We are starting a series on Navigating CSRD Requirements. In each instalment of this series, we deep dive into a specific section or disclosure requirement of the CSRD. In this first instalment, we look at CSRD Annex 1 European Sustainability Reporting Standards (ESRS) 1 - General Requirements.
General architecture of ESRS
Annex 1 of the CSRD, which is published in the Official Journal of the European Commission, includes two out of the three categories of ESRS: the cross-cutting standards and the topical standards. It does not include the sector-specific standards which are currently being drafted. The current timeline for the adoption of the sector-specific standards is June 2026.
ESRS 1 and ESRS 2 are the cross-cutting standards. ESRS 1 General Requirements outlines the general requirements of sustainability reporting. It contains no disclosure requirements. ESRS 2 General Disclosures outlines a set of disclosure requirements at a general level across all material sustainability matters across the dimensions of reporting (governance, strategy, impact, risks and opportunities (IRO), metrics and targets).
The disclosure requirements in the ESRS standards are organised by themes: GOV disclosures referring to the governance process and procedures; SBM disclosures referring to how the strategy and business model interacts with material impacts, risks and opportunities; IRO disclosures referring to how material sustainability matters are identified and managed; and Metrics and Targets to measure sustainability performance. For reporting on policies, actions, metrics and targets, ESRS 2 also includes Minimum Disclosure Requirements (MDR) which needs to applied in the topical and sector-specific standards.
ESRS E1 to E5, S1 to S4 and G1 are topical standards covering the topical areas for Environment, Social and Governance. Sustainability topics, sub-topics, and sub-sub-topics are covered by the topical standards, and are collectively referred to as sustainability matters. Reporting on material sustainability matters is mandatory. Some disclosure requirements covered under ESRS 2 can be included in topical standards, and information criteria from the general disclosure (ESRS 2) applies to the particular topical standard. Some examples of this type of disclosures include SBM-3 Material impacts, risks and opportunities and their interaction with strategy and business model, which appears in ESRS 2 as well as ESRS E1, ESRS E4, ESRS S1, ESRS S2, ESRS S3 and ESRS S4.
The reporting of the topical standards is based on the initial materiality assessment which should be designed to identify the list of sustainability matters for reporting. If a topic emerges from the materiality assessment as being material but is not included in the current topical standards, the ESRS provides a set of Entity Specific Disclosures guidance for such topics.
Qualitative characteristics of information
ESRS 1 General Requirements recognises two types of qualitative characteristics of information. The fundamental qualitative characteristics of information are relevance and faithful representation, and the enhancing qualitative characteristics of information are comparability, verifiability, and understandability. These terms are defined and explained in Appendix B Qualitative characteristics of information.
Double materiality as the basis of sustainability disclosures
ESRS 1 General Requirements places emphasis on the concept of Double Materiality as the basis of sustainability disclosure. It emphasises the following points regarding the materiality assessment process
- Importance of stakeholder engagement, including “affected stakeholders” and “users of sustainability statements.” Affected stakeholders are individuals or groups whose interests could be positively or negatively affected across business relationships and value chains. Users of sustainability statements include primary users of general-purpose financial reporting and other users like business partners, civil society, etc.
- A materiality assessment based on the concept of Double Materiality is the starting point of sustainability reporting. Disclosure requirements related to the materiality assessment process includes ESRS-2 IRO-1, which requires disclosure on the process to identify impacts, risks and opportunities, and ESRS-2 SBM-3, which provides general disclosures on the material impacts, risks and opportunities resulting from the materiality assessment process. ESRS-1 AR-16 provides a list of sustainability matters covered in the topical ESRS standards and is meant to be used to support the materiality assessment process.
- If a materiality assessment concludes that Climate Change is not material and thus omits all disclosure requirements related to ESRS-E1 Climate Change, a detailed explanation of its conclusion with regard to Climate Change, including a forward-looking analysis of the conditions that will make Climate Change material in the future, needs to be disclosed in accordance with ESRS-2 IRO-2. For all other topics that the organisation concludes as non-material, a brief explanation of its conclusion is asked.
- Impact materiality and financial materiality are the two dimensions of Double Materiality. In general, the starting point is the assessment of impacts although there could be risks and opportunities not related to impacts which would be separate starting points. Impacts may or may not be financially material currently but may become financially material in the short-, medium-, or long-term when such impacts may have a material effect on financial positions.
- For impact materiality, severity is a key metric for determining whether the impact is material for both actual and potential impacts (likelihood is an additional metric for potential impacts). Severity is based on the scale and scope for both positive and negative impacts. Irremediable characteristic of the impact is an additional criteria for negative impacts.
- Financial materiality corresponds to information that is considered material for primary users of general-purpose financial reports in making investment decisions. Information is considered material if omitting, misstating, or obscuring that information could reasonably be expected to influence decisions. The financial materiality of risks and opportunities is assessed based on likelihood and potential magnitude of the financial effects.
Due diligence
The integration of Due Diligence in sustainability management and reporting is reflected through ESRS-2 Disclosure Requirements in various sections.
- Due diligence should be embedded in governance, strategy and business model and these processes are disclosed through ESRS-2 GOV-2, GOV-3 and SBM-3.
- Ongoing stakeholder engagement is an important aspect of Due Diligence, and it should be disclosed through ESRS-2 GOV-2, SBM-2, IRO-1, MDR-P and relevant topical standards.
- Identifying and assessing negative impacts on people and planet is address through ESRS-2 IRO-1 and SBM-3.
- Taking actions to address negative impacts is addressed through ESRS-2 MDR-A and topical standards.
- Tracking the effectiveness of actions is addressed through ESRS-2 MDR-M, MDR-T, and metrics and targets of topical standards.
Value chain information
While ESRS 1 General Requirements mandates the reporting of value chain information (those that are connected through direct and indirect business relationships in the upstream and/or downstream value chain), such information is only required for material impacts, risks and opportunities and not on “each and every actor in the value chain.”
ESRS 1 General Requirements allows reporting organisations to estimate value chain information when it is decided to be challenging after making reasonable efforts to do so. These estimations could be based on reasonable and supportable information such as sector-average data and other proxies.
Time horizon of reporting
The reporting period of the sustainability statement should be consistent with the reporting period of the financial statements. The initial definition of short-term is the year of reporting of the sustainability statement, while medium-term is defined as less than 5 years and long-term is defined as more than 5 years. However, this definition of medium-term and long-term could be adjusted if time horizon definitions in other topical or sector-specific ESRS are different. Furthermore, if the reporting organisation’s industry or business situation involves circumstances that dictates a different definition of medium- and long-term, the reporting organisation is allowed to adopt different definitions of time horizons for medium- and long-term.
Preparation and presentation of sustainability information
- Comparability - ESRS 1 General Requirements places emphasis on the criteria to present comparable time-based information when quantitative, metric-based and monetary-based data are being reported. The reporting organisation is expected to take all reasonable effort to report comparable information to previous periods (making methodological adjustments if it is possible). When no comparable information can be presented, an explicit explanation should be given
- When using estimations to present quantitative metric-based or monetary-based data, there could be measurement uncertainties. While scenarios or sensitivity analyses are appropriate for presenting the information in a sustainability statement, the assumptions and estimates of the analyses should be clearly communicated. Data in the sustainability statement should be as consistent as possible with the the corresponding financial data and assumptions. ESRS 1 General Requirements makes a particular note to consider some very low probability events that could have very high impacts. While individual events may not clear the threshold for materiality, a collection of these low-probability events may be material.
- The reporting organisation should make all reasonable efforts to report the most updated and correct information. If information becomes available after the reporting period but before the finalisation of the sustainability reporting, such information related to material impacts, risks and opportunities should be updated. Errors in previous reporting periods, such as calculation mistakes or mistakes in applying various definitions, should be corrected to provide comparable data across time periods.
- When reporting at the consolidated level, the materiality assessment should cover the entire consolidated group and ensure that all subsidiaries are covered. If a subsidiary’s material impacts, risks and opportunities differs significantly from the consolidated group reporting, an adequate explanation of the difference should be reported.
- Classified information or sensitive information do not need to be reported, even if such information is considered material. This information may corresponds to intellectual property, know-how, or the results of innovation. If such information is omitted, the reporting organisation should ensure that the overall relevance of the disclosure in question is not impaired.
Structure of the sustainability statement and linkages to other corporate reports
The sustainability statement should be structured in four parts: General, Environment, Social, and Governance.
The sustainability statement should include a section for the disclosures related to the EU Taxonomy regulation. The disclosures relating to each of the environmental objectives defined in the Taxonomy Regulation should be presented together in a clearly identifiable part of the Environmental section of the sustainability statement.
When information in one part refers to information in another part, such information can be cross-referenced to avoid duplication. When referencing other legislations that require the disclosure of sustainability information or other generally-accepted sustainability reporting standards and frameworks (e.g., GRI and ISSB), these references should be clearly identified and meet the requirements for Qualitative Characteristics of Information.
The reporting organisation may use references to respond to a particular Disclosure Requirement or data point. These references could be i) another section of the management report, ii) the financial statements, iii) the corporate governance statement, iv) the renumeration report, v) the universal registration document, or vi) public Pillar 3 disclosures. These references have to satisfy a set criteria, for example, they are clearly identified in the sustainability statement, they should be published on or before the management report, they should be in the same language, and they should be subject to the same level of assurance and meet the same technical digitalisation requirements.
Transitional provisions
- Entity-specific disclosures - As ESRS evolves to incorporate additional Disclosure Requirements particularly in the sector-specific standards, the need for entity-specific disclosures will decrease. In the first three years of sustainability reporting, the reporting of the entity-specific disclosure should prioritise the introduction of such entity-specific disclosures and how they meet the Qualitative Characteristics of Information, and could use available best practices and/or available frameworks such as the IFRS industry-based guidance or GRI Sector Standards.
- Value chain information - For the first three years of sustainability reporting, the reporting of policies, actions and targets related to upstream/downstream value chain could be limited to data that is already available in-house. When disclosing metrics, it is not required to include upstream and downstream value chain information except for those datapoints derived from other EU legislations.
- Comparable information is not required for the first year of sustainability reporting
Other major phase-in requirements as presented in Appendix C List of Phase-in Disclosure Requirements are:
- Sector-related disclosures (e.g., ESRS-2 SBM-1 breakdown of total revenue by significant ESRS sectors) should be reported starting from the application date of the sector-specific ESRS standards.
- General anticipated financial effects (ESRS-2 SBM-3) and anticipated financial effects from each Environment topical standard (ESRS-E1 E1-9, ESRS-E2 E2-6, ESRS-E3 E3-5, ESRS-E4 E4-6, ESRS-E5 E5-6) may be omitted for the first year of reporting. Qualitative information, instead of quantitative information, could be reported for the first three years of reporting.
- Characteristics of non-employee workers in the own workforce (ESRS-S1 S1-7), social protection (ESRS-S1 S1-11), percentage of employees with disabilities (ESRS-S1 S1-12), training and skills development (ESRS-S1 S1-13), work-life balance (ESRS-S1 S1-15) can be omitted in the first year of reporting
- Collective bargaining coverage and social dialogue (ESRS-S1 S1-8) on own employees in non-EEA countries can be omitted for the first year of reporting
- Health and safety (ESRS-S1 S1-14) on cases of work-related ill-health and on number of days lost to injuries, accidents, fatalities and work-related ill health can be omitted for the first year of reporting. Reporting on non-employees can be omitted for also for the first year of reporting.
For those organisation with less than 750 employees during the financial year, the following disclosure phase-ins apply:
- Scope 3 emissions and total GHG emissions (ESRS-E1 E1-6) can be omitted for the first year of reporting.
- Disclosure requirements of ESRS-E4, ESRS-S2, ESRS-S3, and ESRS-S4 can be omitted for the first two years of reporting. Disclosure requirements of ESRS-S1 can be omitted for the first year of reporting.
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