ESRS Reform: What to Expect?

On July 31, 2023, the European Commission reached a significant milestone by adopting the European Sustainability Reporting Standards ('ESRS') to be applied by all companies falling under the scope of the Corporate Sustainability Reporting Directive ('CSRD').

For a refresher on the CSRD's requirements, check this article.

‍What are the ESRS?

The ESRS are a set of standards that ensure a structured and uniform approach to sustainability reporting. They cover a wide range of topics, including environmental impacts, social responsibilities, employee matters, human rights, and anti-corruption measures.

What makes the ESRS framework unique is its emphasis on comprehensive reporting that goes beyond merely disclosing policies and objectives. It encourages companies to provide insights into their actual performance and the outcomes of their sustainability initiatives. This holistic approach encompasses both the company's own operations and its value chain.

ESRS Classification

The ESRS framework distinguishes between cross-cutting, topical and sector-specific standards.

Cross-cutting standards

The cross-cutting ESRS serve as a fundamental framework for sustainability reporting, acting as a backbone upon which specific company details are built. These cross-cutting standards form a common ground, applicable to all businesses, and provide guidance on reporting governance, strategy, risk management and sustainability-related performance metrics.

Topical standards

Topical ESRS are designed to delve into specific environmental, social, and governance ('ESG') themes. They refer to information on crucial sustainability issues, such as climate change, biodiversity, human rights, and anti-corruption. The Topical ESRS play a pivotal role in guiding companies to provide comprehensive and theme-specific information, ensuring transparency and facilitating comparability among different organisations.

Sector-specific standards

Lastly, sector-specific standards bring standardisation and comparability to the next level by prescribing specific information requirements for each sector. For instance, an automobile company might heavily emphasise reporting on emissions and waste management, while a tech company may highlight their data protection and labour practices. This approach enables stakeholders to gain a deeper understanding of a company's sustainability efforts and performance in the specific areas that matter most for its business and industry.

The ESRS Reform under the Omnibus Proposal

Sector-specific standards were still under development by EFRAG, leaving space for companies to familiarise themselves with the CSRD double materiality assessment and data-gathering on general sustainability standards on their first report (2025) before adding this extra layer of data based on the particular sectors in which they operate. The Omnibus Proposal, if adopted, would eliminate sector-specific standards.

The Omnibus is also cutting required datapoints by more than 60%. These were largely narrative datapoints that added weight without delivering commensurate insight. The advantage of this reduction is that it aims to reduce noise and concentrate effort where it matters. With fewer boxes to tick, companies can redirect time and attention toward evidence, consistency and decision-useful analysis, which should improve the overall quality of reports.

CSRD, Double Materiality & ESRS

Double materiality acts like a two-way mirror, reflecting not only how a company impacts the environment and society, but also how sustainability issues impact the company's performance. This concept highlights the interconnectedness between a company's actions and their broader environmental and societal implications.

In the context of the ESRS, embracing double materiality ensures that your sustainability report offers a comprehensive and holistic view of your organisation's sustainability efforts. By considering both the impact that the company has on the environment and society, as well as how sustainability issues can affect its performance, the report becomes more insightful and valuable.

Does the ESRS framework have too many datapoints?

It is also a good moment to dispel a common myth: ESRS does not force “1,000+ datapoints” on every company. The double materiality assessment is the filter that determines what is actually relevant to disclose.

For large, diversified groups with multiple business lines, complex supply chains, significant R&D... the number of datapoints can indeed grow, and rightly so. These organisations have the resources and the responsibility to disclose the scale of their impacts, the credibility of their remediation plans and their progress toward aligning value creation with stewardship of environmental and social systems.

Should the ESRS be used by smaller companies?

Proportionality works the other way as well. For some SMEs, a rigorous assessment may yield as few as six material topics, split into near-term and longer-term priorities. That keeps the effort manageable while still building comparable and strategic information, both for today’s needs and for tomorrow’s scale-up.

In practice, this means smaller companies can measure themselves by the same principles as their larger partners, and as they grow, the ESRS framework becomes an asset for managing risk, spotting opportunity and communicating impact. In light of the direction that the rules on sustainability reporting are taking, it is likely that companies under 1,000 employees will decide to use the ESRS for these purposes rather than for mandatory reporting.

The European Commission has also pointed to the voluntary standards for SMEs (VSME) as an appropriate framework for such scale in the event that the Omnibus is adopted. Nevertheless, you may want to choose which standards best suit your company's goals. To help you understand how the VSME differ from the ESRS, as well as from the LSME (a lighter version of the ESRS), we've published this article.

As a smaller player, you can also explore different tools and expert guidance tailored for your scale and needs. We go through the options in this article.

Want to dive deeper into the ESRS?

Follow the following links to check the ESRS Annexes:

- General requirements.

- General disclosures.

- Climate Change.

- Pollution.

- Water and marine resources.

- Biodiversity and ecosystems.

- Resource use and circular economy.

- Own workforce.

- Workers in the value chain; affected communities; and consumers and end users.

- Business conduct.

As mentioned earlier, the sector-specific standards are still under development and may never become mandatory if the Omnibus is adopted. EFRAG has published a sector classification, including general rules on its interpretation and application, which may still be interesting to read if you are exploring how to report on these issues voluntarily.

At an international level, GRI are the most used international standards. The ESRS are aligned with the GRI methodologies, although they introduced some additional requirements stemming from the CSRD. More on this topic in this article.

Have questions or need guidance applying the ESRS? Get in touch, we’ll help you scope materiality, streamline datapoints and build an audit-ready report