ESRS Standards for ESG Reporting - Guidelines

» European Sustainability Reporting Standards (ESRS)

The ESRS are divided into three main categories:

1. Cross-Cutting Standards: These standards apply across all sectors and industries, providing general guidelines for sustainability reporting. They include ESRS 1 (General Requirements) and ESRS 2 (General Disclosures).
2. Topical Standards: These standards focus on specific sustainability topics, such as climate change, biodiversity, and social impacts. They are divided into three pillars: environmental, social, and governance.
3. Sector-Specific Standards: These standards are tailored to the unique sustainability challenges faced by different industries, ensuring that companies report on the issues most relevant to their sector.

Cross-Cutting Standards

ESRS 1: General Requirements

ESRS 1 lays out the foundational principles for sustainability reporting, providing a general framework that all companies must follow. It introduces several key concepts that guide the preparation of sustainability reports, including:

• Double Materiality: One of the most important concepts in the regulation, double materiality requires companies to consider both the impact of their operations on the environment and society (impact materiality) and the financial implications of sustainability risks and opportunities (financial materiality).

For example, a company may need to report on its carbon emissions because they have a direct impact on the environment (impact materiality), and also because climate risks may affect its financial performance, such as increased costs due to carbon taxes or extreme weather events (financial materiality).

• Value Chain Reporting: Companies must report on the sustainability impacts of their entire value chain, including upstream (suppliers) and downstream (customers and end-users) activities. This ensures a holistic view of the company’s sustainability performance, recognizing that many environmental and social impacts occur beyond the company’s direct control.

For example, a fashion retailer may need to report on the labor conditions at its suppliers’ factories or the environmental impact of the raw materials used in its products.

• Time Horizons: Companies must consider short-, medium-, and long-term time horizons when reporting on their sustainability impacts and risks. This ensures that stakeholders have a clear understanding of how the company’s sustainability performance may evolve over time.
• Short-term: Typically the same as the company’s financial reporting period (usually one year).
• Medium-term: Generally two to five years.
• Long-term: Beyond five years.

This approach ensures that companies are forward-looking in their sustainability reporting, providing insights into both current performance and future risks and opportunities.

Value Chain Reporting

One of the key innovations of the Commission Delegated Regulation (EU) 2023/2772 is the requirement for companies to extend their sustainability reporting beyond their direct operations to include their entire value chain. This means that companies must consider the sustainability impacts of their suppliers, contractors, and customers, ensuring that they take responsibility for the full lifecycle of their products and services.

Upstream Value Chain Reporting

The upstream value chain includes all of the activities that occur before a company’s product or service reaches the market, including sourcing raw materials, manufacturing, and transportation. Companies must report on the sustainability impacts of their upstream activities, particularly in industries like fashion, electronics, and food, where the supply chain is often global and complex.

Key disclosure requirements for the upstream value chain include:

• Supplier Labor Practices: Companies must disclose the labor practices of their suppliers, including wages, working conditions, and labor rights. This is especially important in industries where goods are often produced in low-cost countries with less stringent labor laws.
• Environmental Impacts of Suppliers: Companies must report on the environmental impacts of their suppliers, including energy use, water consumption, and pollution. This includes disclosing how they monitor and enforce environmental standards across their supply chain.
• Sustainable Sourcing: Companies are encouraged to adopt sustainable sourcing practices, such as using recycled or renewable materials and working with suppliers that meet environmental and social standards. Companies must report on the share of their raw materials that are sourced sustainably and any efforts to increase this share.

Downstream Value Chain Reporting

The downstream value chain includes all of the activities that occur after a company’s product or service reaches the market, including product use, disposal, and recycling. Companies must report on the sustainability impacts of their downstream activities, particularly in industries like automotive, electronics, and consumer goods, where products often have a significant environmental impact throughout their lifecycle.

Key disclosure requirements for the downstream value chain include:

• Product Environmental Impact: Companies must disclose the environmental impact of their products, including energy consumption, emissions, and waste generated during product use. This includes reporting on product lifecycle assessments (LCAs) and efforts to design products that have a lower environmental impact.
• Product End-of-Life Management: Companies must report on how their products are managed at the end of their lifecycle, including recycling, reuse, and disposal. This includes disclosing any take-back programs, recycling initiatives, or efforts to reduce waste.
• Customer Safety and Sustainability: Companies must disclose any risks related to the safety or sustainability of their products, including health risks, environmental impacts, and product recalls. This includes reporting on how they engage with customers to promote responsible product use and disposal.

Double Materiality

The concept of double materiality is a central pillar of the Commission Delegated Regulation (EU) 2023/2772, and it represents a significant shift in how companies are required to approach sustainability reporting. Double materiality requires companies to consider both the financial materiality of sustainability issues (i.e., how sustainability risks and opportunities affect the company’s financial performance) and the impact materiality (i.e., how the company’s operations affect the environment and society).

Impact Materiality

Impact materiality focuses on how a company’s operations, products, and services affect the environment, society, and human rights. Companies must disclose their most significant environmental and social impacts, regardless of whether these impacts have a direct financial effect on the company.

Key considerations for impact materiality include:

• Environmental Impact: Companies must report on their impact on the environment, including carbon emissions, water use, pollution, and biodiversity loss. This includes disclosing the company’s efforts to reduce negative environmental impacts and enhance positive ones.
• Social Impact: Companies must disclose their impact on society, including labor practices, community engagement, and human rights. This includes reporting on how the company contributes to or mitigates social issues like inequality, poverty, and displacement.
• Human Rights: Companies must consider their impact on human rights, including issues like forced labor, child labor, and the rights of indigenous peoples. Companies are required to report on how they address human rights risks in their operations and value chains.

Financial Materiality

Financial materiality focuses on how sustainability risks and opportunities affect a company’s financial performance, including revenue, costs, assets, liabilities, and access to capital. Companies must disclose the financial implications of sustainability issues, such as the cost of complying with environmental regulations, the impact of climate change on their operations, or the financial benefits of adopting sustainable business practices.

Key considerations for financial materiality include:

• Climate-Related Financial Risks: Companies must report on the financial risks associated with climate change, including physical risks (e.g., damage to assets from extreme weather events) and transition risks (e.g., financial losses due to the shift to a low-carbon economy). This includes disclosing how climate-related risks are integrated into the company’s financial planning and risk management.
• Regulatory Risks: Companies must disclose the financial implications of complying with environmental and social regulations, such as carbon pricing, emission reduction targets, and labor standards. This includes reporting on the costs of meeting regulatory requirements and any potential fines or penalties for non-compliance.
• Sustainability Opportunities: Companies must also report on the financial opportunities associated with sustainability, such as the potential for revenue growth from sustainable products or cost savings from energy efficiency initiatives. This includes disclosing how sustainability is integrated into the company’s growth strategy and long-term financial planning.

ESRS 2: General Disclosures

ESRS 2 focuses on the specific information that all companies must disclose, regardless of their sector or industry. These general disclosures are divided into four main categories:

1. Governance: Companies must provide detailed information about their governance structures and how sustainability is integrated into their decision-making processes. This includes disclosing the roles and responsibilities of the board and senior management in overseeing sustainability risks and opportunities.

For example, companies may need to disclose whether they have a dedicated sustainability committee at the board level or whether executive compensation is linked to sustainability performance.

1. Strategy: Companies must explain how their business model and strategy address sustainability risks and opportunities. This includes disclosing how sustainability is integrated into the company’s long-term strategy and how it is responding to external factors such as climate change, resource scarcity, and shifting consumer preferences.
2. Impact, Risk, and Opportunity Management: Companies must disclose their processes for identifying, assessing, and managing sustainability-related impacts, risks, and opportunities. This includes explaining how the company prioritizes different sustainability issues, how it engages with stakeholders, and how it monitors progress.

For example, a company may need to explain how it identifies its most significant environmental impacts, such as carbon emissions or water use, and how it is working to reduce those impacts.

1. Metrics and Targets: Companies must disclose quantitative and qualitative metrics that measure their sustainability performance. This includes providing information on any sustainability targets the company has set, such as reducing greenhouse gas emissions or increasing the diversity of its workforce, and reporting on progress towards those targets.

The inclusion of both qualitative and quantitative data ensures that companies provide a complete picture of their sustainability performance. Quantitative data, such as emission levels, provide hard evidence of progress, while qualitative information, such as policies and initiatives, offers context for how these results were achieved.

» Sustainability Reporting Standards – Topical Standards

The topical standards cover specific sustainability issues and are divided into three pillars: environmental, social, and governance. Each standard requires companies to provide detailed information about their performance in these areas, ensuring that stakeholders have a comprehensive understanding of the company’s sustainability impacts and risks.

Environmental Standards

1. ESRS E1: Climate Change: Climate change is one of the most critical sustainability issues, and ESRS E1 requires companies to provide detailed disclosures about their greenhouse gas (GHG) emissions, energy use, and efforts to mitigate climate change. This includes:
• Reporting on Scope 1 (direct), Scope 2 (indirect), and Scope 3 (value chain) emissions.
• Disclosing the company’s energy consumption, including the share of renewable energy.
• Explaining how the company is adapting to physical climate risks, such as extreme weather events, and transitioning to a low-carbon economy.
2. ESRS E2: Pollution: This standard focuses on companies’ efforts to reduce pollution, including air, water, and soil pollutants. Companies must disclose:
• The types and quantities of pollutants they emit.
• Their policies and actions to reduce pollution, including the use of cleaner technologies or pollution control measures.
• Any violations of environmental regulations related to pollution.
3. ESRS E3: Water and Marine Resources: Companies must report on their water use and their impact on marine resources. This includes:
• Disclosing the company’s water consumption and wastewater discharge.
• Reporting on the company’s efforts to conserve water and protect marine ecosystems.
• Explaining how the company is managing water-related risks, such as water scarcity or flooding.
4. ESRS E4: Biodiversity and Ecosystems: Biodiversity loss is a growing global concern, and this standard requires companies to report on their impact on biodiversity and ecosystems. This includes:
• Disclosing the company’s impact on protected areas, endangered species, and habitats.
• Explaining the company’s efforts to restore ecosystems or protect biodiversity, such as reforestation or habitat conservation initiatives.
5. ESRS E5: Resource Use and Circular Economy: This standard focuses on how companies use natural resources and their efforts to adopt circular economy practices, such as recycling and waste reduction. Companies must disclose:
• The types and quantities of raw materials they use.
• Their efforts to reduce resource consumption and increase resource efficiency.
• Their use of recycled or renewable materials in their products.

Each environmental standard requires companies to provide both quantitative metrics (e.g., tons of CO2 emitted, liters of water used) and qualitative information about their environmental policies, actions, and targets. This ensures that stakeholders have a complete understanding of the company’s environmental performance.

Social Standards (ESRS S)

The social aspect of sustainability reporting is just as critical as environmental and governance factors. These standards ensure that companies are transparent about how they interact with their employees, contractors, communities, and customers. Social sustainability covers issues like worker rights, community relations, customer safety, and the overall impact of a company’s operations on society at large. The ESRS social standards provide a structured way for companies to disclose their social policies, practices, and impacts.

ESRS S1: Own Workforce

This standard focuses on how a company manages its workforce, including employees and contractors. It covers a wide range of issues related to labor practices, diversity, health and safety, and worker engagement. This is especially important in labor-intensive industries like manufacturing, construction, and retail, where workforce-related issues can significantly affect sustainability performance.

Key requirements under ESRS S1 include:

• Employee Demographics: Companies must disclose the total number of employees and contractors they employ, broken down by full-time, part-time, temporary, and permanent positions. This helps stakeholders understand the company’s reliance on different types of labor.
• Diversity and Inclusion: Diversity metrics are critical for understanding how inclusive a company is. Companies must disclose the gender, ethnicity, age, and disability status of their workforce, particularly in management and leadership positions. These disclosures help highlight whether the company is promoting diversity and inclusion at all levels of the organization.
• Health and Safety: Occupational health and safety is a significant concern, particularly in industries like manufacturing, construction, and healthcare. Companies must report on workplace accidents, injuries, and fatalities, as well as the measures they are taking to improve worker safety. This may include providing details on safety training programs, safety audits, and personal protective equipment (PPE) usage.
• Employee Engagement and Well-being: Companies must disclose their policies and initiatives related to employee engagement, well-being, and work-life balance. This includes reporting on employee satisfaction surveys, turnover rates, and programs to promote mental health and prevent burnout. Employee engagement is increasingly seen as a key indicator of long-term sustainability, as it impacts productivity, retention, and overall company culture.
• Labor Rights: Companies are required to disclose their adherence to international labor standards, such as the International Labour Organization (ILO) conventions. This includes issues such as freedom of association, collective bargaining rights, and the elimination of forced labor and child labor. Companies must report on their policies and actions to protect labor rights, both within their own operations and across their supply chains.

ESRS S2: Workers in the Value Chain

ESRS S2 extends the focus beyond a company’s direct employees to include workers employed by suppliers, contractors, and other value chain partners. This standard is particularly important for companies in industries with global supply chains, such as fashion, electronics, and agriculture, where labor practices can vary significantly across regions and countries.

Key areas of focus under ESRS S2 include:

• Working Conditions in the Supply Chain: Companies must disclose the working conditions of workers in their supply chains, including wages, working hours, and health and safety standards. This is especially important in industries where there is a risk of exploitative labor practices, such as low wages, excessive working hours, or unsafe working conditions.
• Labor Rights in the Supply Chain: Companies must ensure that their suppliers respect labor rights, including freedom of association and the elimination of forced labor and child labor. They are required to report on how they monitor and enforce labor rights across their supply chains, including conducting audits, engaging with suppliers, and implementing corrective actions.
• Fair Wages: Companies must disclose whether workers in their supply chains are paid fair wages that meet or exceed the local living wage. This is a critical issue in industries where workers in developing countries are often paid below subsistence levels.
• Health and Safety in the Supply Chain: Companies must report on the health and safety standards in their supply chains, particularly in high-risk industries like mining, construction, and agriculture. This includes reporting on workplace accidents, injuries, and fatalities among workers employed by suppliers and contractors.

ESRS S3: Affected Communities

ESRS S3 focuses on the impact of a company’s operations on local communities. Companies must consider how their activities affect the people who live near their facilities, including issues related to land use, displacement, and community engagement. This standard is particularly relevant for industries like mining, oil and gas, and construction, where large-scale projects can have significant social and environmental impacts on local communities.

Key disclosure requirements under ESRS S3 include:

• Community Engagement: Companies must report on how they engage with local communities, including consultation processes, stakeholder engagement initiatives, and efforts to address community concerns. This is particularly important for companies undertaking projects that require the use of land or natural resources, as community opposition can lead to delays or even the cancellation of projects.
• Impact on Local Communities: Companies must disclose the social and environmental impacts of their operations on local communities. This includes issues like air and water pollution, displacement of people, and access to resources such as clean water and land. Companies must also report on any mitigation measures they have implemented to address negative impacts.
• Human Rights: Companies must report on their adherence to international human rights standards, such as the UN Guiding Principles on Business and Human Rights. This includes disclosing how they address human rights risks in their operations and value chains, such as the risk of displacement, exploitation, or violation of indigenous peoples’ rights.
• Grievance Mechanisms: Companies are required to provide information on the grievance mechanisms they have in place to address community complaints. This includes reporting on the accessibility, transparency, and effectiveness of these mechanisms, as well as how complaints are resolved.

ESRS S4: Consumers and End-Users

ESRS S4 focuses on the impact of a company’s products and services on consumers and end-users. This standard is particularly important for consumer-facing industries like retail, food and beverage, and technology, where product safety, customer privacy, and sustainable consumption are key concerns.

Key requirements under ESRS S4 include:

• Product Safety: Companies must disclose any risks related to the safety of their products, including potential health and environmental risks. This includes reporting on product recalls, safety incidents, and any steps the company is taking to ensure product safety.
• Customer Privacy: Companies must report on how they protect customer data and privacy, including compliance with data protection regulations like the General Data Protection Regulation (GDPR). This is especially important for companies in industries like technology, telecommunications, and financial services, where customer data is a critical asset.
• Sustainable Consumption: Companies must disclose their efforts to promote sustainable consumption, including the development of eco-friendly products, reducing the environmental impact of their products, and encouraging responsible consumption patterns among customers. This includes initiatives such as using recyclable packaging, offering product take-back programs, or promoting energy-efficient products.
• Customer Satisfaction and Engagement: Companies are required to report on customer satisfaction metrics, including customer feedback, complaints, and surveys. This helps stakeholders understand how the company engages with its customers and addresses their needs and concerns.

Governance Standards (ESRS G)

The governance aspect of sustainability reporting focuses on how a company’s governance structures support its sustainability goals and responsible business conduct. Good governance is essential for ensuring that sustainability is integrated into a company’s strategy, risk management, and decision-making processes. The governance standards provide a framework for companies to disclose their governance policies, structures, and practices.

ESRS G1: Business Conduct

ESRS G1 focuses on how companies ensure responsible business conduct, including issues like anti-corruption, board diversity, executive compensation, and compliance with legal and regulatory frameworks. This standard is essential for building trust with stakeholders and ensuring that companies are held accountable for their actions.

Key disclosure requirements under ESRS G1 include:

• Anti-Corruption and Anti-Bribery: Companies must disclose their policies and practices related to preventing corruption and bribery. This includes reporting on any incidents of corruption, how they were addressed, and the steps the company is taking to prevent future incidents. Companies are also required to disclose whether they have implemented anti-corruption training programs for employees and business partners.
• Board Diversity: Companies must report on the diversity of their boards of directors, including gender, age, ethnicity, and professional background. Board diversity is increasingly seen as a key factor in good governance, as it promotes a range of perspectives and reduces the risk of groupthink. Companies are encouraged to set diversity targets for their boards and report on progress towards these targets.
• Executive Compensation: Companies must disclose how executive compensation is linked to sustainability performance. This includes reporting on whether sustainability metrics are included in the calculation of bonuses, stock options, or other forms of executive pay. Linking executive compensation to sustainability goals is seen as a way to align the interests of management with those of stakeholders.
• Ethical Business Practices: Companies must report on their policies and practices related to ethical business conduct. This includes disclosing how the company ensures compliance with legal and regulatory frameworks, as well as how it promotes ethical behavior among employees and business partners.
• Compliance with Laws and Regulations: Companies must report on their compliance with relevant laws and regulations, including environmental, labor, and human rights standards. This includes disclosing any violations or legal actions related to non-compliance and the steps the company is taking to address these issues.

Sector-Specific Standards

In addition to the cross-cutting and topical standards, the regulation includes sector-specific standards that address the unique sustainability challenges faced by different industries. These standards provide more detailed guidance for companies operating in sectors like energy, agriculture, and finance, where the sustainability risks and impacts are often more pronounced.

Energy Sector

The energy sector is one of the most significant contributors to greenhouse gas emissions and environmental degradation. As such, companies in this sector are subject to particularly stringent sustainability reporting requirements. The energy sector-specific standards focus on issues like carbon emissions, renewable energy, and environmental restoration.

Key disclosure requirements for the energy sector include:

• Carbon Emissions: Energy companies must disclose their greenhouse gas emissions, including Scope 1 (direct), Scope 2 (indirect), and Scope 3 (value chain) emissions. This includes reporting on emissions from the extraction, production, and distribution of energy, as well as from the use of energy by customers.
• Renewable Energy: Companies must report on their use of renewable energy sources, such as wind, solar, and hydropower. This includes disclosing the share of renewable energy in their overall energy mix and any efforts to increase the use of renewables.
• Environmental Restoration: Energy companies are often required to restore ecosystems that have been damaged by their operations, such as land disturbed by mining or drilling activities. Companies must report on their environmental restoration efforts, including reforestation, habitat conservation, and water resource management.

Agriculture Sector

The agriculture sector is closely linked to issues like biodiversity loss, deforestation, and water use. Companies in this sector must disclose their impact on ecosystems and their efforts to promote sustainable farming practices.

Key disclosure requirements for the agriculture sector include:

• Biodiversity and Land Use: Companies must report on their impact on biodiversity and land use, including the conversion of natural habitats for agricultural purposes. This includes disclosing the company’s efforts to protect endangered species, conserve natural habitats, and promote sustainable land use practices.
• Water Use: Agriculture is one of the largest consumers of water, and companies in this sector must report on their water use and efforts to improve water efficiency. This includes disclosing water consumption, wastewater management, and the impact of agricultural activities on water quality.
• Pesticide and Fertilizer Use: Companies must disclose their use of pesticides and fertilizers, including the types and quantities used, and the impact on soil health, water quality, and biodiversity. This includes reporting on efforts to reduce the use of harmful chemicals and adopt more sustainable farming practices.

Financial Sector

The financial sector plays a critical role in driving sustainable investment and ensuring that capital is allocated to projects and companies that support environmental and social goals. The sector-specific standards for financial institutions focus on issues like responsible lending, investment, and risk management.

Key disclosure requirements for the financial sector include:

• Sustainability in Lending and Investment: Financial institutions must disclose how they integrate sustainability considerations into their lending and investment decisions. This includes reporting on the share of their portfolio that is aligned with sustainable investment principles, such as those outlined in the EU Taxonomy for Sustainable Activities.
• Climate-Related Financial Risks: Financial institutions must report on the climate-related risks they face, including both physical risks (e.g., damage to assets from extreme weather events) and transition risks (e.g., financial losses due to the shift to a low-carbon economy). This includes disclosing how these risks are integrated into the institution’s risk management framework and financial planning.
• Sustainability-Linked Products: Financial institutions are encouraged to develop and offer sustainability-linked products, such as green bonds, sustainable loans, and impact investment funds. Companies must report on the availability and performance of these products, as well as the impact they have on sustainability outcomes.

» Guidelines for Effective Sustainability Reporting

Qualitative Characteristics of Information

To ensure that sustainability information is useful to stakeholders, the regulation sets out several qualitative characteristics that companies must adhere to when preparing their sustainability reports. These characteristics are critical for ensuring the reliability, comparability, and transparency of sustainability data.

Relevance

Sustainability information must be relevant to the decision-making needs of stakeholders, including investors, regulators, customers, and employees. Relevant information is that which can influence stakeholders’ understanding of the company’s sustainability performance and its ability to create long-term value.

Key considerations for relevance include:

• Materiality Assessment: Companies must conduct a materiality assessment to identify the most significant sustainability issues they face and prioritize reporting on these issues. This ensures that the information disclosed is focused on the most relevant and impactful areas of sustainability.
• Stakeholder Engagement: Companies must engage with stakeholders to understand their information needs and ensure that the sustainability report addresses these needs. This includes consulting with investors, regulators, customers, employees, and local communities.

Faithful Representation

Sustainability information must be faithfully represented, meaning it should be complete, neutral, and free from material error. Faithful representation is essential for ensuring that stakeholders can trust the information provided and make informed decisions based on it.

Key considerations for faithful representation include:

• Completeness: Companies must ensure that their sustainability reports cover all material aspects of their sustainability performance, including both positive and negative impacts. This includes disclosing any challenges or setbacks the company has faced in meeting its sustainability goals.
• Neutrality: Companies must avoid bias in their sustainability reporting, presenting information in a balanced and objective manner. This includes providing a fair representation of the company’s sustainability performance, without exaggerating achievements or downplaying risks and challenges.
• Accuracy: Sustainability information must be accurate and free from material error. Companies must ensure that the data used in their reports is reliable and based on verifiable sources.

Comparability

Comparability is critical for enabling stakeholders to assess a company’s sustainability performance over time and compare it to other companies. Sustainability information must be presented in a way that allows for meaningful comparisons, both within the company’s reporting periods and across different companies in the same industry.

Key considerations for comparability include:

• Consistency: Companies must use consistent methods and metrics for measuring and reporting sustainability performance over time. This ensures that stakeholders can track progress and compare performance across reporting periods.
• Standardization: The ESRS provide standardized reporting requirements, ensuring that companies within the same industry report on the same issues using the same metrics. This enhances comparability across companies and sectors.

Verifiability

Verifiability ensures that sustainability information can be independently verified by external auditors or third-party assurance providers. Verifiable information is essential for building trust with stakeholders and ensuring the credibility of sustainability reports.

Key considerations for verifiability include:

• Third-Party Assurance: Companies are encouraged to obtain third-party assurance for their sustainability reports, ensuring that the information provided is accurate and reliable. This includes having external auditors review the company’s data collection processes, calculations, and disclosures.
• Documentation: Companies must maintain documentation and evidence to support the information disclosed in their sustainability reports. This includes providing detailed records of data sources, assumptions, and calculations.

Understandability

Sustainability information must be presented in a way that is clear and easy to understand. This includes using plain language, avoiding technical jargon, and providing explanations for complex concepts.

Key considerations for understandability include:

• Clarity: Companies must present sustainability information in a clear and concise manner, using plain language and avoiding unnecessary complexity. This ensures that the report is accessible to a wide range of stakeholders, including those who may not have technical expertise in sustainability.
• Explanations and Context: Companies must provide explanations and context for the data and metrics they report, ensuring that stakeholders can understand the significance of the information. This includes explaining how metrics were calculated, what assumptions were made, and how the company’s performance compares to industry benchmarks.

Presentation and Structure of Sustainability Reports

The regulation provides clear guidelines on how companies should structure and present their sustainability reports. These guidelines ensure that the reports are easy to navigate, provide comprehensive information, and meet the needs of a wide range of stakeholders.

General Presentation Requirements

Sustainability information must be presented in a dedicated section of the company’s management report, clearly separated from financial information and other disclosures. This ensures that sustainability information is given appropriate prominence and is easily accessible to stakeholders.

Key presentation requirements include:

• Separation of Sustainability and Financial Information: Companies must clearly distinguish between sustainability information and financial information in their reports. This includes presenting sustainability disclosures in a dedicated section, rather than integrating them into the financial statements.
• Format and Accessibility: Sustainability reports must be presented in a format that is both human-readable and machine-readable, ensuring that the information is accessible to a wide range of stakeholders, including those using digital tools for analysis.

Content and Structure of the Sustainability Statement

The sustainability statement must be structured in a way that provides a comprehensive overview of the company’s sustainability performance, covering environmental, social, and governance (ESG) factors. The regulation provides a suggested structure for sustainability reports, including the following sections:

1. General Information: This section provides an overview of the company’s sustainability strategy, governance structure, and materiality assessment. It includes disclosures on how sustainability is integrated into the company’s business model, strategy, and risk management processes.
2. Environmental Information: This section covers the company’s environmental performance, including disclosures on carbon emissions, energy use, water consumption, waste management, and biodiversity. Companies must report on their environmental policies, actions, targets, and progress.
3. Social Information: This section covers the company’s social performance, including disclosures on labor practices, diversity, health and safety, community engagement, and human rights. Companies must report on their social policies, actions, targets, and progress.
4. Governance Information: This section covers the company’s governance practices, including disclosures on board diversity, executive compensation, anti-corruption measures, and ethical business conduct. Companies must report on their governance policies, actions, targets, and progress.

The suggested structure ensures that sustainability reports are comprehensive, covering all relevant ESG factors, and organized in a way that is easy to navigate.

Incorporation by Reference

The regulation allows companies to incorporate information from other reports by reference, reducing duplication and ensuring that sustainability information is aligned with other corporate disclosures. However, companies must ensure that the information incorporated by reference meets the same qualitative standards as the sustainability report itself.

Key requirements for incorporation by reference include:

• Clear Identification: Information incorporated by reference must be clearly identified, ensuring that stakeholders can easily locate the relevant disclosures.
• Consistency and Assurance: Information incorporated by reference must be consistent with the rest of the sustainability report and subject to the same level of assurance. This ensures that all of the information provided meets the same standards of reliability and accuracy.

Linkages with Financial Reporting

One of the unique aspects of the Commission Delegated Regulation (EU) 2023/2772 is its emphasis on ensuring connectivity between sustainability reports and financial statements. Companies must ensure that sustainability information is aligned with financial information, particularly when sustainability issues have material financial implications.

Direct Connectivity

When sustainability information is directly related to financial information, such as when a company reports on the financial impact of carbon pricing or regulatory fines, companies must provide a clear link between the sustainability report and the financial statements. This includes referencing the relevant line items in the financial statements and providing a reconciliation if necessary.

Indirect Connectivity

In cases where sustainability information is indirectly related to financial information, such as when a company reports on the long-term financial risks associated with climate change, companies must explain how the sustainability information aligns with their financial planning and risk management processes. This includes providing qualitative explanations of how sustainability risks and opportunities are integrated into the company’s financial strategy.

Transitional Provisions

The regulation includes transitional provisions to help companies gradually adjust to the new reporting requirements. These provisions are particularly important for companies that are new to sustainability reporting or that face challenges in collecting the necessary data, particularly for value chain reporting.

First Year of Application

In the first year of application, companies are not required to provide comparative information for the previous reporting period. This recognizes that companies may not have historical data available for all of the sustainability metrics required under the ESRS.

Phasing in Value Chain Reporting

One of the most challenging aspects of the regulation is the requirement for companies to report on the sustainability impacts of their entire value chain, including upstream suppliers and downstream customers. The regulation provides a three-year transition period for value chain reporting, allowing companies to phase in these disclosures gradually.

During the transition period, companies are allowed to limit their value chain reporting to information that is readily available, such as data already collected from suppliers or publicly available information. However, companies must explain the efforts they are making to collect more comprehensive value chain data and their plans for improving value chain reporting in the future.

Challenges and Opportunities for Companies

The Commission Delegated Regulation (EU) 2023/2772 presents both challenges and opportunities for companies. On the one hand, the regulation significantly increases the scope and complexity of sustainability reporting, requiring companies to collect and disclose a wide range of environmental, social, and governance data. On the other hand, the regulation provides a framework for companies to improve their sustainability performance and build trust with stakeholders.

Challenges

Some of the key challenges companies may face include:

• Data Collection: Collecting the necessary data for sustainability reporting, particularly for value chain reporting, can be a significant challenge, especially for companies with complex global supply chains.
• Compliance Costs: Implementing the new reporting requirements may involve significant costs, particularly for smaller companies or those that do not already have robust sustainability reporting systems in place.
• Complexity of Reporting: The regulation requires companies to report on a wide range of sustainability issues, including both quantitative metrics and qualitative information. Ensuring that the report is comprehensive, accurate, and easy to understand can be a complex task.

Opportunities

Despite these challenges, the regulation also provides significant opportunities for companies:

• Enhancing Transparency and Accountability: The regulation provides a framework for companies to improve transparency and accountability, building trust with stakeholders and enhancing their reputation as responsible corporate citizens.
• Driving Sustainable Innovation: The reporting requirements encourage companies to adopt more sustainable business practices, such as reducing carbon emissions, improving labor conditions, and promoting sustainable consumption. This can lead to cost savings, improved efficiency, and new market opportunities.
• Attracting Investment: With the growing focus on sustainable investment, companies that meet the new reporting requirements and demonstrate strong sustainability performance are likely to attract more investment from ESG-focused investors.

Adaptation Notice under the European Sustainability Reporting Standards (ESRS)

This text has been adapted in accordance with the guidelines set forth by the European Sustainability Reporting Standards (ESRS). In our efforts to ensure transparency, accountability, and alignment with sustainable practices, we have carefully reviewed and incorporated ESRS principles into the content. This adaptation process reflects our commitment to high-quality, accurate, and comprehensive sustainability reporting, ensuring that the information presented adheres to internationally recognized standards.

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