ESRS 1

Sustainability is becoming a central component of business strategy and reporting. Shareholders increasingly prioritize these concerns, and regulatory measures are being introduced to address the critical challenges facing our communities and environment.

The European Sustainability Reporting Standards (ESRS) have been adopted to address reporting on Environmental, Social, and Governance (ESG) issues. These standards impact a wide range of companies, fostering greater accountability and transparency in sustainability reporting. For more details about the standards and their applicability, refer to our article: European Sustainability Reporting Standards

This article focuses on the foundational section within the general cross-cutting standard category, ESRS 1: General Requirements.

Architecture

There are 3 categories within the ESRS framework: cross-cutting standards, topical standards (Environmental, Social, and Governance standards), and sector-specific standards. Cross-cutting and topical standards apply to all reporting companies regardless of business sector. Sector-specific standards address issues (impacts, risks, and opportunities) that are likely to be material within a business sector and are not sufficiently covered by cross-cutting or topical standards. ‍

Drafting Conventions

The ESRS includes drafting conventions designed to help companies identify and disclose material information related to their sustainability impacts, risks and opportunities.

Key Vocabulary and Definitions

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The drafting conventions specify the use and meaning of critical terms, as outlined below:

• Impacts: Material positive and negative sustainability-related impact identified through an impact materiality assessment.
• Risks and Opportunities: Sustainability-related financial risks and opportunities identified through a financial materiality assessment.
• Impacts, Risks, and Opportunities: Reflect the concept of double materiality.

The ESRS standards express different levels of disclosure obligations, using specific terminology to indicate requirements:

• “Shall disclose”: Indicates mandatory disclosures
• “May disclose”: Indicates voluntary disclosures that represent good practice.

By distinguishing between mandatory and voluntary disclosures, and through the lens of double materiality, these ensure both sustainability impacts and financial implications are appropriately addressed. ‍

‍Fundamental Concepts

The concept of double materiality is a cornerstone of ESRS 1, emphasizing the dual focus on sustainability impacts and financial risks and opportunities. This concept is so integral that a separate article has been dedicated to explaining double materiality in detail and how to measure its effect, Double Materiality.

Materiality assessment is critical in ESRS 1. Companies must disclose both their materiality assessment outcomes and the methods used to determine them. They must evaluate the severity of the impact through its scale, scope, and irremediable character. Impacts across the company’s upstream and downstream value chain must also be considered. A sustainability matter is deemed “material” when it meets the criteria for either:

• Impact Materiality: Relates to the company’s significant positive or negative impacts on people or the environment.
• Financial Materiality: Matters that have a material influence or could reasonably be expected to have a material influence on the company’s development, financial position, financial performance, cash flows, access to finance or cost of capital. This includes dependencies, risks, and opportunities that have a material financial effect.
  

When a sustainability matter is determined to be material (either impact material, financial material or both), the company must disclose the information required by the related topical and sector-specific ESRS. If a material topic is not addressed by an ESRS, additional entity-specific disclosures are necessary.

Disaggregation is required in some cases to ensure clarity. Companies may need to present data disaggregated by country, site, or asset to avoid aggregating material items that differ in nature. This ensures that disclosures remain accurate and meaningful.
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Value chain considerations require companies to examine sustainability matters throughout their entire value chain. While it is not necessary to account for every actor in the value chain, companies must include material matters and apply the double materiality approach. Where specific data is unavailable, companies are permitted to estimate using sector-average data or other reasonable methods.

Reporting periods in sustainability statements must align with financial statements, maintaining consistency. Timeframes for considering impacts, risks and opportunities are defined as:

• Short-term: Corresponding to the reporting period in financial statements.
• Medium-term: Extending from the short term up to five years.
• Long-term: Spanning more than five years.

ESRS 1 provides guidelines on classified and sensitive information. A company is not required to disclose information that is not generally known among persons within the circles that normally deal with the kind of information, holds commercial value, or has been kept confidential through reasonable measures. However, this exemption must be used judiciously to balance transparency with protecting proprietary information. ‍

General Presentation Requirements

The sustainability statement must be structured into four sections presented in the following order: general information, environmental information (including information disclosed under the EU Taxonomy), social information, and governance information.

Additional disclosures may be included to comply with other legislation or sustainability reporting standards. These disclosures must be clearly identified with appropriate references and meet the requirements for qualitative characteristics of information in ESRS 1.

Disclosures mandated by sector-specific ESRS should be grouped by reporting area and sustainability topic. These disclosures must be presented alongside ESRS 2 and the corresponding topical ESRS to ensure comprehensive and cohesive reporting.

Sustainability statements must be both human- and machine-readable and enable readers to understand connections between different pieces of information throughout the report. For instance, the statement should clearly link governance, strategy, risk management, metrics, and targets. For example, a company would explain how the company’s strategy influences financial plans or how natural resource use impacts risks, costs, or investments.

If direct connections between the sustainability statement and financial statements are disclosed, companies must reference the specific section of the financial statements. Where indirect connections exist, the company should explain the linkage and identify the relevant financial statement sections. For example, the connection between an actual financial effect (or combination of actual financial effects) in the sustainability report and financial report needs to be explained, demonstrating alignment and integration across reporting frameworks.

Conclusion

The European Reporting Sustainability Reporting Standards represent a significant step toward transparent and accountable sustainability reporting. ESRS 1, as the foundational standard, provides the architecture and guidance necessary for companies to produce comprehensive and meaningful sustainability statements.