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.

The other prongs of the ESRS framework, yet to come, are the sector-specific standards (applicable depending on the industry in which a company operates) or the standards specific for certain types of entities, i.e. SMEs or non-EU entities falling within the scope of the CSRD.

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

• Impact materiality: a sustainability matter pertaining to the reporting entity could create actual or potential positive or negative impacts on people or the environment, and
• Financial materiality: a sustainability matter could be material from a financial perspective if it produces or could produce financial effects on the reporting entity.

Building on the 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 chain². 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 public focus on the dramatic consequences of global warming. Reporting entities are expected to disclose their transition plans for climate change mitigation³. 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 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 Sustainability Disclosure standards developed by the International Sustainability Standards Board (ISSB), which can reasonably be expected to become the global baseline. 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 ISSB Standards is the concept of “impact materiality”, which is not covered in the ambit of the ISSB’s mandate. Having said that, one might wonder whether the practical consequences of the aforementioned conceptional divergence is not somehow 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)⁴ 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 if 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 and based on the [draft] GRI-ESRS Interoperability Index which has been made publicly available, 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 statement⁵.

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