The complete guide to ESRS in 2024

What is ESRS?

ESRS stands for European Sustainability Reporting Standards and is a set of standards developed by the European Financial Reporting Advisory Group (EFRAG) on behalf of the European Commission. These standards aim to harmonize and improve the quality of sustainability reporting among companies in Europe. ESRS is part of the broader Corporate Sustainability Reporting Directive (CSRD), which was adopted by the EU in 2021 and will be implemented gradually over the coming years. Already from the financial year 2024, these reporting standards must be implemented in larger companies within the EU.

Double materiality analysis

A double materiality assessment forms the basis for your work with sustainability and reporting of non-financial key figures. It is therefore one of the first steps you should take when working with ESG.

It's important to point out that you don't have to report on all the categories in ESRS. The company must perform a double materiality analysis and then assess which key figures are relevant to work and report on.

The analysis involves two dimensions: financial materiality, which assesses how sustainability issues affect the company's financial performance, and impact materiality, which looks at the company's impact on the environment and society.

Follow these steps when doing your dual materiality analysis:

1. Identifying relevant topics: First, identify a broad range of potentially material environmental, social and governance (ESG) topics. This can be done by reviewing existing reports, industry best practices, regulatory requirements, and stakeholder input.
2. Stakeholder engagement: Next, both internal and external stakeholders are engaged through interviews, questionnaires and workshops to get their views on which ESG topics are most important. Internal stakeholders can include management and employees, while external stakeholders can include customers, suppliers, investors, NGOs and authorities.
3. Financial materiality assessment: Issues are assessed based on their potential financial impact on the business. This includes analyzing risks and opportunities that could affect the company's financial performance, such as reputational risks, regulatory changes, and market conditions.
4. Impact materiality assessment: Topics are also assessed based on their impact on the environment and society. This analyzes how the company's activities affect external factors such as climate change, biodiversity, human rights and local communities.
5. Combining results: The results from both the financial and impact assessment are combined to create an overall picture of materiality. This can be illustrated in a double materiality matrix, where the most material topics are identified as those that have high importance in both dimensions.
6. Prioritization and decision-making: Based on the analysis, the most material topics are prioritized and decisions are made on which ESRS requirements to work with and report on. This ensures that the company's sustainability reporting is focused on the most relevant and important topics.

This structured approach ensures that the company's sustainability efforts and reporting are well founded and aligned with both internal and external expectations and requirements.

Review of ESRS

The ESRS consists of four categories with subcategories that need to be accounted for:

Specific key information and requirements for each standard

• Policies and strategies: Description of relevant policies and strategies to address identified risks and opportunities.
• Goals: Specific goals and performance indicators related to each standard.
• Activities: Description of activities and initiatives implemented to achieve the goals.
• Resources: Resources allocated to implement policies and achieve goals.
• Risks and opportunities: Identification and assessment of significant risks and opportunities.
• Quantitative and qualitative data: Collecting and presenting relevant data and metrics.
• Stakeholder engagement: Description of engagement with relevant stakeholders and their input.

Timelines and transition periods

• Transition periods: Implementation of the requirements may include transition periods where certain disclosure requirements are phased in gradually.
• Updates and revisions: The regulation is expected to be reviewed and updated regularly to adapt to new developments and requirements.

Incorporating ESRS into reporting

To ensure clear and structured reporting, the following approach should be followed:

1. Separate section for general requirements and general information:
   • Create a separate section in the sustainability report that outlines the general requirements (ESRS 1) and general information (ESRS 2).
   • This section should provide an overall context and understanding of the company's approach to sustainability and the basic principles and structures that guide reporting.
2. Specific sections for each category:
   • Create separate sections for each of the specific standards (E1-5, S1-4, G1)
   • These sections shall include detailed reporting on the respective environmental, social and governance topics.
3. Integrated reporting:
   • Ensure that the general requirements and disclosures (from ESRS 1 and 2) are integrated in a way that supports and contextualizes the specific reporting under the E, S, and G standards.
   • Use references between the general and specific sections to create a coherent narrative and facilitate reader understanding.

ESRS 1: General requirements

ESRS sets stricter requirements for sustainability reporting and is an extension of the traditional approach to ESG reporting. The requirements include both a description of the value chain and what the company's own activities cover. There must also be a double materiality analysis, which covers the financial significance for the company and the impact the company's activities have on the environment and people. The general requirements are as follows:

• Scope: Covers both the company's own activities and the entire value chain.
• Double materiality: Assess the materiality of both environmental and human impacts (impact materiality) and financial materiality by performing a double materiality analysis.
• Report content: Description of management structure, strategy, business model, policies, goals, impacts, risks, and opportunities (IRO - Impact, Risks, and Opportunities).
• Presentation: The sustainability report must be presented in the annual report's management review.

ESRS 2: General information

In the general information, you must provide information about the company's work with the entire ESG area, with a particular focus on strategy and value chain, stakeholders of importance and management of the company:

• Strategy and value chain: Description of the company's main influences, opportunities, risks, business model, and value chain.
• Stakeholders: Identifying key stakeholders and their views.
• Management: Description of sustainability leadership, management involvement in sustainability, and any remuneration based on sustainability goals.
• Disclosure requirements: Strategy, business model, value chain, market position, stakeholders, due diligence (eventually in line with CSDDD), risk management, and internal controls.

ESRS E1: Climate change

When your company reports on climate, you must, among other things, address how you are actively working to achieve the Paris Agreement's requirement to keep global warming below 1.5 degrees Celsius. You must also report in both scope 1, 2 and 3.

In E1 you need to explain the following:

• Emissions: Reporting of scope 1, 2, and 3 emissions.
• Risks and opportunities: Description of significant risks and opportunities associated with climate change.
• Disclosure requirements: Business model change or climate impact mitigation plans, alignment with strategy and business model, impacts, risks and opportunities, policies, activities and resources, emissions and targets, energy consumption and mix, scope 1, 2 and 3 (gross) and total carbon emissions, carbon credit purchases, internal carbon pricing and possible financial effects.

ESRS E2: Pollution

There is a lot to keep in mind when it comes to pollution and reporting on it. According to ESRS, you must disclose the emissions you make to air, water and land. The information should be about current impacts, and also about how you can reduce them. Both within your own company and in your value chain. In addition, you must provide information about microplastics that are generated or used in the company.

In E2 you need to explain the following:

• Pollution sources: Air, water, soil, and use of critical substances.
• LEAP model: Using the model to assess significant pollution areas.
• Zero pollution: Measures to prevent and mitigate pollution.
• Disclosure requirements: Impact, risks and opportunities, policies, activities, resources, pollution, critical substances, and financial effects

ESRS E3: Water and marine resources

A general description of your water consumption, discharges, and generally how you manage your water use. You must also explain your potential impact on the marine environment, either in the company or in the value chain, and how you work to reduce these impacts. If your company is in the fishing industry, be aware that special EU directives apply in this area.

In ESRS E3 you must account for the following:

• Management: Consumption of water and marine resources, protection of the marine environment.
• Recirculated and stored water: Information about water recirculation and storage.
• LEAP model: Applying the water resources assessment model.
• Disclosure requirements: Policies, activities, resources, water usage, targets, and financial impacts

ESRS E4: Biodiversity

Reporting in ESRS E4 should address how your business impacts biodiversity and local ecosystems, and how you respect plant and animal life. Globally, this area is still under development and therefore lacks concrete reporting measures to calculate effects and impacts on ecosystems. The information you need to provide is therefore based on descriptions. You must provide information about what specific measures you are taking and how you as a company are working with it.

In E4 you need to explain the following:

• Protection and restoration: Description of the company's work with biodiversity and ecosystems.
• Business model: Business model dependency on biodiversity.
• LEAP model: Applying the model for biodiversity assessment.
• Disclosure requirements: Policies, activities, resources, impact, and financial effects

ESRS E5: Circular economy

Under ESRS E5, you must provide information about how your company relates to circular initiatives and economy. In particular, you must focus on your resource consumption and waste management. The information must include how you contribute to the circular economy through your value chain. You must distinguish between renewable and non-renewable resources.

In E5 you need to explain the following:

• Resource usage: Description of the use of renewable and non-renewable resources.
• Circularity: Working towards increased circularity in the value chain.
• Waste: Inflow and outflow of resources, including hazardous waste.
• LEAP model: Applying the resource utilization assessment model.
• Disclosure requirements: Policies, activities, resources, resource inflow and outflow, waste, and targets.

ESRS S1: Own employees

ERRS S1 covers many aspects. There is both the classic information about the number of employees, gender distribution, working hours and employment type etc. New reporting requirements that have been added are that conditions and rights for these employees must also be reported.

You also need to report on non-employees that fall under your organization. This could be, for example, consultants who are part of your workforce and management. In addition, you must provide information about social security for employees. This includes collective agreements, terms and conditions, and how health and safety is ensured in the workplace. You must report on the pay gap between men and women, as well as the pay gap between the highest earning person and the average salary in the company.

Diversity reporting requirements are set for both the number of employees with disabilities and diversity in management. The information on diversity differs from the Danish legal requirements. You must therefore report within both Danish legislation and ESRS standards.

In terms of occupational health and safety, you must disclose workplace injuries and accidents, child and forced labor, and incidents of harassment, discrimination and human rights.

In S1 you must explain the following:

• Employee data: Number of employees by gender, employment type, and region.
• Social Security: Collective agreements, employee involvement, and social security.
• Pay: Gender pay gap, ratio between highest and average pay, and adequate pay.
• Diversity: Number of employees with disabilities and diversity in management.
• Work environment: Work accidents, discrimination, harassment, and human rights.
• Disclosure requirements: Policies, processes, collaboration with employees, mitigation of negative impacts, and goals.

ESRS S2: Employees in the value chain

The disclosure requirements in ESRS S2 are about the employees in your value chain and how these employees affect your strategy and business model. The standard focuses on how you as a company have an influence on employee relations through your business partners and how this affects the value chain. Policies in this area must be described comprehensively. It must be possible to assess whether the UN Guiding Principles on Human Rights are being complied with. You should also pay special attention to countries and areas where child labor is common and whether these are included in your value chains. Finally, you must describe the activities and goals you have set to accelerate positive development and reduce negative impacts on employees in the value chain.

In S2 you need to explain the following:

• Working conditions: Conditions in the value chain, including rights, working conditions, and fair pay.
• Risks: Significant risks and opportunities related to working conditions in the value chain.
• Commitments: Company policies and due diligence to ensure good working conditions.
• Disclosure requirements: Policies, risk assessment, engagement, collaboration with suppliers, mitigation measures, and targets.

ESRS S3: Surrounding communities

The description of the surrounding community should provide insight into the significant impacts on economic, social and cultural conditions that stem from your activities and value chain. This also includes the impact arising from business partnerships and the use of your products and services.

The standard focuses on access to clean drinking water and sanitation, decent housing, the rights of citizens to assemble and freedom of expression, and the rights of indigenous peoples. You need to pay close attention to the indigenous people in the surrounding community. The description should show how the indigenous people are affected. You should also write how the indigenous people are affected, if any water has been polluted or if the installation of a solar farm has consequences for the surrounding community, etc.

In S3 you need to explain the following:

• Impact: Impact on local communities, including economic, social and environmental.
• Stakeholders: Engaging with local communities and identifying key interests.
• Risks: Description of significant risks to local communities and mitigation measures.
• Disclosure requirements: Policies, risk assessment, engagement, social investment, and goals.

ESRS S4: Consumers and end users

In S4, the focus is on the consumer and end user. Here you must provide information on how significant impacts on consumers and end-users. For example, their health, safety, privacy, protection of children and against discrimination. This impact can come both from your own products and services and through business partnerships.

In S4 you need to explain the following:

• Consumer safety: Product safety, quality and customer satisfaction.
• Data: Personal data protection and privacy.
• Access: Improved access to products and services, especially for vulnerable groups.
• Disclosure requirements: Policies, risk assessment, engagement, product liability, data and privacy protection, and goals.

ESRS G1: Company management

ESRS G1 is about good business practices, among other things. Here, you are expected to provide information about how you will actively fight corruption, how your company culture is put together and the ethical guidelines. The information must include both the board and the management.

The general description should include a whistleblower scheme, how you work with stakeholders, how you promote your company culture, ethics, and how your code of conduct aligns with your policies.

The standard only requires detailed information about e.g. corruption if this information is already publicly known. This could, for example, be due to a court case. There are also requirements for information about lobbying activities and how these activities interact with your key influences, risks and opportunities. Finally, you must also disclose your political influence and political contributions.

Finally, you must disclose the collaboration between your suppliers that are SMEs and what payment terms you give these suppliers.

In G1 you must explain the following:

• Governance structure: Board composition, competencies, and committees.
• Business ethics: Ethics, anti-corruption, and compliance policies.
• Risk and internal control: Risk management and internal control systems.
• Stakeholders: Stakeholder engagement and reporting.
• Disclosure requirements: Policies, risk assessment, governance structure, engagement, code of conduct, and goals.

This summary covers the key points of the ESRS standards and provides an overview of the requirements and expectations that companies must meet in their sustainability reporting. If you need further details or specific information on individual requirements, it is a good idea to consult the full texts of the ESRS documents. On the site you will also find explanatory videos about the different categories and standards.

ESRS for SMEs

Please note that CSRD and the associated ESRS standard only apply to large companies. If you have fewer than 250 employees, the reporting requirements are more relaxed.

We see a general trend of requirements for smaller and smaller companies, and if you want to stay ahead of upcoming regulations, it's a good idea to stay updated on the reporting requirements for large companies.

Every year, more regulations are introduced at EU level that set requirements for companies' sustainability reporting. We see a general trend of requirements for smaller and smaller companies, and if you want to stay ahead of upcoming regulations, it's a good idea to stay updated on the reporting requirements for large companies.

The EU is already well underway with developing sustainability reporting standardization for SMEs. It's called VSME and it's very similar to ESRS, which we've covered here, but there are fewer specific standards to account for. You can access the latest VSME draft here.

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