The European Sustainability Reporting Standards (ESRS) are an integral part of the European Union effort to transform how companies disclose sustainability-related information. ESRS has two essential foundational standards: Cross-cutting standards (ESRS-1 & ESRS-2), Topical standards (Environmental E1-5, Social S1-4 and Governance G1 standards). Cross-cutting standards and topical standards are sector-agnostic meaning that they apply to all undertakings regardless of which sector the undertaking operates in. ESRS 1 and ESRS 2 are critical cross-cutting standards for comprehensive sustainability reporting, helping companies align their disclosures with EU requirements.

Gain insights into ESRS 1 and ESRS 2 and explore the key aspects necessary for effective reporting

ESRS 1

ESRS 1 provides the framework, principles, and key concepts for sustainability reporting, guiding companies in disclosing material impacts, risks, and opportunities related to ESG and how sustainability issues influence its performance and position. Additionally, ESRS 1 defines the architecture of ESRS, drafting conventions, and core concepts for presenting sustainability information in line with Directive 2013/34/EU, as amended by Directive (EU) 2022/2464

Key concepts covered in ESRS 1 are:

  • Double materiality assessment as the basis for sustainability disclosures
  • Due diligence procedure
  • Reporting on value chain information.
  • Time horizons
  • Preparation and presentation of sustainability information
  • Linkages with other parts of corporate reporting and connected information
  • Linkages with other parts of corporate reporting and connected information
  • Alignment of ESRS data points with other EU regulations (Appendix B)

ESRS 2 General Disclosures

ESRS 2 sets out cross-cutting requirements for general disclosures in sustainability reporting that apply across all topical standards. As a mandatory standard that needs to be reported under ESRS, it aims to establish universal disclosure requirements for all companies, regardless of sector. ESRS 2 ensures companies provide standardized and comprehensive sustainability-related information that helps stakeholders assess risks, impacts, and opportunities associated with the company's operations.

Under ESRS 2, organizations must outline their governance structures and disclose how they manage impact, risk, and opportunity management, ensuring they meet minimum disclosure requirements. This ensures consistency and transparency in sustainability reporting, facilitating a clearer understanding of how businesses manage and disclose their sustainability impacts and risks.

Also Read: Implementing Double Materiality in CSRD Reporting: A Comprehensive Guide to Assessment and Disclosure Practices

It is structured into five main sections:.

  • BP-Basis for preparation
  • GOV-Governance
  • SBM-Strategy and business mode
  • IRO-Impact, risk and opportunity management
  • Minimum disclosure requirements on policies, actions, metrics and targets

BP-Basis for preparation

Basis for Preparation (BP 1-2) is to explain how the sustainability report is compiled, including details about the scope of consolidation and the value chain. Key aspects covered in basis of preparation are:

  • Organization must state whether the report is consolidated or individual. For consolidated reports, it should confirm if the scope matches the financial statements and mention any subsidiaries exempt from individual reporting.
  • The report must clarify how much of the organization's upstream and downstream value chain is included. If sensitive intellectual property, know-how, or innovation details are excluded, this must be disclosed.
  • The organization must disclose estimation methods, uncertainties, and any changes from previous reporting periods. If prior errors are identified, they must be corrected. If other reporting frameworks or legal requirements are included, these should be identified on the basis of preparation.
  • Organizations (less than 750 employees) using phase-in provisions to omit specific information must still disclose whether those topics were assessed as material.

GOV-Governance

Governance (Gov 1-5) covers the roles and responsibilities of administrative, management, and supervisory bodies in overseeing sustainability matters. This includes disclosing the composition and diversity of these bodies, their expertise in sustainability, and how these governance bodies manage risks, impacts, and opportunities. Companies are re-required to provide a mapping that explains how and where its application of the main aspects and steps of the due diligence process are reflected in its sustainability statement, to allow a depiction of the actual practices of the undertaking regarding due diligence.

Also Read: How CSRD impacts your Supply Chain: Ensuring Supplier Compliance

Additionally, it covers the integration of sustainability-related performance in incentive schemes and outlines internal controls and risk management processes to ensure accurate sustainability reporting . Through these measures, organizations ensure effective governance and accountability in addressing sustainability issues.

SBM-Strategy and business model

Strategy and business model (SBM 1-3) emphasizes how a company�s strategy and business model interact with sustainability matters, ensure a clear understanding of how the company�s operations, markets, and products are exposed to sustainability risks and impacts.

  • Companies must describe key elements of their strategy that impact sustainability, including significant products, markets, and sectors, along with sustainability goals and challenges. They also need to explain how their value chain functions, covering relationships with suppliers and customers.
  • Disclose how they engage with stakeholders, their views on sustainability, and how these insights influence strategy and business model changes.
  • Companies are required to identify and disclose material impacts, risks, and opportunities from their materiality assessments, including the financial effects and how they impact strategy and business model resilience.

IRO-Impact, risk and opportunity management

The Impact, Risk, and Opportunity (IRO 1-2) section focuses on disclosing how an organization identifies, assesses, and manages material impacts, risks, and opportunities in relation to its sustainability practices.

  • The IRO section provides guidelines on how organizations should communicate the processes and outcomes related to materiality assessments, which determine what sustainability-related matters are relevant for disclosure.
  • The company must disclose which ESRS requirements were considered material and included in the sustainability statement, and which topics were omitted as not material, explaining why. If climate change or other topics are deemed non-material, the company requires to give the explanation including its material in the future. a forward-looking analysis of the conditions that could lead the undertaking to conclude that climate change.
  • Companies are required to identify and disclose material impacts, risks, and opportunities from their materiality assessments, including the financial effects and how they impact strategy and business model resilience.

Minimum disclosure requirements on policies, actions, metrics and targets (MDR PAT&M)

The MDR PAT&M is related to sustainability, focusing on ensuring transparency and accountability when organizations manage material sustainability matters. The reporting company shall apply the minimum disclosure requirements regarding policies, actions, metrics, and targets together with the corresponding disclosure requirements in topical standards.

Also Read: The EU Corporate Sustainability Due Diligence Directive: A New Era for Corporate Responsibility

If the company cannot disclose the information on policies, actions, metrics and targets required under relevant ESRS, because it has not adopted policies and/or actions with reference to the specific sustainability matter concerned, it shall disclose this to be the case and provide reasons for not having adopted policies and/or actions. The company may disclose a timeframe in which it aims to adopt them.

Appendix B-List of datapoints in cross-cutting and topical standards that derive from other EU legislation

ESRS 2 Appendix B lists datapoints that are derived from various EU legislation, which are essential for sustainability reporting under the European Sustainability Reporting Standards (ESRS). These datapoints are particularly significant as they provide the necessary information for financial institutions to facilitate the transition aligned with the EU's Green Deal. If a company omits information prescribed by a datapoint from Appendix B, it must explicitly state that the omitted information is "not material" (ESRS 1 paragraph 35). This stipulation ensures that companies are held accountable for the completeness of their disclosures.

Recommendations for effective reporting under ESRS 1 & ESRS 2

  • For effective ESRS 1 and ESRS 2 reporting, companies should first conduct a double materiality assessment, disclosing both financial and sustainability impacts, with clear explanations of material or non-material topics, supported by threshold analysis as per EFRAG IG 1 Materiality Assessment Implementation Guidance.
  • Governance involvement is also crucial, with clear disclosures on the roles and responsibilities of the board in overseeing sustainability matters. Many early ESRS adopters present this information in flowcharts that outline management hierarchies, making governance structures easier to understand.
  • A robust due diligence process is essential for managing ESG risks throughout the value chain. Companies should make early efforts to collect data from both upstream and downstream sources to ensure value chain transparency. A table that maps each of these elements to the relevant sections of the sustainability statement can be an effective format for due diligence disclosure.
  • It�s also vital to meet minimum disclosure requirements and clearly identify these in the report. Companies should ensure alignment with EU regulations, particularly by following Appendix B for regulatory datapoints, and indicate the location of these disclosures on the index page of the report.
  • For phased-in provisions, companies should clearly identify material topics and include relevant information, in line with ESRS 2, paragraph 17. This approach ensures transparency and clarity as companies transition to full compliance with the reporting standards.

At ecoPRISM, we specialize in helping companies navigate the complexities of ESRS 1 and ESRS 2, ensuring their sustainability reporting is both accurate and aligned with the EU Green Deal.

For tailored support in navigating your materiality assessment and ensuring comprehensive reporting, get in touch with us at ecoPRISM. Our expertise can help you effectively integrate double materiality into your sustainability practices and reporting.