Latest update on February 7, 2024
In a nutshell:
- The ESRS have two Cross-Cutting Standards, the general requirements (ESRS 1) and general disclosures (ESRS 2)
- ESRS 1 outlines important concepts and principles which must be followed when reporting under the CSRD
- ESRS 2 offers reporting requirements which must be followed under the topical standards, which all companies must report on, regardless of sector
- Find out more about the topical standards in our following blogposts: ESRS E1-E5, ESRS S1-S4, ESRS G1
The first set of ESRS were officially adopted on 31 July 2023. The legislation is composed of the Delegated regulation - C(2023)5303 and Annexes I and II. The delegated act specifies the European Sustainability Reporting Standards (ESRS) regulations to follow when reporting on sustainability. Annex I consists of information on the cross-cutting and topical standards. Annex II includes the list of acronyms and a glossary of definitions which can be used in reporting according to the ESRS.
This article will dive deeper into the two cross-cutting standards: General Requirements (ESRS 1) and General Disclosures (ESRS 2).
ESRS 1: General Requirements
ESRS 1 outlines the general requirements for sustainability disclosure expected from applicable companies (check if you are applicable in Kickstart CSRD). Published details on ESRS 1 can be found on pages 1 - 35 of Annex I. As the name states, ESRS 1 outlines the mandatory concepts and principles to apply when preparing sustainability statements under the CSRD.
This includes:
- Categories of ESRS Standards, reporting areas and drafting conventions
- Qualitative characteristics of information
- Double materiality as the basis for sustainability disclosures
- Due diligence procedure
- Value chain information
- Time horizons
- Preparation and presentation of sustainability information
- Structure of sustainability statements
- Linkages with other parts of corporate reporting and connected information
- Transitional provisions
Guiding Principles for Comprehensive Sustainability Reporting under CSRD
As per the legislation, the objective of ESRS 1 is to offer insight into the structure of ESRS, the drafting conventions, fundamental concepts, and the overall requirements for compiling and presenting sustainability information in alignment with Directive 2013/34/EU, as amended by Directive (EU) 2022/2464.
More specifically, ESRS 1 states that a company must disclose all material information about its sustainability-related impacts, risks and opportunities in accordance with the ESRS.
It requires companies to report information on governance, strategy, management of impacts, risks and opportunities, metrics and targets related to climate change regardless of their materiality assessment results.
Additionally, ESRS 1 defines the double materiality process required for companies to determine which topics are material and thus must be reported on.
CSRD Stakeholder Identification (ESRS 1)
The ESRS 1 requires companies to identify its two main stakeholder groups:
1) Affected stakeholders
Individuals or groups that have interests that are or could be affected — positively or negatively — by the company’s activities and through its value chain
2) Users of sustainability reporting
Stakeholders with an interest in the company, including:
- Primary users of general-purpose financial reporting: existing and potential investors, lenders and other creditors (including asset managers, credit institutions, insurance companies)
- Other users, including business partners of the companies, trade unions and social partners, civil society organizations and non-governmental organizations
Illustrative Example for the structure of an ESRS sustainability statement
ESRS 1 further provides illustrative, non-binding examples of the structure of ESRS sustainability statements. Below is an example for a company that has derived from the materiality assessment that climate change, circular economy, own workforce, workers in the value chain and consumers and end-users are material, while biodiversity and ecosystems, pollution, and affected communities are not material.
ESRS 2: General Disclosures
ESRS 2 presents cross-cutting requirements for general disclosures in the sustainability reporting that also need to be covered within the topical standards. It requires you to disclose specific compliance information such as approximations in relation to your company’s value chain and boundaries. Detailed information on ESRS 2 can be found on pages 35 - 66 of Annex I.
According to EU legislation, the objective of ESRS 2 is to establish disclosure requirements that are applicable to all companies (undertakings), irrespective of their sector (i.e., sector agnostic), and are universally relevant across sustainability topics.
The four reporting areas of ESRS 2
In the realm of sustainability reporting, ESRS stands as a pivotal framework with distinct pillars — Impact, Risk, and Opportunity Management (IRO), Governance (GOV), Strategy (SBM), and Metrics and Targets (MT). Let's break down the key elements:
1) Impact, risk and opportunity management (IRO)
Includes the process by which impacts, risks and opportunities are identified, assessed and managed through policies and actions
Disclosure Requirements:
- IRO-1 – Description of the processes to identify and assess material impacts, risks and opportunities
- IRO-2 – Disclosure requirements in ESRS covered by the company’s sustainability statement
Minimum Disclosure Requirement (MDR):
- Policies (MDR-P) – Policies adopted to manage material sustainability matters
- Actions (MDR-A) – Actions and resources in relation to material sustainability matters
2) Governance (GOV)
Includes the governance processes, controls and procedures used to monitor and manage impacts, risks and opportunities
Disclosure Requirements:
- GOV-1 – The role of the administrative, management and supervisory bodies
- GOV-2 – Information provided to and sustainability matters addressed by the company’s administrative, management and supervisory bodies
- GOV-3 – Integration of sustainability-related performance in incentive schemes
- GOV-4 – Statement on due diligence
- GOV-5 – Risk management and internal controls over sustainability reporting
3) Strategy (SBM)
How the business model/strategy interacts with its material impacts, risks and opportunities, including the strategy or business model for addressing them
Disclosure Requirements:
- SBM-1 – Strategy, business model and value chain
- SBM-2 – Interests and views of stakeholders
- SBM-3 - Material impacts, risks and opportunities and their interaction with strategy and business model(s)
4) Metrics and targets (MT)
How a company measures its performance, including progress toward its set goals and targets
Minimum Disclosure Requirement (MDR):
- Metrics (MDR-M) – Metrics in relation to material sustainability matters
- Targets (MDR-T) – Tracking effectiveness of policies and actions through targets
The “General disclosures” standard is structured in a four-pillar system analog to TCFD (Task Force on Climate-Related Financial Disclosures) and the ISSB (International Sustainability Standards Board), allowing for alignment with these standards.
While ESRS 2 is mandatory for all companies, further disclosure requirements result from your double materiality analysis.
You want to know more about the ESRS? Check out our blogposts about the following Standards:
