Deciphering ESRS to really understand your environmental and social impact

What are ESRS standards?

The ESRS standards are an integral part of the CSRD (Corporate Sustainability Reporting Directive), which came into force on 1 January 2024, and are designed to provide a framework for the non-financial sustainability reporting required of certain companies. In other words, they serve to harmonise practices on a European scale, so that organisations become more aware of their impact.

But between the various criteria that need to be known, the associated regulations and even the notion of double materiality... it's easy to get lost 😱!

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

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What are ESRS standards?

ESRS and CSRD

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

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

👉 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, the ESRS define a set of indicators and standards setting out the way in which this reporting will be carried out. In particular, they specify the information to be included.

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

standardise and further harmonise practices, in order to :

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

☝️ All entities subject to the 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 🥹.

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

• facilitates reporting and, more generally, the internal management of your operations linked to the analysis of your impact ;
• enables you to position yourself better 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, which must 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 organisation's activities on the environment and people. One example is _CO2 emissions from human activities, which have a major impact on the climate.

Ultimately, 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:

• cross-cutting standards;
• thematic standards (environmental, social and governance standards) ;
• sectoral standards.

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

At the same time, we should point out that there are (still to come!) sector-specific standards, aimed at organisations working in a particular field and whose specific characteristics 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

The ESRS are currently based on :

• cross-cutting 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, see 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 the reporting is based ;
• which reporting conventions to apply.

ESRS 2 - General information

ESRS 2 defines the disclosure requirements applicable to all companies, regardless of their sector of activity, and which cover cross-cutting sustainability topics: governance, strategy, risks and opportunities, etc.

ESRS E1 - Climate change

This standard specifies the reporting rules for understanding :

• how the company impacts (positively or negatively) climate change;
• its past, current and future efforts to :
  • Mitigate climate change, in accordance 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 organisation affects air, water and soil pollution;
• the actions taken to prevent, mitigate or remediate its 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 the need to prevent, control and eliminate pollution.
  👉 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 land.

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

ESRS E3 - Marine and water resources

This involves understanding, among other things:

• the impact of the organisation's activities on water and marine resources;
• any actions taken, and their results, to protect these resources, including with reference to reducing water consumption;
• how and to what extent the company contributes to :
  • 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 fisheries sectors.

Other initiatives include:

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

☝️ ESRS E3 sets out the disclosure criteria for water and marine resources, including surface water 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 objective 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 organisation's ability to operate within the global limits of biosphere integrity and earth system change.

In other words, ESRS E4 details the 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 - Use of resources and circular economy

This involves understanding :

• how the company affects resource use, including:
  • the 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:
  • minimising waste ;
  • Maintaining the value of products, materials and other resources at their highest value;
  • improving their efficient use in production and consumption.

ESRS S1 - Company 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; and
• other labour rights (e.g. prohibition of child labour).

ESRS S2 - Employees in the value chain

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

• on all workers in the organisation'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 examined.

ESRS S3 - Affected communities

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 organisation's entire value chain, upstream and downstream, including in relation to its products, services and procurement process.

☝️ Consequently, the ESRS S3 affects 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 specifically, the 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 processes and performance in terms of business conduct.

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 organisation's commitment to political influence, including lobbying;
• protection of whistleblowers
• animal welfare;
• payment practices, specifically those relating to late payment 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;
• SMEs listed on the stock exchange meeting at least 2 of the following criteria:
  • more than 10 employees ;
  • 900,000 euros in sales ;
  • 450,000 euros balance sheet total.

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

• generate turnover in excess of €150 million within the European Union ;
• have a subsidiary or branch with a net turnover of more than €40 million in the European Union.

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

The timetable for implementing the ESRS

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

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

How do you prepare your company for ESRS?

Some advice...

As you will have realised, CSRD and taking ESRS into account are no picnic 😬.

So here are a few best practices to follow in order to tackle this change more calmly:

• ✅ 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 the priority environmental and societal issues.
  
  
• ✅ Set up an effective data collection system to easily capture the information required by the CSRD.
  
  
• ✅ Ensure that the data collected is sufficiently reliable to guarantee accurate reporting.
  
  
• ✅ Align your corporate strategy with the sustainable development objectives that will emerge from the various analyses.
  
  
• ✅ View the ESRS standards as an opportunity to strengthen 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 the tools

As we saw in the previous paragraph, the issue 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 helping you to carry out your carbon audit. This data is also extremely useful for completing the climate change section of the CSRD. What's more, Carbo can help you put in place 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 in greater detail and standardising the non-financial reporting to which many companies are subject.

Comprising 12 standards, each with its own objectives and requirements, the ESRS are proving to be a rather tricky subject for the organisations concerned. Fortunately, they are able to adapt and focus on the indicators that really concern them, based on the principle of double materiality, among other things.

Finally (and fortunately!), it is possible to call on the services of experts or dedicated software. They will support you in drawing up your reports, helping you to concentrate on what matters most: implementing an action plan to promote your sustainability 🍃.