The European Sustainability Reporting Standards (ESRS) represent a fundamental shift in non-financial disclosure, mandated by the Corporate Sustainability Reporting Directive (CSRD). At the core of this new framework is ESRS 1, "General Requirements." This standard sets the foundational principles that govern the preparation and presentation of all sustainability information, ensuring reports are comparable, reliable, and relevant.
Understanding ESRS 1 is not just a matter of compliance; it is the first step for any organization aiming to create a robust and transparent sustainability report. This guide breaks down the key concepts of ESRS 1, providing a clear and operational framework for its application.
The Role of ESRS 1 in the Reporting Framework
ESRS 1 serves as the instruction manual for the entire set of standards. It does not introduce specific disclosure requirements on its own but establishes the mandatory rules and principles that apply to all topical standards (Environmental, Social, and Governance). Its primary function is to ensure consistency and quality across all reported sustainability information.
The standard outlines the architecture of the sustainability statement, defines key concepts, and provides guidelines for structuring the report. Adhering to ESRS 1 is essential for achieving compliance with the CSRD.
Key Concepts Defined by ESRS 1
ESRS 1 introduces and clarifies several foundational concepts that are central to the new reporting paradigm. Mastering these concepts is crucial for a correct application of all other ESRS standards.
Double Materiality
The principle of double materiality is the cornerstone of the ESRS framework. It requires companies to assess and report on sustainability matters from two distinct perspectives:
- Impact Materiality: This perspective focuses on the company's impacts on the environment and people. An issue is considered material if it relates to the company's actual or potential, positive or negative impacts on sustainability matters in the short, medium, or long term. This is an "inside-out" view.
- Financial Materiality: This perspective considers how sustainability matters create financial risks and opportunities for the company itself. A sustainability matter is financially material if it could reasonably be expected to affect the company's financial position, performance, cash flows, or cost of capital. This is an "outside-in" view.
A topic is material, and therefore must be included in the report, if it is material from either an impact perspective, a financial perspective, or both.
The Value Chain
ESRS 1 mandates that sustainability reporting must cover the entire value chain. This means a company must consider the impacts, risks, and opportunities related to its own operations as well as those connected to its upstream and downstream business relationships. This includes suppliers, customers, distribution partners, and other entities.
This comprehensive approach ensures that the sustainability statement provides a complete picture, preventing companies from overlooking significant impacts that occur outside their direct operational control.
Due Diligence
The concept of due diligence is deeply integrated into the ESRS framework. It refers to the process through which an organization identifies, prevents, mitigates, and accounts for its negative impacts on the environment and human rights. This process, aligned with the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises, requires a proactive approach to managing sustainability issues. Reporting under ESRS must reflect the outcomes of this due diligence process.
Time Horizons
ESRS 1 requires companies to consider different time horizons when reporting on impacts, risks, and opportunities:
- Short-term: The reporting period, typically one year.
- Medium-term: Generally considered to be one to five years.
- Long-term: Beyond five years.
This requirement ensures that the sustainability statement provides a forward-looking perspective, capturing issues that may develop over time.
Structure of the Sustainability Statement
ESRS 1 provides a clear structure for organizing the sustainability report, ensuring that information is presented logically and coherently. The report should be divided into four main parts:
- General Information: This section provides context for the report, including the basis of preparation and an overview of the company's strategy and business model.
- Environmental Information (E): Disclosures related to environmental topics such as climate change (ESRS E1), pollution (ESRS E2), and biodiversity (ESRS E4).
- Social Information (S): Information covering social matters, including the company's own workforce (ESRS S1), workers in the value chain (ESRS S2), and consumers (ESRS S4).
- Governance Information (G): Disclosures related to governance practices, primarily focused on business conduct (ESRS G1).
This structure ensures that users of the report can easily find and compare information across different companies.
Qualitative and Quantitative Reporting
ESRS 1 specifies that disclosures must be both qualitative and quantitative. Companies are required not only to present numerical data (e.g., tons of CO2 emitted) but also to provide narrative explanations that give context to the figures. This includes describing policies, actions taken, and targets set.
This combination of data and narrative allows stakeholders to gain a deeper understanding of the company's sustainability performance and its strategic approach to managing ESG issues.
How to Implement ESRS 1
For a company starting its sustainability reporting journey under CSRD, applying ESRS 1 involves several key steps:
- Conduct a Double Materiality Assessment: This is the critical first step to identify which sustainability topics are material and must be reported on.
- Map the Value Chain: Understand the full scope of business relationships to identify potential impacts, risks, and opportunities.
- Integrate Due Diligence: Establish or refine processes for identifying and managing negative impacts.
- Structure Data Collection: Set up systems to gather the necessary qualitative and quantitative data required by the topical ESRS standards for all material issues.
Simplify Your ESRS Reporting
Navigating the requirements of ESRS 1 and the broader CSRD framework can be a demanding task. The complexity of data collection, materiality analysis, and adherence to specific disclosure requirements presents a significant challenge for many organizations.
An ESG software solution can simplify and automate this process. By centralizing data, guiding you through the materiality assessment, and generating compliant reports, a dedicated platform ensures accuracy and efficiency.
Book a demo today to see how our ESG software can support your company in navigating the complexities of ESRS reporting and turning compliance into a strategic advantage.
