The EU is introducing reporting standards for the disclosure of sustainability aspects. These cover the full range of environmental, social and governance (ESG) issues. Aspects of climate protection are particularly pronounced in here. The new standards are now being gradually rolled out in corporate reporting.

Uniform sustainability standards

As part of the Green Deal,  the EU Commission adopted the European Sustainability Reporting Standards (ESRS). The ESRS provide a uniform reporting framework for environmental, social and governance (ESG) criteria in the EU.

The standards are intended to make the management of sustainability data more efficient through higher quality and reduced costs. Today, companies use different data and indicators, which limits data usability and comparability.

The delegated act for the ESRS was challenged by an motion in Parliament on October 19^th, 2023. The EU-Parliament, however, voted to reject the objection and the act will enter into force as early as November.

The delegated act for the ESRS details the reporting obligations in the Corporate Sustainability Reporting Directive (CSRD) (EU Directive 2022/2464). The CSRD, which came into force in January 2023, requires companies to disclose sustainability risks and their sustainability impact based on the double materiality concept.

The CSRD expands the obligations under the Non-Financial Reporting Directive (NFRD) (EU Directive 2014/95). The NFRD is already applied to approximately 11,700 large companies in the public interest.     

The ESRS were developed by the European Financial Reporting Advisory Group (EFRAG). To ensure consistency, the ESRS also takes into account global standards, such as those of the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI).

Coverage of all ESG topics

The sustainability reporting standards are detailed in Annex I of the Delegated Act. The ESRS is divided into 2 overarching standards and 10 thematic standards (by ESG categories) for disclosure.

Overarching standards

ESRS 1 describes the structure and basic concepts of the standards as well as the general requirements for the preparation and presentation of the information.

ESRS 2 specifies the disclosure requirements for the material sustainability aspects:

1. Governance processes, controls and procedures for monitoring, managing and overseeing sustainability issues (GOV-1 – GOV-5)
2. Sustainability-related elements of the corporate strategy, business model and value chain, relevant stakeholder interests as well as the assessment of material impacts, risks and opportunities (SBM-1 – SBM-3)
3. Procedures for identifying material impacts, risks and opportunities as well as information for the sustainability statement (IRO-1, IRO-2)
4. Minimum requirements for disclosure of information on metrics and objectives set out in the thematic standards

Climate standards

ESRS E1 covers the disclosure of aspects of climate change mitigation, adaptation to climate impacts and energy use:

1. Remuneration based on emissions reduction targets (GOV-3)
2. Climate change transition plan (E1-1)
3. Climate and transition risks as well as impacts, risks and opportunities therefrom, including interaction with strategy and business model (SBM-3)
4. Description of the procedures for the identification and assessment of material climate-related impacts, risks and opportunities (IRO-1)
5. Climate change mitigation and adaptation measures (E1-2)
6. Actions and resources related to climate action (E1-3)

The following aspects are included as metrics and goals:

1. Emission reduction targets, including Scope 1, Scope 2 and Scope 3 (E1-4)
2. Energy consumption and energy mix as well as energy intensity (E1-5)
3. Absolute emissions Scope 1, Scope 2 and Scope 3 as well as emission intensity (E1-6)
4. Emission removals and reductions financed by CO2 credits (E1-7)
5. Internal CO2 pricing (E1-8)
6. Financial Impact of Physical and Transition Risks and Climate-Related Opportunities (E1-9)

Other environmental standards

ESRS E2 is about air, water and soil pollution and the production, use, distribution and marketing of substances of concern (IRO1, E2-1- E2-6).

ESRS E3 covers water and marine resources, including surface and groundwater and their consumption and use (IRO-1, E3-1 – E3-5).

ESRS E4 brings in biodiversity and ecosystems. It discloses the company’s relationship with habitats, ecosystems and populations of animals and plants (SBM-3, IRO-1, E4-1 – E4-6).

ESRS E5 incorporate aspects of resource use and circular economy, including resource inflows, outflows and waste (IRO-1, E5-1 – E5-6).

Social and governance standards

In the ESRS S1, the focus in on the company’s own workforce. This includes social factors, such as working hours and salaries (SBM-2, SBM-3, S1-1 – S1-17).

ESRS S2 refers to the employees in the value chain – through the company’s business, products or services, and business relationships (SBM-2, SBM-3, S2-1 – S2-5).

ESRS S3 extents to other affected communities (SBM-2, SBM-3, S3-1 – S3-5) and ESRS S 4 consumers and end-users (SBM-2, SBM-3, S4-1 – S4-5).

ESRS G1 covers business conduct ranging from business ethics and corporate culture to supplier management and lobbying (IRO-1, G1-1 – G1-6).

Gradual application with exceptions

The ESRS apply to companies with reporting obligations under the CSRD.

As early as 2024 (for the annual report in 2025), companies that are already covered by the NFRD will have to implement the ESRS. From 2025, all non-NFRD companies with more than 250 employees will follow. Listed SMEs will be covered from 2026, but will be able to apply for an exemption for the first two years.

As per the amendment to the Accounting Directive, which specifies the size-criteria for EU companies, large companies exceed at least 2 out of 3 criteria: total balance sheet of EUR 25 million, total net-turnover of 50 million, and 250 employees.

Overall, a gradual introduction of the thematic aspects in the ESRS is intended.

For example, for companies with fewer than 750 employees in the first year, Scope 3 emissions (E1) and own workforce standards (S1) are exempt from disclosure. For biodiversity (E4) and social aspects (S2-4), a possible exemption is even valid for 2 years.

Initially, the financial impact of environmental aspects (E2 – E5) can only be disclosed in qualitative terms. The full standards will not apply to NFRD companies until 2027 and to all other companies from 2028.

Overall, companies can refrain from disclosing a thematic standard if the topic is judged to be non-material. An explanation based on a materiality assessment must be given for this.

Expanding reporting obligations

The CSRD with the ESRS form one piece of the ESG data puzzle. At the same time, European companies must also increasingly disclose sustainability aspects in their supply chains.  

Currently, the EU is negotiating about the EU Corporate Sustainability Due Diligence Directive (CSDDD). This legislation would make companies not only to report on sustainability impacts, but also mitigate such risks. Once this directive has been passed, it needs to be translated into national legislation.

Germany has already implemented a national version of the CSDDD. The  Lieferketten-Sorgfalts-Gesetz (LkSG)  requires companies with 3,000 or more employees (from 2024 from 1,000) to identify risks in their supply chains to human rights as well as health and environmental hazards that contribute to them.

Yet the LkSG requirements for company size and risks to be accounted for are weaker than the currently discussed CSDDD provisions. Thus the LkSG would need to be revised once the CSDDD is passed.  

Additionally, importers of CO2-intensive goods will have to report embedded emissions of their imports as early as October. These reporting obligations are part of the EU Carbon Border Adjustment Mechanism (CBAM), which establishes a CO2 levy on imports.

(This bloq is frenquently updated – Last update on October 27, 2023)

Sources and further information:

• EU Commission: Commission adopts ESRS  
• EU Commission: Questions and Answers on the ESRS
• EU Commission: Implementing and delegated acts – CSRD
• EU: Delegated Regulation ESRS
• EU: Delegated Act Annex I ESRS
• EU: Corporate Sustainability Reporting Directive (CSRD)
• EU: Non-Financial Reporting Directive (NFRD)

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