Navigating ESRS: Essential Guide to CSRD Reporting for Companies (Part 1)

A Comprehensive Walkthrough of ESRS1 Requirements and Practical Implementation Strategies

Part 1: Understanding Materiality and Mandatory Disclosures

As companies prepare to meet the requirements of the Corporate Sustainability Reporting Directive (CSRD), understanding the European Sustainability Reporting Standards (ESRS) becomes crucial. In this series, we'll break down ESRS, the foundational standard that sets the general requirements for sustainability reporting under CSRD.

This first part focuses on two critical aspects of ESRS: the concept of double materiality and mandatory disclosures. After reading this post, you'll understand how to determine what your company needs to report under ESRS and what to omit, based on the principles of double materiality and mandatory disclosures.

In upcoming parts, we'll explore:

• Part 2: Structure and Content of the Sustainability Statement

• Part 3: Time Horizons and Value Chain Reporting

• Part 4: Qualitative Characteristics of Information and Connectivity with Financial Reporting

• Part 5: Practical Implementation Strategies and Tools

Let's dive into the core concepts that will shape your CSRD reporting:

Decoding ESRS: The New Standard in Sustainability Reporting

The European Sustainability Reporting Standards (ESRS) represent a paradigm shift in corporate disclosure. Mandated by the CSRD for sustainability reporting, ESRS aim to create a common language for sustainability reporting across the EU. The ESRS framework consists of:

1. ESRS1: General Requirements

2. ESRS2: General Disclosures

3. Topical Standards:

   • Environmental (E1-E5)

   • Social (S1-S4)

   • Governance (G1)

A glimpse of CSRD AND ESRS

ESRS1, our focus today, lays the groundwork for all sustainability reporting under the CSRD. It defines the fundamental principles and concepts that underpin the entire ESRS framework.

ESRS1: The Blueprint for Comprehensive Sustainability Disclosure

ESRS1 is not just another reporting standard; it's a transformative approach to corporate sustainability disclosure. Here's what your company needs to know to align with ESRS1 requirements:

1. Embracing Double Materiality

At the core of ESRS1 is the concept of double materiality. This dual-lens approach requires companies to consider:

• Impact Materiality: How your operations affect people and the environment.

• Financial Materiality: How sustainability issues impact your financial performance.

This concept directly affects what you need to report. Here's how:

1. You must assess each sustainability topic through both lenses.

2. If a topic is material from either perspective (or both), you need to report on it.

3. If a topic is not material from either perspective, you generally don't need to report on it (with some exceptions, which will be covered in the next section).

For example, if water usage isn't material to your financial performance but significantly impacts local communities, you would need to report on it due to impact materiality. Conversely, if a sustainability issue doesn't have significant impact but could materially affect your financial performance, you would report on it due to financial materiality.

This approach ensures you report on all relevant sustainability matters while avoiding unnecessary disclosures. It allows for a focused, yet comprehensive, sustainability report that reflects your company's unique sustainability profile and sector-specific challenges.

Note: There's an exception for climate change reporting. Even if you assess climate change as non-material, you must provide a detailed explanation of this conclusion.

By applying double materiality, you can streamline your reporting process, focusing resources on the sustainability matters most relevant to your company and its stakeholders.

2. Mandatory Disclosures: Beyond Double Materiality

While double materiality is a key principle in ESRS, certain disclosures are mandatory regardless of your materiality assessment. These requirements ensure a baseline level of sustainability reporting across all companies. Here are the key elements you must report on:

1. General Information (ESRS 2): You must disclose all the information required by ESRS 2, which covers general disclosures about your company's sustainability governance, strategy, and management approach.

2. Materiality Assessment Process: You're required to describe your process for identifying and assessing material impacts, risks, and opportunities (IRO-1 in ESRS 2).

3. Climate Change Reporting: Even if you conclude that climate change is not material to your company, you must provide a detailed explanation of this conclusion, including a forward-looking analysis of potential future materiality.

4. Disclosure on Policies, Actions, and Targets: For topics assessed as material, you must disclose information on related policies, actions, and targets, even if you haven't yet developed these elements. In such cases, you should state this fact and may provide a timeframe for their development.

5. Specific Datapoints: Certain datapoints, particularly those derived from other EU legislation (listed in Appendix B of ESRS 2), must be reported regardless of materiality assessment.

6. Taxonomy Regulation Disclosures: Information required under Article 8 of the EU Taxonomy Regulation must be included in your sustainability statement, separate from ESRS disclosures.

By understanding these mandatory requirements, you can ensure your sustainability report meets all necessary baseline disclosures, providing a comprehensive view of your sustainability efforts even in areas you might not have identified as material through the double materiality assessment.

3. What to Omit: Maintaining Focus and Protecting Sensitive Information

While comprehensive, ESRS also provides guidance on what to exclude from your sustainability report:

1. Non-material information

2. Classified or sensitive information

3. Specific details about intellectual property or trade secrets

By focusing on material, non-sensitive information, your report remains concise and protective of your company's interests.

Simplifying CSRD Compliance with ESGKit

While ESRS1 sets a high bar for sustainability reporting, tools like ESGKit can significantly streamline the process. ESGKit offers an efficient solution for CSRD reporting by:

1. Aligning seamlessly with ESRS requirements

2. Providing an LLM powered intuitive interface for data input

3. Automating complex calculations and report generation

4. Ensuring up-to-date compliance with evolving standards

By leveraging ESGKit, companies can transform the potentially daunting task of CSRD reporting into a manageable, even insightful, process.

Closing Thoughts: Preparing for Comprehensive Sustainability Reporting

Understanding double materiality and mandatory disclosures is just the beginning of your ESRS1 journey. These concepts form the foundation of a more comprehensive, transparent approach to sustainability reporting.

As you prepare for CSRD compliance, keep in mind:

1. Double materiality will help you focus your reporting on what truly matters for your company and its stakeholders.

2. Mandatory disclosures ensure a baseline of comparability across companies, regardless of sector or size.

3. This new approach may require changes to your data collection and reporting processes.

In our next installment, we'll explore the structure and content requirements for your sustainability statement under ESRS1. Stay tuned to ensure you're fully prepared for the new era of sustainability reporting.

Remember, while CSRD reporting may seem daunting, it's an opportunity to showcase your company's commitment to sustainability and create long-term value. With the right understanding and tools, you can turn this regulatory requirement into a strategic advantage.