CSRD and ESRS: How to understand the reporting standards in the European directive?

Since January 1st, 2024, the CSRD (Corporate Sustainability Reporting Directive) has officially entered into force. Large companies will have to comply with this new directive on the publication of sustainability information. It is in this context that they will have to rely on the ESRS (European Sustainability Reporting Standards). These elements will provide them with a framework for understanding and navigating this complex regulatory landscape.

The CSRD directive as a backdrop

Published in the Official Journal of the European Union on December 16, 2022, the CSRD (Corporate Sustainability Reporting Directive) modernises and strengthens the existing rules on sustainability reporting. Fabienne Ménard, Chief Financial Officer of the Manutan Group, shares her vision in a B Smart video: "When we talk about reporting, it is generally seen as a constraint. At Manutan, we see it as an opportunity because it gives us direction. We are convinced that it will help us to accelerate the energy transition. As you know, anything that is measured can help us improve. As soon as we have more indicators, it will encourage us to go even further.”

The CSRD replaces the former directive on the disclosure of non-financial information (NFRD) dating from 2014. Its purpose is to improve, harmonise and broaden the communication of environmental, social and governance (ESG) information by companies.

This directive significantly broadens the scope of application. Ultimately, it will concern all companies listed on a regulated European market (excluding micro-enterprises), but also all large European companies, not to mention certain large non-European companies with a significant European anchor.

Moreover, it introduces more stringent reporting requirements, notably with a mandatory normative reporting and verification obligation. This includes the analysis of double materiality[1] which makes it possible to identify the key issues for each company, but also for society and the environment, as well as the ESRS which frame the preparation of sustainability reports.

What are the ESRS?

The ESRS (European Sustainability Reporting Standards) are rules aimed at framing the preparation of the extra-financial reporting required by the CSRD. It is the EFRAG (European Financial Reporting Advisory Group) which has been appointed as technical adviser to the European Commission to develop them.

These standards specify the information that companies must provide on the impacts, risks and opportunities related to each ESG issue. The aim is to promote better transparency, harmonisation and standardisation with regard to the sustainability reporting of companies at the European level.

Overall, there are three main categories of ESRS:

• The "universal" standards which apply to all companies, regardless of the sector. They include cross-cutting standards, but also thematic standards (environmental, social and governance).
• Specific standards for SMEs listed on regulated markets. 
• Sector-specific standards.

A first set of cross-cutting and thematic standards has already been adopted by the European Commission on July 31, 2023, and published in the Official Journal of the European Union on December 22, 2023

Group	Number and subject	Sub-themes
Cross-cutting standards	ESRS 1: General requirements	Architecture, general principles and concepts of ESRS
	ESRS 2: General disclosures	Governance, strategy, identification and management of impacts, risks and opportunities, indicators and targets
Thematic standards: Environment	ESRS E1: Climate change	Adaptation to climate change, climate change mitigation and energy
	ESRS E2: Pollution	Air, water, soil, living organisms and food resources pollution, substances of concern or of very high concern and microplastics
	ESRS E3: Water and marine resources	Water consumption, water withdrawals, water discharges including into oceans, marine resource extraction and use
	ESRS E4: Biodiversity and ecosystems	Direct drivers of biodiversity loss, impacts on the state of species, as well as the extent and condition of ecosystems, and dependencies and impacts on ecosystem services[NE1]
	ESRS E5: Circular economy	Inflow resources including resource use, outflow product resources and waste
Thematic standards: Social	ESRS S1: Own workforce	Working conditions, equal opportunities and other labour rights
	ESRS S2: Workers in the value chain	Working conditions, equal opportunities and other labour rights
	ESRS S3: Affected communities	Economic, social, cultural, civil and political rights of communities, indigenous peoples’ rights
	ESRS S4: Consumers and end-users	Impacts related to consumer and end-user information, safety and social inclusion
Thematic standards: Governance	ESRS G1: Business conduct	Corporate culture, whistleblowing protection, animal welfare, political engagement and lobbying, supplier management including payment practices, corruption and bribery

 

Other standards, notably those specific to SMEs and sector-specific, will be gradually developed and adopted by the European Commission.

It is important to note that the thematic standards are generally structured into several sub-themes. They also include disclosure requirements (e.g. water consumption) and datapoints (e.g. total water consumption in m3). "One of the methodological challenges will be to collect the data, make it reliable and be able to trace it so that we can rely on it to carry out our measurements," emphasises Fabienne Ménard.

Within this reporting framework, companies have an obligation to provide general disclosures (ESRS 2). For all other standards, as well as the disclosure requirements and datapoints, they must rely on their double materiality assessment to determine the relevant topics that must be taken into account and published.

Ultimately, the CSRD and the ESRS that frame it constitute a major step towards greater transparency and harmonised communication of ESG information within the EU. Today more than ever, companies need to understand these reporting standards to meet increasing regulatory requirements, improve their sustainability performance, but also strengthen stakeholder confidence and their market position. In this respect, Fabienne Ménard reminds us of the essentials: "This is a project that concerns the entire company and must be driven by management. Companies must integrate CSR into their strategies in one way or another, with sustainability being embedded in their overall culture and ambition."