With a view to involving companies in the transition to a more sustainable economy, the European CSRD (Corporate Sustainability Reporting Directive) introduced the ESRS (European Sustainability Reporting Standards). These new rules redefine the way in which companies must communicate their extra-financial performance.

The 12 ESRS cover a wide range of environmental, social and governance (ESG) issues, providing a clear framework for consistent and harmonized reporting. These standards help stakeholders to better understand the impact of companies on society and the environment.

In this article, we'll explore the broad outlines of the ESRS, focusing on ESRS 1, the methodological foundation of the CSRD. 

This cross-functional standard sets out the general principles, key definitions and expectations that will guide companies in applying the 11 other thematic and sector-specific standards. It is a key step towards mastering the challenges of CSRD and structuring your sustainability report.

What is an ESRS?

An ESRS, or European Sustainability Reporting Standard, is a set of rules created within the framework of the European CSRD (Corporate Sustainability Reporting Directive). These standards define the information that companies must publish on their CSR performance. 

They cover the major ESG topics, the environment, social aspects and governance. Their main objective is to ensure transparency in ESG reporting and make data comparable between companies, to help stakeholders (investors, customers, regulators) assess the impact of companies.

To make things clear, EFRAG has drawn up a series of 12 ESRS for sustainability reporting: 2 general ESRS and 10 thematic ESRS.

ESRS 1 establishes the overall framework for companies, defining the context, principles and rules applicable to all reporting.

ESRS 2, on the other hand, requires the disclosure of general information about the company, providing an essential basis for understanding its sustainability positioning and priorities.

The 10 thematic ESRS take a closer look at specific topics related to the Environment (E), Social (S) and Governance (G).

To put it simply, let's imagine that they function like the elements of a film:

• ESRS 1 is the script. It defines the film's universe, the rules, and the general framework in which the story unfolds. Although very important, it's not what the viewer (or in this case, the stakeholders) sees directly.
• ESRS 2 is all about the main characters on the screen. This is the key information about the company: who it is and what are the essential subjects that will guide the rest of the story (reporting).
• The thematic ESRS represent the individual stories of each character. They detail the actions, impacts and specifics of the Environment, Social and Governance themes.

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General principles of ESRS 1

ESRS 1 represents the backbone of reporting standards for CSRD. 

It lays down the general principles that companies must follow when structuring their reports: for example, how to choose the most relevant themes to cover (this is known as double materiality), or how to make data reliable, comparable and understandable. 

ESRS 1 is an instruction manual, which you should read before starting your CSRD. These are the rules, definitions and standards to be observed when reporting CSRD.

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It's important, because thanks to these principles, stakeholders can truly understand a company's sustainability challenges and assess whether its actions are aligned with expectations.

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ESRS 1 requirements

What should I do? 

• 👉 You don't need to do ANY REPORTING under ESRS 1 directly. 
• It guides the application of other sector/thematic ESRSs (such as ESRS 2, E1, S1...).

ESRS 1 serves as a methodological framework for applying CSRD standards in a consistent and structured way.

It provides general principles, definitions, background and explanations to help you produce your CSRD report on :

• The most important ESG themes for CSRD,
• Explaining the concept of double materiality,
• The structure of the information required to ensure clarity, comparability and reliability,
• An explanation of the coherent approach between the different areas covered by the thematic and sectoral standards.

ESRS 1 therefore serves as a global framework for CSRD reporting, sharing with you the basic principles that will guide the application of the other specific standards (sectoral and thematic). Nothing is expected of you at this stage.

Here's how it works and what it's for:

Data definition in ESRS 1 to be followed for the rest of the report

ESRS 1 establishes key definitions and principles to be followed in the creation of the sustainability report, helping to structure the rest of the process in a coherent way. The following section details and simplifies the topics covered by ESRS 1.

Definition of ESRS categories

There are 3 categories of ESRS:

• Cross-cutting (general) standards: These define the general principles applicable to all sustainability reports, such as governance and risk management.
• Thematic standards: These focus on specific areas such as environmental, social and governance issues. Each area is subdivided into sub-themes and sub-sub-themes for greater precision in reporting.
• Sector-specific standards: These apply to specific sectors, detailing the issues particular to each industry. These standards identify the material issues specific to a company's sector of activity. They are still under development.

Methodology for determining your material challenges

ESRS 1 defines the double materiality method expected in CSRD. It guides companies in identifying material themes, sub-themes and sub-sub-themes, i.e. those that are most significant for their activities. If the company has a positive or negative impact on a theme, or if it represents a risk or an opportunity for the company, then these must be taken into account in the materiality analysis.

Description of the 4-pillar standards disclosure structure

Details of the expected structure can be found in each ESRS. The sustainability report must be structured around four main areas:

• Governance (GOV): Supervisory processes related to corporate sustainability.
• Strategy (SBM): How the company manages the risks and opportunities associated with sustainability.
• Impact, risk and opportunity management (IRO): Managing environmental and social risks and impacts.
• Metrics and Indicators (MI): Monitoring sustainability results and performance.

Defining stakeholders and their roles

ESRS 1 emphasizes the importance of involving stakeholders in the CSRD reporting process. This includes all individuals, groups or organizations likely to affect or be affected by the company's activities, such as investors, customers, regulators, suppliers, employees, etc.

What ESRS 1 expects in concrete terms :

• Stakeholder consultation: ESRS 1 stresses the importance of exchanging with stakeholders to understand their expectations and concerns regarding sustainability issues. This exchange makes it possible to collect quantitative and qualitative data on the company's material issues.
• Integrating these expectations into strategy: To guide the company's actions in line with the priorities identified by stakeholders, and better meet their expectations.

• Weigh the importance of stakeholders: Not all stakeholders have the same importance or influence on each sustainability topic. ESRS 1 recommends quantifying the importance of each stakeholder, based on their impact and knowledge, to correctly weight their influence in the double materiality analysis process. This is an essential point in defining a double materiality matrix. For example, for a battery manufacturer, customers (carmakers) will be of major importance on the subject of environmental performance, as their requirements directly influence innovations in sustainable materials. Conversely, the local communities surrounding the production sites will play a key role on issues related to social impacts, such as nuisance management or job creation.

Definition of double materiality

ESRS 1 introduces the notion of double materiality, which analyzes both :

1. Material impact: how the company's activities affect the environment and society (positively or negatively). This involves assessing the severity, scale, scope, irreversibility and probability of these impacts.
2. Financial materiality: how these sustainability issues influence the company's financial performance, measured by the financial magnitude (in €) of the risk or opportunity, and its probability of being realized (in %).

ESRS 1 also defines the level of disaggregation, i.e. the level of detail with which you will analyze the information. In concrete terms, this means that the company must adapt its analysis according to various criteria, such as :

• Sectors of activity: If the company operates in several sectors, each sector will need to be analyzed separately, taking into account the issues specific to that sector.
• Geographical areas: Environmental and social impacts can vary from region to region, so it is necessary to analyze impacts according to the different geographical areas in which the company operates. This is particularly relevant for issues such as water or biodiversity, where the importance of stakeholders varies considerably according to geography.
• The type of business: Some companies have very diverse activities, requiring specific information tailored to each area of activity.

Value chain definition

ESRS 1 defines the expected value chain for CSRD. A company's value chain must therefore correspond to :

• Own operations: These are activities directly under the company's control, such as production, human resources management or internal operations.
• Upstream: These are the activities that take place before the company's products or services reach the production stage, such as suppliers of raw materials or service providers.
• Downstream: This concerns the stages following production, such as distributors, retailers or end customers.
• External environment: ESRS 1 also takes into account external factors that directly influence the company, such as regulations, financing, geopolitical and geographical conditions.

Links with other regulations or reporting frameworks

ESRS 1 establishes links with other reporting frameworks or regulations, such as :

• The EU's Green Taxonomy: companies must report on their green activities (environmental issues) in the Green Taxonomy, as well as in the ESRS environmental report. 
• TCFD recommendations: ESRS 1 stresses that companies must comply with the recommendations of the TCFD (Task Force on Climate-related Financial Disclosures) for the disclosure of information related to climate risks, particularly with regard to governance, strategies, risk management and climate-related financial indicators.
• GRI and SASB standards: Although ESRS 1 does not call for strict compliance, it does encourage alignment with these standards for greater consistency in reporting.

The inclusion of these links in ESRS 1 ensures that corporate reporting is integrated and internationally recognized, while offering greater clarity and consistency for stakeholders. 

Alignment with the duty of reasonable care

The CSRD focuses on the integration of due diligence obligations - commonly referred to as "duty of care" - into corporate governance and disclosure practices.

Duty of care is a company's obligation to prevent and remedy the negative impacts of its activities, particularly on human rights and the environment, throughout its production chain. In concrete terms, this means that a company must ensure that its suppliers respect ethical and sustainable standards.

The elements of alignment between the CSRD and the duty of care are : 

• Materiality assessment: the CSRD requires companies to identify and disclose risks and opportunities to human rights and the environment, in line with the principle of due diligence.
• Governance and oversight: companies must put in place governance structures to oversee practices and manage their risks, in line with due diligence obligations.
• Risk management: the CSRD requires companies to share how they manage risk, as part of their duty of care.
• Stakeholder engagement: the guidelines encourage companies to engage with stakeholders, ensuring that their concerns and expectations are taken into account.

Conclusion

ESRS 1 is the methodological foundation of the CSRD, giving companies the tools they need to structure their extra-financial reporting in line with European regulatory expectations. More than just a guide, it clarifies essential concepts such as double materiality, transparency requirements and stakeholder consideration.

Thanks to this standard, companies have a clear framework for identifying their material challenges, structuring their disclosures and reinforcing the reliability of their data.

Mastering this standard will give you the means to tackle all the requirements of thematic and sector-based ESRSs with confidence, while demonstrating a genuine desire to contribute to a more sustainable economy.