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The CSRD has paved the way for the harmonization of ESG reporting at European level. The NFRD, which already obliged a limited number of European companies to produce extra-financial reports, did very little to regulate the format and content of these sustainable development information reports.
Henceforth, the CSRD, which will eventually concern 50,000 European and non-European companies, includes strict reporting standards: the ESRS, for European Sustainability Reporting Standards.
What is ESRS?
The CSRD (Corporate Sustainability Reporting Directive) will require companies to produce annual reports on environmental, social and governance issues. Each year, they will therefore have to collect thousands of data items representing their activities and their impact on a range of indicators, as well as taking stock of the measures they have taken to mitigate the negative impact of their activities on these indicators.
This is where ESRS standards come in. The European Commission has mandated the European Financial Reporting Advisory Group (EFRAG) to work on the standards that will frame CSRD reporting.
The delegated act detailing the first 12 ESRS published by EFRAG was adopted by the European Commission on July 31, 2023. They will provide an initial framework for ESG reporting, which will be implemented from January 1, 2024.
These reporting standards have several objectives:
- provide companies with an analysis grid to help them better understand the expectations expressed by this new reporting format
- harmonize all corporate sustainability reports within the European Union to simplify their reading and analysis by the various stakeholders
- enable automated processing of published data using digital tools
How do they work?
CSRD reporting will contain quantitative and qualitative data provided by companies on environmental, social and governance issues.
For each company, this will represent hundreds or even thousands of data items that will have to be collected from numerous internal and external players. On the environmental front, for example, companies will have to report on the carbon emissions of their entire value chain. This means collecting data not only from the company's own sites and departments, but also from suppliers of goods and services.
The magnitude of this analysis, collection and formatting work calls for a protocol that aims to simplify the task for companies by guiding them through the process of publishing ESG reports.
The other issue, of course, is how stakeholders deal with this data. The primary aim of the CSRD is to make companies more transparent about the impact of their activities and to measure their commitment to sustainability, so that this information can be made publicly available. An underlying objective is to redirect public and private investment towards the most virtuous companies.
ESRS standards should make it easier to read these extremely rich reports, by providing a common framework for all the companies concerned.
For each data collection component, they detail all the information that needs to be collected, the methods of collection and the associated reporting formats.
To date, 12 ESRSs have been published, divided into 4 main sections:
- generic standards (2 ESRS)
- the environmental component (5 ESRS)
- the social component (4 ESRS)
- governance (1 ESRS)
Disclosure Requirements
ESRS structures the information to be collected into Disclosure Requirements, which correspond to each category of data to be collected to complete the report.
The Biodiversity Report, for example, will contain 8 publication requirements, differentiating between the company's current policy in this area, the actions taken and resources mobilized, the objectives set by the company, and the anticipated financial effects of the impact on biodiversity. Each of these topics corresponds to a different DR.
These Disclosure Requirements can be supplemented by Application Requirements. These detail how the information in each Disclosure Requirement is to be collected, and the format in which it is to be published.
Dual materiality analysis
The major new feature of the CSRD is the double-materiality analysis. For each ESRS, companies must carry out an ESG impact analysis. In concrete terms, this involves measuring the impact that the issue addressed by the ESRS has and will have on their business, in the first instance, financial materiality, and then the impact that their business has and will have on the issue addressed, impact materiality.
Depending on the results of this double materiality analysis, the company may or may not complete the corresponding ESRS. It must set itself materiality thresholds below which it decides not to disclose information relating to the sustainability topic in question. In this way, it will only report on thematic ESRSs whose stakes have been deemed material with regard to the thresholds set.
Nevertheless, ESRS E1, linked to climate change, is subject to specific treatment in view of its importance in CSRD reporting. If a company considers that the materiality analysis does not justify completing this ESRS, it must detail the analysis that led to this finding and justify its decision. In addition, it must carry out a prospective analysis of the conditions that could lead it to conclude in the future that climate change is a material issue.
The first 12 ESRS in detail
The first ESRSs adopted by the European Commission on July 31, 2023 correspond to the ESRSs applicable to all companies and those specific to each major strand of the CSRD.
There are currently 12 of these standards - 2 transversal standards and 10 thematic standards - and they will be supplemented by new ESRS specific to certain companies according to their size and sector of activity.
General criteria
The two ESRS standards in this section are an introduction to all subsequent reporting and apply de facto to all other ESRSs.
General requirements
This mainly informative ESRS aims to set out the architecture and operation of ESRSs. It sets out the general requirements for the preparation and presentation of information to be published in CSRD reports.
This ESRS also defines the main concepts used in ESG reporting, notably the notions of double materiality, value chain and due diligence.
It details how materiality analyses are to be carried out in each of the following ESRSs.
General disclosure
This ESRS provides information on the reporting obligations that apply to all companies, whatever their sector of activity. These cross-functional standards apply to all the topics covered in the environmental, social and governance sections of the CSRD.
This ESRS defines two types of Disclosure Requirements:
- Disclosure requirements: information and data that are cross-cutting and must be filled in. They are published in ESRS 2.
- Minimum disclosure requirements: information and data relating to policies, actions, metrics and targets that must at least be published when the subject is considered material for the reporting company. They must be published in the ESRS corresponding to the topic covered.
The environmental component
This section can be considered the heart of the CSRD. It is made up of 5 ESRS dealing with different environmental issues, and is currently the one requiring the most commitment from the company, notably via ESRS E1.
Climate change
This ESRS comprises 9 Disclosure Requirements. Particularly comprehensive, it is the only ESRS that is virtually impossible to consider as non-material.
As we said earlier, any company that considers that it does not need to complete it must justify this reason and detail the analysis that led it to take this decision.
In this ESRS, companies will be required to take stock of their impact on the climate by accurately and scientifically accounting for their carbon emissions across their entire value chain.
They will also be required to set targets for reducing their carbon footprint and specify the strategy they have put in place to achieve these targets, comparing it with those set by the 2015 Paris Agreements.
Finally, they will be required to carry out an analysis of the financial impact of their climate transition plan and of global warming on their activities.
To find out more about the ESRS E1, please see our dedicated article on the subject.
Pollution
This ESRS is made up of 6 Disclosure Requirements.
In this section, companies must indicate the measures they have taken to combat air, water and soil pollution.
They will also have to specify which pollutants are likely to be part of their production process.
Finally, they will have to model the financial impact of the effects of pollution on their business.
Water and marine resources
This ESRS is made up of 5 Disclosure Requirements.
In this ESRS, companies will have to indicate what their policy is in terms of preserving water resources.
They will take stock of the actions undertaken and the objectives they have set themselves.
Finally, they will carry out a financial analysis of the impact of water resources on their business in terms of risks and opportunities.
Biodiversity and ecosystems
This ESRS is composed of 6 Disclosure Requirements.
Like the previous ESRS on water resources, this one will look at the objectives set and actions taken to preserve biodiversity and ecosystems.
It will also request a financial analysis of the impact, risks and opportunities linked to biodiversity and ecosystems in relation to the company's activities.
Resource use and circular economy
This ESRS standard contains 6 Disclosure Requirements.
In this ESRS, companies will have to indicate whether they have an existing strategy, objectives and measures implemented to reuse resources and/or contribute to a circular economy project as part of their activities.
They will have to provide details of the inflows and outflows of the resources concerned, and once again carry out a financial analysis of the implementation of resource reuse and circular economy projects.
The social component
This section, comprising 4 ESRSs, covers HR issues as well as the company's impact on the stakeholders in its value chain.
Own workforce
This ESRS consists of 17 (!) Disclosure Requirements.
Mainly focused on the HR dimension of the company, it will cover a wide variety of topics:
- social dialogue
- diversity
- training policy
- work-life balance
- social protection
- pay grids
- social inclusion
- incident management
- ...
The aim of this ESRS standard, which is mainly quantitative and declarative, is to provide an overall view of the company's policy for the well-being of its employees and self-employed workers.
It brings together a wide range of indicators to provide an overview of the actions taken by the company and the objectives it has set itself to protect its employees and improve the working environment.
Workers in the value chain
This ESRS consists of 5 Disclosure Requirements.
In this report, the company must indicate the processes it has put in place to assess the impact of its activity on the employees in its value chain , and how it manages this impact in terms of risks and opportunities.
Affected communities
This ESRS standard comprises 5 Disclosure Requirements.
In order to continue to take into account all its stakeholders, the company must, in this report, assess the impacts generated by its activity on the various communities that could be affected, positively or negatively.
It will also have to detail the measures taken to manage these impacts and the objectives it has set itself in this context.
Consumers and end-users
This ESRS contains 5 Disclosure Requirements.
By focusing on the consumers and end-users of the company's products and/or services, this ESRS completes the value chain analysis.
As in previous reports, the company must analyze the potential impact of its activity on consumers and end-users, and describe the actions it has taken to manage the material impacts, risks and opportunities associated with its activity, as well as the objectives it has set itself in this area.
The governance component
Business conduct
This latest ESRS, made up of 6 Disclosure Requirements, aims to provide a global view of the company's governance on a wide range of subjects, including :
- the role of administrative, supervisory and management bodies
- processes for identifying and assessing impacts, risks and opportunities
- corporate culture
- supplier relationship management
- prevention, detection and management of corruption incidents
- any lobbying activities
- its payment practices
New ESRS under construction
These first 12 ESRS cover all companies subject to the CSRD. New reporting standards will soon be added, applying more specifically to certain companies according to predefined criteria.
The next standards expected are the ESRSs specific to listed SMEs.
Next will come the sector-based ESRSs. Based on the same principle as the CDP questionnaires, additional reporting requirements will apply to companies active in certain sectors considered to be particularly at risk or to have an impact on environmental, social and governance issues. Originally scheduled for June 30, 2024, the European Commission has proposed to postpone their publication until June 30, 2026.
The ESRSs for non-European companies subject to the CSRD will also be published at this date, as they operate substantially on European territory. From 2029 onwards, these companies will have to report on data for the year 2028.
EFRAG is also working on the construction of a digital taxonomy. Using an elaborate system of tags associated with each item of data in the CSRD reports, this tool should enable automated processing of the data and information provided in companies' CSRD reports.
Finally, EFRAG is developing Voluntary Sustainability Reporting Standards (VSRS) alongside ESRS. These European standards, aimed at unlisted SMEs, are intended to encourage them to report even if they are not obliged to do so, and to guide them in managing ESG issues. They also enable them to meet the expectations of their customers and/or stakeholders subject to the CSRD. The latter are required to carry out analyses of scope 1, 2 and 3 of their activities, i.e. their entire value chain, including suppliers and service providers.
What's the timetable for implementation?
The first CSRD reports will be published in 2025 on data collected in 2024. The ESRS will first apply to companies subject to the NFRD.
In 2025, European companies meeting at least two of the following criteria will have to start collecting data for their first reporting in 2026:
- More than 250 employees
- 50 million € sales or more
- Balance sheet of €25 million or more
In 2026, it will be the turn of listed SMEs, which will be postponed until 2027. Companies meeting at least two of the following criteria will be affected:
- 10 or more employees
- 900k€ sales or more
- Balance sheet of €450k or more
Finally, in 2028, the CSRD will apply to non-European companies generating more than 150 million in sales on European territory.
Gradual implementation
To help companies get to grips with the exercise, the European Commission has relaxed certain rules for the first sustainability reports.
Companies with fewer than 750 employees will be able to defer application of the E4 ESRS on biodiversity for 2 years, as well as the S2, S3 and S4 ESRSs measuring their impact on their value chain (workers in the value chain, affected communities, consumers and end-users). The ESRS S1 may be deferred for one year.
Certain reports have also been made more flexible for the first year of publication, notably on climate change.
- companies with fewer than 750 employees can defer accounting for Scope 3 greenhouse gas emissions for one year.
- all companies may refrain from disclosing the anticipated financial impact of environmental issues (ESRS E1, E2, E3, E4 and E5).
What is the correspondence with international standards?
Given the urgency of climate change, and the need to reorient our economies towards a strategy of sustainable development, numerous standards have flourished internationally in recent years, at the risk of seeing companies drowned in the production of carbon, social and environmental reports that are inconsistent with one another.
For companies, this inevitably represents a cost that can be substantial, and can lead to a gradual disengagement in the face of the complexity of the task, in terms of both reporting and ESG criteria policies. It may also lead companies to turn to less restrictive voluntary standards systems.
To avoid this pitfall, the European Commission and EFRAG have ensured that ESRS standards are compatibility of ESRS standards with GRI (Global Reporting Initiative) (Global Reporting Initiative) standards, as well as international standards IFRS S1 and IFRS S2 of the ISSB (International (International Sustainability Standards Board) in order to ensure global consistency in sustainability reporting requirements.
The CDP, for its part, is working on the alignment of its questionnaires with the ESRS and IFRS S1 and S2.
From the outset of the creation of the ESRS, EFRAG has ensured that the conditions for the production of these standards include a high level of interoperability with the ISSB and GSSB climate standards, enabling companies to establish synergies in the production of their reports. They are also working on the production of documents enabling companies to navigate between the two types of standards without having to duplicate their efforts.
Sources :
- "EFRAG-GRI joint statement of interoperability".GRI, 05/09/2023
- "European sustainability standards - first set of standards".European Commission, 07/31/02
- "European Commission, EFRAG and ISSB confirm high degree of climate-disclosure alignment", IFRS, 31/07/2023
- "CSRD sustainability reporting: preparing for new obligations", AMF, 20/06/2023
- "EU Voluntary Sustainability Reporting Standard for non-listed SMEs that are outside the scope of CSRD"EFRAG, 17/11/2022
- "Draft european sustainability reporting standards - ESRS E1 Climate Change"EFRAG, 01/11/2022
