance (G) topics.

1) Architecture of ESRS

• Cross-cutting: ESRS 1 (General Requirements) and ESRS 2 (General Disclosures) apply to all companies and topics.
• Topical Standards – Environment: E1 Climate change; E2 Pollution; E3 Water and marine resources; E4 Biodiversity and ecosystems; E5 Resource use and circular economy.
• Topical Standards – Social: S1 Own workforce; S2 Workers in the value chain; S3 Affected communities; S4 Consumers and end-users.
• Topical Standards – Governance: G1 Business conduct.

2) Double Materiality: Impact & Financial

ESRS require companies to assess both:

• Impact materiality: Actual or potential, positive or negative impacts on people and the environment across the value chain.
• Financial materiality: Sustainability-related risks and opportunities that could reasonably influence enterprise value (cash flows, access to finance, cost of capital).

Companies disclose the process used to determine material topics, including stakeholder engagement, boundary, time horizons, and thresholds. Non‑material topics can be omitted, but the basis for conclusions must be clear.

3) ESRS 1 – General Requirements

• Scope & boundary: Consolidation perimeter (financial consolidation as a baseline), plus value chain coverage where material.
• Qualitative characteristics: Fair presentation, relevance, faithful representation, comparability, verifiability, understandability, and timeliness.
• Estimates & data quality: Explain use of estimates, limitations, and improvements planned.
• Connectivity: Link sustainability information to financial statements and management discussion.

4) ESRS 2 – General Disclosures (Required for all)

• Governance: Oversight by the administrative, management, and supervisory bodies; roles, expertise, and information flows.
• Strategy: Business model and strategy; resilience to sustainability-related risks and opportunities; transition plans (e.g., climate).
• Impact, risk & opportunity (IRO) management: Processes to identify, assess, manage, and monitor IROs, including policies and actions.
• Metrics & targets: KPIs, baselines, methodologies, targets, and progress tracking.

5) ESRS E1 – Climate (Spotlight)

• GHG accounting: Scope 1, Scope 2 (location- and market-based), and Scope 3 by relevant categories, aligned with the GHG Protocol.
• Transition plan: Decarbonization pathways, interim and long-term targets (e.g., net‑zero), investment plans, and dependency on carbon‑intensive assets.
• Resilience & scenarios: Physical and transition risk analysis (qualitative/quantitative), use of scenario analysis where appropriate.
• Intensity & performance: tCO₂e absolute and intensity metrics (e.g., per revenue, unit output), avoided emissions (if any, with caution), and progress year‑over‑year.
• Energy mix & efficiency: Renewable share, electricity consumption, efficiency initiatives, internal carbon pricing (if used).

6) Other Environmental Standards (E2–E5)

• E2 Pollution: Air, water, soil pollutants; hazardous substances; reduction programs and compliance.
• E3 Water & marine: Withdrawal, consumption, discharge quality, basin risk, and ecosystem impacts.
• E4 Biodiversity: Dependencies and impacts on ecosystems; locations in or near protected areas; mitigation hierarchy and restoration actions.
• E5 Circularity: Resource inputs, waste prevention, recycling, design for circularity; secondary raw materials and product lifetime.

7) Social Standards (S1–S4)

• S1 Own workforce: Headcount, diversity and inclusion, health & safety, training, pay equity, social dialogue.
• S2 Value chain workers: Due diligence processes, salient risks (e.g., forced labor, child labor), remediation and outcomes.
• S3 Affected communities: Human rights impacts, FPIC where relevant, grievance mechanisms, community investments.
• S4 Consumers & end‑users: Product safety, marketing ethics, privacy/data protection, accessibility.

8) Governance Standard (G1)

• Business conduct: Anti‑corruption and bribery, political engagement, whistleblowing, lobbying transparency, tax governance (high‑level linkages).

9) Data, Tagging, Assurance

• Digital tagging: XHTML/XBRL tagging to enable machine‑readable data and comparability, feeding into EU data access points.
• Assurance: Subject to external assurance (initially limited assurance), which raises expectations for controls, traceability, and audit trails.
• Methods & traceability: Disclose methodologies, emission factors, boundaries, and changes (restatements) with reasons.

10) Example: Minimum ESRS 2 Backbone in Practice

1. Governance: Board oversight, management roles, competency and training, incentive linkage.
2. Strategy: Business model; material sustainability impacts/risks/opportunities; transition plan; financial effects.
3. IRO Management: Policies; action plans (responsible teams, timelines, budgets); risk controls and monitoring.
4. Metrics & Targets: KPIs (e.g., Scope 1–3, injury rates, diversity ratios), baselines, methodologies, short/medium/long‑term targets, and progress.

Note: ESRS are principle‑based yet prescriptive on structure and minimum content. Companies tailor scope via double materiality but must always provide ESRS 2 general disclosures.