Breaking Down the ESRS Standards: A Practical Guide for Business Leaders

As sustainability takes centre stage in corporate strategy, the European Sustainability Reporting Standards (ESRS) emerge as a critical tool under the Corporate Sustainability Reporting Directive (CSRD). ESRS provides businesses with a robust framework to document their environmental, social, and governance (ESG) impacts, ensuring that sustainability reporting meets the expectations of regulators, stakeholders, and society at large.

One of the key challenges in sustainability reporting has been the lack of consistency across industries and regions, making it difficult for stakeholders to assess and compare ESG data. ESRS tackles this issue head-on by introducing a standardised set of guidelines that ensure clarity, transparency, and comparability. By adhering to these standards, companies not only enhance their accountability but also build trust with investors, consumers, and other stakeholders.

This blog post aims to demystify the ESRS framework, exploring its three key pillars—environmental, social, and governance. We’ll delve into the materiality assessments that help businesses focus on what truly matters, ensuring they report on issues with the greatest impact. Finally, we’ll highlight how Prewave’s solution can streamline data collection and compliance, simplifying the path to achieving sustainability goals while meeting regulatory requirements.

Let’s break down ESRS and understand how it can transform the way businesses approach ESG reporting.

What is the ESRS?

The European Sustainability Reporting Standards (ESRS) are a comprehensive framework designed to standardise the way companies report on sustainability. Developed as part of the Corporate Sustainability Reporting Directive (CSRD), ESRS aligns corporate reporting with the EU’s overarching goals of promoting transparency, accountability, and sustainability in business practices. By setting clear and detailed criteria, ESRS ensures that organisations can effectively disclose their environmental, social, and governance (ESG) impacts consistently.

How ESRS Fits into CSRD Goals

The CSRD aims to create a level playing field for sustainability reporting across the EU, enabling businesses, investors, and other stakeholders to make informed decisions based on reliable ESG data. ESRS serves as the cornerstone of this directive by providing companies with a structured approach to document how their operations affect the environment, society, and governance structures. The ultimate goal is to enhance the credibility and comparability of sustainability information across sectors and regions, fostering a greener and more socially responsible economy.

Reporting Requirements Under ESRS

ESRS requires companies to disclose material information related to:

• Environmental: Impacts on climate, natural resources, and biodiversity.
• Social: Effects on employees, communities, and broader societal well-being.
• Governance: Practices related to decision-making, ethics, and risk management.

A key focus of ESRS is materiality, ensuring that businesses prioritise reporting on impacts, risks, and opportunities most relevant to their operations and stakeholders. Companies must demonstrate how these elements are managed, mitigated, or leveraged to align with sustainability goals, offering a transparent account of their performance and future strategies.

By adhering to ESRS, organisations not only comply with regulatory mandates but also position themselves as leaders in sustainability, fostering trust and long-term value creation.

Overview of the ESRS Structure

The European Sustainability Reporting Standards (ESRS) are organised into 12 standards, divided across three primary categories: environmental, social, and governance. This structure ensures that sustainability reporting is both comprehensive and focused, addressing the most critical aspects of ESG impacts.

Cross-Cutting Standards

At the heart of the ESRS framework are two foundational standards—ESRS 1 and ESRS 2—that establish the general requirements and disclosure expectations for companies. These standards set the stage for effective and consistent ESG reporting:

• ESRS 1 (General Requirements)
  This standard outlines the core principles for sustainability reporting, emphasising:
  • Double Materiality: Companies must evaluate and report on sustainability topics from both societal and business perspectives, considering their impacts on stakeholders and their own financial resilience.
  • Value Chain Integration: Organisations are required to capture ESG data across their entire value chain, not just within their direct operations.
  • Boundary Setting: ESRS 1 provides guidance on defining reporting boundaries to ensure comprehensive coverage of material topics.
    

• ESRS 2 (General Disclosures)
  Serving as the backbone of ESG reporting, this standard establishes disclosure requirements related to:
  • Governance: Structures and processes for decision-making and oversight.
  • Strategy: How ESG issues are integrated into business strategies and operations.
  • Impact Management: Methods for identifying, addressing, and mitigating ESG impacts.
  • Metrics and Targets: Quantifiable measures and goals to track progress on ESG initiatives.

Topical Standards

Beyond the cross-cutting standards, ESRS includes ten additional topical standards that delve into specific aspects of ESG reporting:

• Environmental: Standards addressing climate change, pollution, water and marine resources, biodiversity, and resource use.
• Social: Standards covering workforce issues, human rights, and community impacts.
• Governance: Standards focused on business conduct, risk management, and transparency.

These topical standards ensure that businesses provide a complete and detailed account of their sustainability performance, tailored to the unique challenges and opportunities in each area. By combining general and topical standards, the ESRS framework delivers a comprehensive blueprint for ESG reporting that aligns with the needs of stakeholders and regulatory requirements alike.

Environmental Standards (E1-E5)

The Environmental Standards of ESRS address key aspects of a company’s environmental impact, providing detailed reporting requirements that ensure accountability and promote sustainable practices. These standards are divided into five specific areas:

E1: Climate Change

The Climate Change standard focuses on how companies contribute to and manage the risks associated with climate change. Reporting requirements include:

• Greenhouse Gas (GHG) Emissions: Comprehensive data on Scope 1, 2, and, where applicable, Scope 3 emissions.
  
• Carbon Reduction Targets: Disclosure of science-based or other recognised targets for reducing emissions, including timelines and progress updates.
  
• Climate Resilience: Strategies for adapting to and mitigating the physical and transitional risks posed by climate change, such as extreme weather events and regulatory shifts.

E2: Pollution

The Pollution standard addresses the management and reduction of pollutants. Companies must:

• Collect and report data on emissions to air, water, and soil, including hazardous substances, heavy metals, and microplastics.
  
• Outline measures taken to reduce and manage pollution across operations and the value chain.
  
• Highlight compliance with regulatory limits and any remedial actions for past pollution.

E3: Water and Marine Resources

This standard emphasises the sustainable management of water resources and the preservation of marine ecosystems. Companies are required to:

• Report on water use, including consumption, withdrawal, and discharge data, and their implications for local water systems.
  
• Implement and disclose water conservation practices, especially in water-scarce or high-stress regions.
  
• Conduct risk assessments to identify and mitigate potential impacts on water and marine resources, such as pollution runoff or over-extraction.

E4: Biodiversity and Ecosystems

The Biodiversity and Ecosystems standard focuses on safeguarding natural habitats and ecosystems. Reporting must include:

• Impacts on biodiversity, including the destruction of habitats or endangerment of species.
  
• Efforts in habitat preservation and partnerships with conservation organisations.
  
• Actions for ecosystem restoration, such as reforestation or wetland rehabilitation, and their measurable outcomes.

E5: Circular Economy

The Circular Economy standard promotes resource efficiency and waste reduction through sustainable practices. Companies are encouraged to:

• Report on measures for improving resource efficiency, such as reducing raw material use and increasing the share of recycled inputs.
  
• Provide data on waste reduction initiatives, including recycling rates and landfill diversion.
  
• Outline practices in sustainable product design that extend product lifecycles and minimise waste, fostering a circular economy within their operations and across their supply chains.

Why Environmental Standards Matter

These five standards ensure that companies comprehensively address their environmental impacts, align with global sustainability goals, and meet the expectations of stakeholders. By adhering to these standards, organisations demonstrate a commitment to environmental stewardship and long-term value creation.

Social Standards (S1-S4)

The Social Standards of ESRS guide companies in addressing and reporting their impacts on people, both within and beyond their organisations. These standards cover four critical dimensions of social responsibility, ensuring that companies prioritise human rights, fair treatment, and community well-being.

S1: Own Workforce

The Own Workforce standard focuses on labour practices and the overall well-being of employees. Companies must report on:

• Labour practices: Policies and practices related to fair employment, working conditions, and employee rights.
  
• Diversity metrics: Representation across gender, ethnicity, disability, and other key dimensions of diversity, and measures to promote inclusivity.
  
• Workforce health and safety: Data on workplace incidents, safety training, and health programs to ensure a safe working environment.
  
• Employee well-being: Initiatives to support mental health, work-life balance, and professional development opportunities.

S2: Workers in the Value Chain

This standard expands the focus to include workers throughout the company’s value chain, emphasising fair and ethical labour practices. Companies are required to:

• Assess and report on labour conditions within supply chains, including working hours, safety, and job security.
  
• Ensure fair wages and compliance with living wage standards across the value chain.
  
• Protect workers’ rights, such as freedom of association, collective bargaining, and freedom from forced or child labour.

S3: Affected Communities

The Affected Communities standard highlights the company’s role in supporting and respecting the rights and well-being of local communities. Reporting requirements include:

• Community engagement practices: Efforts to engage stakeholders and incorporate their feedback in decision-making processes.
  
• Local economic contributions: Investments in local economies through employment, sourcing, and community development initiatives.
  
• Mitigation of social disruptions: Steps taken to address negative impacts on communities, such as displacement, resource conflicts, or environmental degradation.

S4: Consumers and End-Users

This standard focuses on the company’s responsibility toward the individuals who use its products or services. Reporting must include:

• Product safety: Measures to ensure the safety and quality of products and services throughout their lifecycle.
• Responsible marketing practices: Transparency and honesty in advertising, ensuring ethical communication with consumers.
• Consumer rights: Policies to safeguard data privacy, enable informed choices, and address complaints effectively.

Governance Standards (G1)

The Governance Standard (G1) in the ESRS framework emphasises the importance of ethical business conduct, transparency, and accountability. It ensures companies maintain integrity in their operations, comply with laws and regulations, and foster trust with stakeholders.

Core Focus

The G1 standard requires organisations to establish and disclose practices that uphold ethical behaviour and prevent corruption. Key areas of focus include:

• Ethical business practices: Implementing robust governance policies to ensure fairness, integrity, and accountability in decision-making processes.
• Anti-corruption policies: Developing and enforcing measures to prevent bribery, fraud, and corruption across all operations and interactions.
• Political engagement: Transparency around political contributions, lobbying efforts, and relationships with policymakers.
• Transparency: Full disclosure of governance structures, decision-making processes, and compliance practices to stakeholders.

Disclosure Requirements

To align with G1, companies must report on:

• Bribery prevention policies: Details of anti-bribery measures, training programs, and internal controls to mitigate corruption risks.
• Stakeholder relations: Practices for engaging with stakeholders, fostering open communication, and addressing grievances or concerns.
• Non-compliance incidents: A record of any violations related to business ethics, corruption, or compliance, including actions taken to address and prevent future occurrences.

Implementing ESRS for CSRD Compliance

Materiality Assessments

The ESRS framework introduces the double materiality approach, requiring companies to evaluate their impacts from two key perspectives:

• Impact materiality: How the company’s activities affect society, the environment, and broader sustainability goals.
• Financial materiality: How sustainability issues influence the company’s financial performance, risks, and value creation.

Double materiality ensures that companies comprehensively address their sustainability impacts while also considering the risks and opportunities these issues pose to their business.

Key Assessment Areas
To comply with ESRS, companies must define:

• Assessment methods: Use standardised tools and methodologies to identify and prioritize material topics, such as stakeholder engagement, scenario analysis, and risk mapping.
• Thresholds: Establish clear criteria to determine the significance of identified impacts or risks.
• Judgement criteria for assurance: Develop transparent and defensible criteria to facilitate third-party validation of materiality assessments.

Data Collection and Management

Data Collection Protocols

To ensure consistent and reliable reporting, companies must:

• Implement standardised methods for data collection across all business units and subsidiaries.
• Ensure alignment with ESRS standards to guarantee consistency in measurement and reporting.

Reliable Information Systems

Robust information systems are essential for:

• Data management: Tracking, calculating, and storing ESG data securely and accurately.
• Validation: Automating error checks and ensuring compliance with established protocols.

Data Validation

To maintain high data quality:

• Conduct regular reviews of data and processes to identify discrepancies.
• Use tools that are compatible with existing reporting structures to simplify integration and streamline validation efforts.

Reporting Structure and Content

Alignment with ESRS 2

Companies must organise their disclosures into the four main sections outlined in ESRS 2:

1. General information: Overview of the company and its governance of sustainability topics.
2. Environmental disclosures: Detailed reporting on climate, pollution, biodiversity, water, and the circular economy.
3. Social disclosures: Reporting on workforce, value chain workers, affected communities, and consumers.
4. Governance disclosures: Business conduct, anti-corruption, and governance structures.

Controls and Validation

To ensure the accuracy and completeness of disclosures:

• Implement internal controls for data verification.
• Schedule periodic reviews to audit the completeness and quality of ESG reports.

Third-Party Assurance Requirements

Mandatory Verification

Starting in 2025, companies must have their sustainability reports verified by independent third-party assurance providers. This requirement aims to enhance the credibility and reliability of ESG data.

Documentation and Control

To prepare for third-party assurance:

• Maintain thorough documentation of data sources, calculations, and methodologies.
• Establish clear audit trails that allow external reviewers to trace and validate reported data.
• Develop internal processes that support external verification, including clear roles and responsibilities for sustainability reporting.

These structured approaches to materiality assessments, data management, reporting, and third-party assurance ensure companies can meet ESRS requirements while building trust with stakeholders through accurate and transparent sustainability disclosures.

Preparing for CSRD Audits and Assurance

With the Corporate Sustainability Reporting Directive (CSRD) introducing stringent requirements for sustainability reporting, businesses must proactively prepare for audits and third-party assurance. Establishing robust internal processes and aligning with ESRS standards are critical to ensuring compliance and building stakeholder trust.

Third-Party Verification Requirements

Phased assurance

Starting in January 2025, companies will need to secure limited assurance for their sustainability reports, with reasonable assurance expected in subsequent years. Member states will provide additional detailed requirements as the directive progresses.

Assurance aspects

Third-party assurance will focus on key elements, including:

• Scope: Verification of sustainability statements, including environmental, social, and governance disclosures.
• Timeline: Assurance processes must be completed within 4–6 months post-reporting to meet regulatory deadlines.
• Documentation of double materiality processes: Auditors will review the company’s methodologies for assessing impact materiality and financial materiality, as well as stakeholder engagement records.

Internal Controls and Documentation

Comprehensive and organised documentation is essential for both internal reviews and external audits. Companies should maintain:

• Data sources: Clearly identify the origin of ESG data, ensuring traceability and accuracy.
• Double materiality methods: Provide detailed records of the criteria and tools used for assessing materiality.
• Stakeholder input: Document engagement with stakeholders, including feedback and its integration into the reporting process.
• Audit trails: Establish transparent records that enable auditors to verify the accuracy and completeness of reported data.

Regular Internal Audits

Conducting quarterly internal audits helps companies identify and address documentation or compliance gaps before formal assurance processes. Dedicated audit teams can:

• Review the quality and consistency of ESG data.
• Validate alignment with ESRS standards and CSRD requirements.
• Flag and resolve discrepancies or weaknesses in reporting methodologies.

Addressing Gaps and Improving Reporting Quality

Gap Analysis

Performing a gap analysis is a critical step in ensuring compliance with CSRD and ESRS standards. Companies should:

• Evaluate current reporting practices against ESRS requirements.
• Identify deficiencies in metrics, indicators, and disclosures.
• Implement corrective measures to align with global reporting standards, such as GRI or ISSB frameworks.

Data Systems

Effective ESG reporting requires robust systems capable of handling large volumes of data. Companies should:

• Invest in software solutions designed for ESG data collection, management, and analysis.
• Ensure systems can integrate data from diverse sources, including value chain partners.

Continuous Quality Control

Maintaining high reporting quality requires ongoing diligence. Companies should:

• Conduct periodic checks to validate data accuracy and consistency.
• Implement clear record-keeping practices to document progress and decisions transparently.
• Foster a culture of accountability, where teams are trained and incentivised to prioritise data quality.

By implementing strong internal controls, addressing reporting gaps, and preparing for third-party assurance, businesses can navigate the complexities of CSRD audits with confidence, ensuring both compliance and credibility in their sustainability reporting.

Final Thoughts

The European Sustainability Reporting Standards (ESRS) are transforming how companies approach sustainability, setting a new benchmark for transparency, consistency, and accountability in corporate reporting. These standards play a pivotal role in aligning businesses with global sustainability goals while providing stakeholders with the clarity they need to make informed decisions.

The ESRS framework is not just about compliance—it is about creating a shared language for sustainability. By standardising how companies document their environmental, social, and governance (ESG) impacts, the ESRS ensures that reporting is both comparable across sectors and meaningful to stakeholders. This fosters greater trust, drives accountability, and equips businesses to navigate the challenges of a rapidly changing world.

To prepare for the CSRD and ESRS requirements, companies should:

1. Understand and prioritise relevant standards: Identify which ESRS categories are most material to your business operations, and begin integrating their requirements into your reporting practices.
2. Streamline reporting: Leverage tools like Prewave to simplify data collection, enhance compliance, and manage ESG reporting effectively.

Proactive and thorough ESG reporting is not just a regulatory obligation; it is a strategic advantage. As the EU moves toward a standardised and transparent sustainable business environment, companies that embrace ESRS reporting will build resilience, enhance stakeholder trust, and secure their place as leaders in sustainability. Now is the time to align your operations with this transformative vision for a sustainable future.

Ready to streamline your ESRS data collection? Discover how Prewave can simplify your CSRD compliance journey—talk to an expert today!