ESRS main requirements

The sector-agnostic component of the ESRS articulates around two types of standards – cross-cutting and topical ones. The former set, in a way, the conceptual framework of the ESRS. The latter are structured in three pillars – environment, social and governance related standards. Those pillars include individual standards on different topics which should be read against the backdrop of the requirements outlined in the cross-cutting ones.

Sustainability reporting standards for SMEs and sector-specific standards, initially planned in the CSRD, have been removed from the requirements in the Omnibus simplification measures.

The CSRD is a far-reaching piece of legislation and, together with the underlying ESRS, it introduces a comprehensive array of reporting requirements involving numerous concepts, both new and familiar, but somehow revisited. Among these, some are worth being spelled out, in particular:

Materiality assessment is the cornerstone of the sustainability reporting under the ESRS, and it manifests two dimensions, which are susceptible to be interdependent:

• Impact materiality: a sustainability matter is material from an impact perspective when it pertains to the reporting entity’s material actual or potential, positive or negative impacts on people or the environment over the short, medium and long term, and
• Financial materiality: a sustainability matter is material from a financial perspective if it generates risks or opportunities that produce or could produce financial effects over the short, medium or long term on the reporting entity.

Building on the  European Commission’s (EC)’s guidance related to the NFRD¹, another prominent aspect of reporting under the CSRD is the scope to be covered, which, for several disclosure requirements, extends beyond the financial consolidation perimeter, to upstream and downstream value chain. Whereas sustainability information is not necessarily required for each component of the value chain, material impacts, risks and opportunities connected with a reporting entity through its direct and indirect business relationships along its value chain are to be encompassed. Business actors included in the value chain are, for instance, key suppliers, customers, distribution channels and end-users.

Whereas transition plans correspond to a climate change specific concept, it seems to emerge as one of the most salient points of the CSRD in light of the dramatic consequences of global warming. Reporting entities are expected to disclose their transition plan for climate change mitigation². The goal of disclosing a transition plan is to allow users of the sustainability reports to gain an understanding of the reporting entity’s mitigation endeavours to ensure that its strategy and business model are compatible with the transition to a sustainable economy and with curbing global warming to 1.5 °C in line with the Paris Agreement as well as with the European objective of achieving climate neutrality by 2050.

Whereas the ESRS represent probably the most comprehensive and granular sustainability reporting framework at this stage, it is worth stressing to what extent it is aligned and compatible with the spirit of other internationally recognised frameworks addressing similar topics.

Among the latter, the most prominent example is the IFRS Sustainability Disclosure Standards developed by the International Sustainability Standards Board (ISSB). Albeit for the time being the ISSB has only issued two standards, i.e. IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosure, a convergence process has already been initiated in order to ensure alignment and interoperability of both frameworks to the greatest extent possible, in particular as regards the overlapping climate disclosure standards, and bearing in mind the uneven progress status of both frameworks. A key conceptual difference between the ESRS and the IFRS is the concept of “impact materiality”, which is not covered in the ambit of the ISSB’s mandate. The practical consequences of the aforementioned conceptional divergence is however alleviated by the fact that a topic, which is material for the reporting entity from an inside-out perspective (impact materiality), would be likely to produce effects that would also be significant from a financial point of view (financial materiality).

As a part of the ESRS elaboration process, EFRAG has endeavoured to promote a close cooperation with the Global Reporting Initiative (GRI)³ aiming at a high degree of interoperability under both frameworks as well. Unlike the ISSB Standards, GRI Standards also include a double materiality approach, thus abating almost entirely conceptual differences in this domain, even though ESRS seem to encompass more financially material topics than GRI Standards. The former envisages a topic as material either from impact or financial perspective, whereas the latter analyse financial materiality through the prism of impact materiality, i.e. under GRI Standards a topic is construed as financially material as a consequence of being impact-material in the first place.

Given the high level of interoperability achieved, entities reporting under ESRS can be considered as reporting “with reference” to GRI Standards. Nonetheless, reporting entities subject to ESRS which wish to report “in accordance” with the GRI Standards, could fulfil additional applicable GRI requirements not covered by the ESRS in their sustainability statement.

Finally, it is noteworthy that ESRS application is mandatory for reporting entities falling under the CSRD scope whereas GRI Standards are applicable on a voluntary basis and IFRS adoption on a mandatory basis remains minimal to date.