Deciphering ESRS to truly understand your environmental and social impact

What are ESRS standards?

Integral to the CSRD (Corporate Sustainability Reporting Directive), which came into force on January 1, 2024, they are designed to provide a framework for the extra-financial sustainability reporting required of certain companies. In other words, they serve to harmonize practices on a European scale, for a greater awareness of the impact of organizations.

But between the various criteria to be known, the associated regulations or even the notion of double materiality... there's enough to get lost 😱!

Don't panic, this article has been concocted by us to help you find your way through the ESRS maze.

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What are ESRS standards?

ESRS and CSRD

To understand what ESRS (European Sustainability Reporting Standards) are, we first need to take stock of CSRD, to which they are closely linked.

The CSRD, which stands for Corporate Sustainability Reporting Directive, is a European directive which came into force on January 1, 2024, and whose aim is to require certain companies to produce annual non-financial sustainability reports. It therefore replaces the former NFRD (Non-Financial Reporting Directive) and is part of the EU's overall objective of promoting sustainable development and transparency in organizations.

👉 In short, the CSRD enables everyone to understand the impact :

• companies on people and the environment ;
• of sustainability issues on these companies themselves (on their results, for example).

Definition of ESRS

In this context, ESRS define a set of indicators and standards, setting out how this reporting is to be carried out. In particular, they specify the information to be included.

Drawn up by EFRAG (European Financial Reporting Advisory Group), they aim to

standardize and harmonize practices, in order to :

• simplify comparison of results from one organization to another ;
• cover more themes, by including detailed information on environmental, social and governance impacts.

☝️ All entities subject to CSRD must therefore follow these standards.

The benefits of ESRS

Let's face it, given the complexity of the subject, some companies find it hard to see the benefits of ESRS, and CSRD in general. For them, it's just another regulatory constraint to comply with 🥹.

Yet, thanks to ESRS, it becomes easier to measure your results and understand your situation, based on proven indicators. Ultimately, you have a structured, coherent framework that :

• facilitates reporting and, more generally, the internal management of operations linked to the analysis of your impact ;
• enables you to position yourself more effectively on a European scale and in relation to other companies.

How ESRS works

ESRS and double materiality

Double materiality, also known as double importance, is one of the pillars of CSRD, and one that needs to be mastered.

This principle requires companies to assess and communicate their impacts on the following two levels:

• Financial materiality: this involves identifying and assessing the impact of environmental, social and governance factors on a company's financial performance.
  
  
• The materiality of environmental and social issues: this concerns the consequences of an organization's activities on the environment and on people. One example is _CO2 emissions from human activities, which have a major impact on the climate.

In short, dual materiality provides a more comprehensive and holistic diagnosis of sustainability issues.

The different categories of ESRS

According to Commission Delegated Regulation (EU) 2023/2772, there are 3 categories of ESRS:

• transversal standards;
• thematic standards (environmental, social and governance standards) ;
• sector-specific standards.

The first two relate to all companies concerned by CSRD. However, for reasons of cost resulting from the publication of irrelevant information, only the standards in the " General Disclosures" section are mandatory. It's up to you to determine whether you are concerned by the other themes, taking into account your results and the double materiality analysis mentioned above.

At the same time, we would like to point out the (forthcoming!) presence of sector-specific standards, aimed at organizations operating in a particular field and whose specific features are not sufficiently covered by the thematic standards.

☝️ Important: sector standards do not yet exist, but they should be established and communicated within the next two years or so.

What are the 12 ESRS standards?

General overview

ESRS are currently based on :

• transversal standards (ESRS 1 and ESRS 2) ;
• thematic standards.

For the latter, the ESRS standard is based on the three classic pillars of CSR:

• the environmental pillar (ESRS E1 to ESRS E5) ;
• the social pillar (ESRS S1 to ESRS S4) ;
• the governance pillar (ESRS G1).

👉 To help you understand these concepts, here is a more detailed table of the 12 ESRS standards:

🔎 The following sub-sections provide a brief summary of the objectives of each of these standards. This is just an overview. For more information, please refer to Commission Delegated Regulation (EU) 2023/2772.

ESRS 1 - General requirements

The purpose of this standard is to define the general requirements to be met when preparing and presenting ESRS information.

It therefore helps to determine :

• the fundamental concepts on which reporting is based ;
• which reporting conventions to apply.

ESRS 2 - General information

ESRS 2 defines the disclosure requirements applicable to all companies, irrespective of their sector of activity, and covering cross-functional sustainability topics: governance, strategy, risks and opportunities, etc.

ESRS E1 - Climate change

This standard specifies reporting rules for understanding :

• how the company impacts (positively or negatively) climate change;
• its past, present and future efforts to :
  • mitigate climate change, in line with the Paris Agreement (or an updated international agreement on the subject);
  • limit global warming to 1.5°C;
• its plans and ability to adapt its business models and operations as part of the transition to a sustainable economy;
• any other actions taken (and their results) to mitigate or remedy current or potential negative impacts.

ESRS E2 - Pollution

ESRS E2 focuses on :

• how the organization affects air, water and soil pollution;
• the actions taken to prevent, mitigate or remedy current or potential impacts;
• all its plans and capabilities to adapt its strategy, business models and operations as part of the transition to a sustainable economy, in line with pollution prevention, control and elimination needs.
  👉 This aims to create a toxic-free environment with zero pollution, in support of the EU Action Plan Towards Zero Pollution for air, water and soil.

☝️ This standard covers air, water and soil pollution, as well as substances of high and very high concern.

ESRS E3 - Marine and water resources

This involves understanding, among other things:

• the impact of the organization's activities on water and marine resources;
• any actions implemented, and their results, to protect these resources, including with reference to reducing water consumption;
• how and to what extent the company contributes :
  • to the ambitions of the European Green Pact for clean air, clean water, healthy soil and biodiversity;
  • ensuring the sustainability of the blue economy and fishing sectors.

Other initiatives include:

• the EU Water Framework Directive ;
• the EU maritime strategy ;
• the EU Maritime Spatial Planning Directive;
• SDGs 6 Clean Water and Sanitation and 14 Aquatic Life, etc.

☝️ ESRS E3 establishes disclosure criteria for water and marine resources, including surface and groundwater.

In addition, it specifies requirements for reporting :

• water consumption associated with the company's operations ;
• water withdrawals and discharges.

ESRS E4 - Biodiversity and ecosystems

The aim of this standard is to specify :

• how the company impacts, positively or negatively, biodiversity and ecosystems;
• the actions taken to protect and/or restore them;
• the organization's ability to operate within the global limits of biosphere integrity and earth system change.

In other words, ESRS E4 details reporting requirements on the company's interactions with terrestrial, freshwater and marine habitats, which involves considering:

• the ecosystems and populations of animal and plant species affected ;
• the profound relationship between these elements and indigenous peoples and other impacted communities.

ESRS E5 - Resource use and circular economy

This involves understanding :

• how the company affects the use of resources, including :
  • depletion of non-renewable resources ;
  • regenerative production of renewable resources;
• any measures deployed to reduce its negative impact, including those aimed at decoupling its economic growth from the use of materials;
• its plans and ability to adapt its business models and operations in line with the principles of the circular economy, including:
  • waste minimization ;
  • maintaining the value of products, materials and other resources at their highest level;
  • improving their efficient use in production and consumption.

ESRS S1 - Corporate workforce

ESRS S1 focuses on the impact of companies' activities on their own workforce.

In this section, reporting focuses on components such as:

• working conditions;
• equal treatment of employees;
• other rights associated with work (e.g. prohibition of child labor).

ESRS S2 - Employees in the value chain

The aim of ESRS S2 is to observe the material impacts :

• on all workers in the organization's value chain;
• related to operations, products and services through its business relationships.

As with the previous standard, working conditions, equal treatment and other rights associated with work will be studied.

ESRS S3 - Communities concerned

This standard helps to understand how the company affects communities, particularly in areas where risks are most likely to be present and significant.

It is important to look at the organization's entire value chain, upstream and downstream, including in relation to its products, services and procurement process.

☝️ Consequently, the ESRS S3 touches on both :

• the economic, social and cultural rights of communities;
• the civil and political rights of communities
• the specific rights of indigenous peoples.

ESRS S4 - Consumers and uses

The focus here is on consumers and end-users.

More concretely, ESRS S4 covers the following aspects:

• information-related impacts on consumers and/or end-users;
• their personal safety ;
• their social inclusion.

ESRS G1 - Business conduct

We end with the company's strategy, as well as its business processes and performance.

This standard then focuses on the following uses, as specified by the CSRD:

• corporate culture ;
• supplier relationship management; and
• avoidance of corruption and bribery;
• the organization's commitment to political influence, including lobbying;
• protection of whistle-blowers;
• animal welfare;
• payment practices, specifically those relating to late payments by small and medium-sized enterprises.

Which companies are covered by the CSRD?

The CSRD, and therefore the ESRS, concern :

• large companies meeting at least 2 of the following criteria:
  • more than 250 employees ;
  • 40 million euros in sales;
  • 20 million euros balance sheet;
• listed SMEs meeting at least 2 of the following criteria:
  • more than 10 employees ;
  • 900,000 euros in sales ;
  • 450,000 euros balance sheet.

👉 Non-European organizations with significant activity in the EU are also eligible, provided they :

• generate sales in excess of 150 million euros within the European Union;
• have a subsidiary or branch in the European Union, with net sales in excess of 40 million.

It is estimated that over the next 5 years, more than 50,000 companies will be required to produce ESRS reports.

ESRS implementation timetable

The CSRD came into force on January 1, 2024. However, depending on the type of company, the reporting publication obligations are spread out until 2028, in accordance with the following timetable:

• 📆 January 1, 2024: for companies already subject to the Non-Financial Reporting Directive (publication of the report in 2025 based on data from the 2024 financial year) ;
• 📆 January 1, 2025: for large organizations not yet subject to the Extra-Financial Reporting Directive (publication of the report in 2026 based on data from the 2025 financial year) ;
• 📆 January 1, 2026: for SMEs and other listed companies (publication of the report in 2027 on the basis of data from the 2026 financial year); these structures have the option of not complying with the directive until 2028 ;
• 📆 January 1, 2028: for non-European organizations with significant activities in the EU (publication of the report in 2029 based on data from the 2028 financial year).

How to prepare your company for ESRS?

A few tips...

As you will have gathered, CSRD and ESRS are no picnic 😬.

Here then are a few best practices to observe to tackle this change more serenely:

• ✅ Take the time to rigorously train the teams concerned on the new sustainability and reporting requirements.
  
  
• ✅ Assess the aspects of your business most affected by ESRS and identify priority environmental and societal issues.
  
  
• ✅ Set up an effective data collection system, to easily capture the information required by CSRD.
  
  
• ✅ Ensure that the data collected is sufficiently reliable to guarantee accurate reporting.
  
  
• ✅ Align your corporate strategy with the sustainability objectives that will emerge from the various analyses.
  
  
• ✅ Consider ESRS standards as an opportunity to reinforce your commitment to greater sustainability... not as a constraint!
  
  
• ✅ Make sure your reports are clear and transparent. They must be easy to understand for all stakeholders.
  
  
• ✅ Communicate regularly on your progress in reducing your negative impacts.

... to tools

As we saw in the previous paragraph, the question of data remains central to ESRS.

This is why many companies decide to equip themselves accordingly, using software such as Carbo for example. This solution is used to collect, in a collaborative manner, all the information relating to your CO2 emissions, with the aim of assisting you in carrying out your carbon footprint. And this data proves invaluable in completing the entire CSRD component relating to climate change. What's more, Carbo can help you implement a strategy to reduce your impact, tailored to your own specific issues.

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What can we learn from ESRS?

As part of the CSRD, the ESRS are an invaluable tool for structuring and standardizing the non-financial reporting to which many companies are subject.

Comprising 12 standards, each with its own objectives and requirements, ESRS are a rather tricky subject for the organizations concerned. Fortunately, they can adapt and focus on the indicators that really concern them, based on the principle of double materiality, among others.

Finally (and fortunately!), it is possible to call on experts or dedicated software. They'll support you in your reporting, helping you to focus on what matters most: rolling out an action plan for your sustainability 🍃.