5 Minute Guide to CSRD and ESRS

ESGPro Mastery Institute — Viveck Suman, CFA

1. Introduction

This document summarizes key information from the PwC “CSRD book” excerpt, focusing on the structure and application of the Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS). The guide aims to provide a framework for companies to understand and prepare their sustainability statements. It emphasizes the importance of double materiality, minimum disclosure requirements, and the integration of sustainability into business strategy and operations.

2. Core Concepts and Definitions

• CSRD (Corporate Sustainability Reporting Directive): “CSRD sets the framework for sustainability reporting.” It dictates the scope of content, first-time application, scope of application, and assurance requirements. The CSRD is a directive that has been transposed into Norwegian law, for example, the Norwegian Accounting Act.
• ESRS (European Sustainability Reporting Standards): “ESRS specify the reporting requirements.” The standards are categorized into sector-agnostic (cross-cutting and topical), sector-specific, SME-specific, and non-EU company-specific. This guide focuses primarily on sector-agnostic standards.
• Cross-cutting standards: ESRS 1 (General requirements) and ESRS 2 (General disclosures).
• Topical standards: Cover Environmental (E1-E5), Social (S1-S4), and Governance (G1) matters.
• Double Materiality: “ESRS 1 requires a reporting company to conduct a double materiality assessment to determine what to report on.” This includes both the impact materiality perspective (company’s impacts on people and environment) and the financial materiality perspective (risks and opportunities to the company).
• Material Matters: Only sustainability matters that are identified as material through the double materiality assessment need to be reported.
• Minimum Disclosure Requirements (MDRs): ESRS 2 sets out the MDRs for Policies (MDR-P), Actions (MDR-A), Targets (MDR-T), and Metrics (MDR-M). These are applied together with the corresponding disclosure requirements (DRs) and application requirements (ARs) in the topical ESRS.
• “Shall disclose” vs. “May disclose”: “When ESRS use the term ”shall disclose” the company shall disclose the information if it is material. When ESRS use the term “may disclose”, this indicates a voluntary disclosure to encourage good practice.”

3. Structure of the Sustainability Statement

The guide provides a structured approach to preparing the sustainability statement, which should be part of the company’s overall (consolidated) management report.

• General Information Section (ESRS 2):
• Basis for Preparation (1.1): Includes reporting scope, consolidation, value chain information, and any omissions (e.g., intellectual property).
• Governance (1.2): Covers the role of administrative, management, and supervisory bodies, their responsibilities in managing impacts, risks, and opportunities, due diligence processes, and risk management over sustainability reporting. Key quotes include “The materiality assessment should be informed by the company’s due diligence processes, in accord-ance with the definitions set out in the UN Guiding Principles on Business and Human Rights, and the OECD Guidelines for Multinational Enterprises.”
• Strategy (1.3): Includes the business model, value chain, stakeholder interests, material impacts, risks, and opportunities, and how they interact with the company’s strategy. “Connecting business model and strategy with sustainability is a key aspect of CSRD and ESRS…”
• IRO (Impact, Risk, and Opportunity) Management (1.4): Covers the process to identify and assess material impacts, risks, and opportunities, including references to the topical ESRS.
• Environmental Information Section:
• EU Taxonomy (2.1): Disclosures required under Article 8 of the EU Taxonomy Regulation, to be presented clearly and separately. Must report turnover, capital expenditure, and operating expenditure related to sustainable activities.
• ESRS E1 Climate Change (2.2): Covers mitigation and adaptation policies, actions, targets, energy consumption, GHG emissions, and financial impacts. It notes that “ESRS E1 information overlaps in many regards with the recom-mendations of the Task Force on Climate-related Financial Disclosures (TCFD).”
• Other environmental topics (ESRS E2-E5) are mentioned as following a similar structure of policies, actions, metrics, and targets.
• Social Information Section:
• ESRS S1 Own Workforce (3.1): Covers policies, engagement, working conditions, diversity, health & safety, training, compensation, and human rights impacts related to the company’s employees and direct workers.
• Other social topics (ESRS S2-S4) are mentioned with a similar structure.
• Governance Information Section:
• ESRS G1 Business Conduct (4.1): Covers corporate culture, business conduct policies, supplier management, anti-corruption, political influence, and payment practices.

4. Key Disclosure Requirements (DRs)

The document provides detailed outlines for specific ESRS, including:

• ESRS 2 General Disclosures (Mandatory):
• BP-1: General basis for preparation
• BP-2: Disclosures in relation to specific circumstances
• GOV-1: The role of the administrative, management, and supervisory bodies
• GOV-2: Information provided to, and sustainability matters addressed by, these bodies
• GOV-3: Sustainability-related performance in incentive schemes
• GOV-4: Statement on due diligence
• GOV-5: Risk management and internal controls over sustainability reporting
• SBM-1: Strategy, business model, and value chain
• SBM-2: Interests and views of stakeholders
• SBM-3: Material impacts, risks, and opportunities and their interaction with strategy and business model
• IRO-1: Process to identify and assess material impacts, risks, and opportunities
• IRO-2: Disclosure requirements in ESRS covered by the sustainability statement
• ESRS E1 Climate Change (Illustrative):
• E1–1: Transition plan for climate change mitigation
• E1–2: Policies related to climate change mitigation and adaptation
• E1–3: Actions and resources in relation to climate change policies
• E1–4: Targets related to climate change mitigation and adaptation
• E1–5: Energy consumption and mix
• E1–6: Gross Scopes 1, 2, 3, and Total GHG emissions
• E1–7: GHG removals and GHG mitigation projects financed through carbon credits
• E1–8: Internal carbon pricing
• E1–9: Anticipated financial effects from material physical and transition risks and potential climate-related opportunities
• ESRS S1 Own Workforce (Illustrative):
• S1–1: Policies related to own workforce
• S1–2: Processes for engaging with own workers and workers’ representatives about impacts
• And more, relating to workforce characteristics, social dialogue, diversity, wages, social protection, etc.
• ESRS G1 Business Conduct (Illustrative):
• G1–1: Corporate culture and business conduct policies
• G1–2: Management of relationships with suppliers
• G1–3: Prevention and detection of corruption and bribery
• G1–4: Confirmed incidents of corruption or bribery
• G1–5: Political influence and lobbying activities
• G1–6: Payment practices

5. Key Considerations and Guidance

• Materiality Assessment: The document emphasizes the crucial role of the double materiality assessment.
• Stakeholder Engagement: Stakeholders include affected parties and users of sustainability statements. The document states, “Stakeholders are those who can affect or be affected by the company.”
• Digital Tagging: The document notes that “CSRD requires digital tagging of the information disclosed” and suggests companies keep the “European Single Electronic Format (ESEF) Sustainability Taxonomy in mind when designing the sustainability statement.”
• Transitional Provisions: The document highlights the phased implementation of certain requirements, allowing for some omissions or qualitative reporting in early years. “When defining its entity-specific disclosures, management may adopt transitional measures for their preparation in the first 3 annual sustainability statements.”
• Incorporation by Reference: Companies may incorporate by reference information from other parts of their annual report, financial statements, or other public disclosures, provided certain conditions are met.
• Entity-Specific Disclosures: Where ESRS doesn’t sufficiently cover a material issue, entity-specific disclosures are required.

6. Appendices

The document includes useful appendices:

• Abbreviations.
• Qualitative characteristics of information (relevance, faithful representation, comparability, verifiability, and understandability).
• A flowchart for determining disclosures under ESRS.
• Transitional provisions.
• Guidance on incorporation by reference.
• Regulatory overview links.

7. Disclaimer

The document includes a disclaimer, noting that the information is for general guidance and does not constitute professional advice.

8. Conclusion

This guide provides a detailed overview of the CSRD and ESRS, focusing on practical implementation for companies preparing their sustainability statements. The emphasis on double materiality, detailed disclosure requirements, and integration with business strategy is crucial for effective and compliant reporting. It stresses that the illustrative structures must be adapted to the specific company context based on its unique material sustainability matters. The document also encourages users to seek further professional advice.