As we have written about previously on our blog, the new Corporate Sustainability Reporting Directive (CSRD) and the related European Sustainability Reporting Standards (ESRS) will require all companies in the EU with more than 250 employees or meeting other financial criteria to publish a sustainability report in 2026. But what does that actually entail? How should such a report look? This article will answer that question, laying out the steps required to prepare your first sustainability report in alignment with the requirements of the ESRS.
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Non-financial reports, or sustainability reports, must share the same scope and time horizon as financial reports, in the case the company is already doing financial reporting. In addition, ESRS reports must also include information about the company’s impact, risks and opportunities relating to its full upstream and downstream value chain. Companies will have to define which parts of the value chain are in the scope of the report. Time horizons used in the report (short, medium and long-term) must also be defined.
A double materiality assessment, which we have described in previous posts, is the basis of every sustainability report. It is the way that companies will find out which of the 10 sustainability topics in the ESRS to report on. Double materiality has two parts, impact materiality and financial materiality.
Impact materiality is about understanding the external impacts that your company and its value chain have, otherwise known as your externalities. This can partially be achieved through sustainability due diligence, which is the act of engaging with impacted stakeholders or their representatives to understand how your company is impacting them. For environmental issues, an in-depth environmental impact assessment is one of the best ways to understand and quantify your impacts on nature, ranging from your emissions, water use, impact on ecosystems and resource use. Impact materiality is the starting point of a double materiality assessment, followed by financial materiality.
Financial materiality is about understanding the financial risks and opportunities your company and its value chain face as a result of issues relating to sustainability. The reason financial materiality follows after impact materiality is because the material externalities you identified (your “impacts”) can turn into financial risks or opportunities for your company. For example, a negative externality impacting the environment can materialize as a reputational and regulatory risk that will cost the company money as a result of lost business and sanctions. In addition to your company’s externalities, risks can also stem from your dependencies on resources, whether those be natural, human, or financial resources. However, sustainability issues do not only pose risks, but also financial opportunities. These can take the form of cost savings, productivity gains and new revenue streams.
The ESRS provides a list of topics, subtopics and sub-subtopics that can form the starting point of your double materiality assessment. Any of those topics are considered material for reporting if they are found to be material from either an impact or risk point of view. Companies may also add “entity-specific” topics to the list to reflect their specific circumstances or industry. The assessment of materiality should be done in as objective a way as possible, with all assumptions and “scoring” of materiality done in a transparent way that could be understood by a third party, such as an auditor. EFRAG has provided a double materiality implementation guide to help companies in this process.
EFRAG will also make the first drafts of sector standards available in early 2025, which will help companies in specific sectors to identify material topics. The first sector standards will include oil, gas, mining and coal, and later the financial sector.
Once you know which issues are material to your business, you can then complete a gap analysis to see if you are collecting all of the required indicators relating to that issue. As mentioned above, ESRS provides a list of sustainability topics, subtopics and sub-subtopics, and each of these is associated with indicators, whose reporting is required if the topic is material. Some of these indicators are qualitative and some are quantitative. For “entity-specific” topics that are added by companies, the company must define their own indicators.
In practice, a gap analysis requires going through the requirements of the ESRS, datapoint by datapoint, to see if the company is collecting or reporting the required data. For companies that are already doing ESG reports, this gap analysis can be done by going through the latest report. For companies who are new to ESG, it will require reaching out to specialists throughout the company to inquire about what data is being collected or reported. It is likely that at least some data will already be available as it is required by law or is already being used by management to improve efficiencies or, in the case of HR data, track employee trends.
Once the gap analysis is complete, data collection can begin. The ESRS provides detailed instructions on how each indicator should be reported, to facilitate comparability between company sustainability reports. This includes details such as units, and the required level of granularity. Some indicators must be disaggregated by country of operation and all quantitative metrics require a comparator year. Therefore, existing data collection processes may have to be altered to suit these requirements. For data that is not yet collected, companies will have to set up data collection processes and internal competencies. Large companies will likely have to set up specialized IT systems for unified data collection across the organization. This will streamline the process, ensure transparency, and reduce error.
Once data have been collected, companies can begin preparing their reporting.
Qualitative, or “narrative” indicators include reporting on company policies, action/transition plans, targets and metrics. Companies will have to either state that these documents and activities are not yet in place, or will have to describe what they currently have enforced. Descriptions of policies, action plans, targets and metrics should follow the “Minimum Disclosure Requirements” or “MDRs” that can be found in ESRS 2 General Disclosures. Companies will also have to give an in-depth description of their assessment of financial risks and opportunities, which can be qualitative in the first three years of reporting. From 2028, companies must provide quantitative estimates of financial risks and opportunities.
Quantitative indicators have many formats, from single percentages and numbers to more extensive tables with multiple columns. The ESRS taxonomy mentioned above will provide a template for the more detailed tables that are required. In the meantime, companies can create these tables in Excel using the description of requirements in the ESRS documents. All quantitative indicators must be compared with a previous year. Monetary data should be aligned and/or cross-referenced with financial data from the financial report.
For both qualitative and quantitative indicators, it is essential that report preparers refer back to the ESRS standards for full detailed instructions on how each indicator should be reported.
ESRS reports will have to be reported in a format that is machine-readable. EFRAG has stated that they will provide an ESRS digital taxonomy (a so-called XBRL taxonomy) that will form the basis of this electronic reporting. EFRAG is due to publish a draft for consultation in Q1 2024 and will issue its final recommendation to the European Commission in the second half of 2024. In the meantime, companies can prepare their reports in a clearly structured format that can later be tagged according to the ESRS taxonomy.
The ESRS report should have a specific format. It should have four sections: General Information, Environmental Information, Social Information and Governance Information. Appendix D and Appendix F of ESRS 1 provide examples of how this structure could look in more detail.
Sample ESRS report structure (ESRS 1, Appendix F)
The disclosures from the “General Disclosures” chapter must be reported in the first chapter of the report, except for the disclosures related to material impacts, risks and opportunities of each topic (SBM-3). Disclosures relating to each material topic should be reported separately, within the respective chapter. Each disclosure should be separately identifiable. Information relating to EU Taxonomy reporting should have a clearly delineated section within the Environmental chapter of the report.
As mentioned, it is still not clear if companies will be able to publish their reports in a simple pdf document as is currently the practice, or if they will also have to report the data in a specialized format according to the ESRS taxonomy. We are actively monitoring this and will post updates once available.
Sustainability reports should meet the qualitative characteristics defined in Appendix B of ESRS 1. These characteristics are:
- Relevance: Information should significantly influence the decisions of users by having predictive or confirmatory value.
- Faithful representation: The report must accurately and neutrally depict all necessary details of the impacts, risks, or opportunities.
- Comparability: Information should be consistent and easily comparable with previous periods and other similar entities.
- Verifiability: The report should provide information that can be independently corroborated to ensure its accuracy and completeness.
- Understandability: The report should be clear, concise, and comprehensible to an informed reader, avoiding unnecessary complexity or ambiguity.
Preparing an ESRS report is a demanding multi-stage task that will require months of preparation and the involvement of multiple stakeholders, both internal and external. To read more about the standards, check out our previous article covering everything you need to know about ESRS.