EFRAG, the European Financial Reporting Advisory Group, approved its first set of
standards in November 2022. EFRAG was mandated by the European Commission to
develop the European Sustainability Reporting Standards (ESRS) specifying the
requirements laid out in the Corporate Sustainability Reporting Directive (CSRD).
This contains 10 topical standards in the areas of Environment, Social and
Governance, the first set covered cross-cutting rules on general reporting
principles and disclosure requirements that apply to all topical areas and
sectors. In 2023, sector-specific rules as well as "lighter" SME standards
The concept of “double materiality” sits at the very core of ESRS. All material information
regarding impacts, risks, and opportunities of ESG matters must be disclosed, enabling the
understanding of the company’s impact on those ESG matters, as well as how those impact the
company’s financial development, performance and position. Crucially, in doing so, companies
need to consider not only their own operations but must also take into account the full value chain,
from upstream suppliers to downstream product usage, waste and disposal. In their reporting, companies
have to comply with clearly defined qualitative characteristics, such as faithful presentation,
verifiability, relevance, comparability, and understandability of provided information.
The general disclosure requirements, fully mandatory for all topical areas and sectors, are structured
around the four pillars of the Task Force on Climate-related Financial Disclosures (TCFD): governance,
strategy, impact, risks and opportunities management, as well as metrics and targets.
Oversight of material impacts, risks and opportunities through board and management
Integration of sustainability-related performance in incentives schemes
Process of conducting sustainability due diligence
Risk management and internal control system in relation to sustainability reporting
Impact and Risk management:
Material sustainability impacts, risks and opportunities and their effect on the business model, strategy, cash flow, access to finance and cost of capital
Current and committed investment plans (Capex, M&A, JVs, new business areas) and the planned sources of funding
Strategy and business model resilience to address material impacts and risks and pursue material opportunities
Metrics and targets:
Action plans and resources, allocated or planned, to address material impacts, risks and opportunities
Process to identify impacts, risks and opportunities and to assess which ones are material
Policies in place to identify, assess, manage or remediate material sustainability matters
Data and infrastructure.
How targets relate to policy objectives and progress made over time
Metrics are defined in topical ESRS and sector-specific ESRS
Although not part of the ESRS framework, meeting the reporting requirements depend
on a robust approach to data gathering and analysis. Scope 3 in particular places a high demand on a supplier
engagement strategy, with the appropriate infrastructure to collect and aggregate data flows from across the
company and value chains, conduct the scenario modelling and tracking of KPIs.