What is ESRS?

What is ESRS?

The European Sustainability Reporting Standards (ESRS) are a comprehensive set of mandatory sustainability disclosure standards developed by the European Financial Reporting Advisory Group (EFRAG) and adopted by the European Commission under the Corporate Sustainability Reporting Directive (CSRD). The first set of 12 sector-agnostic standards was finalized in July 2023, covering cross-cutting requirements (ESRS 1 and ESRS 2) and ten topical standards spanning environment (E1–E5), social (S1–S4), and governance (G1). They require double materiality assessment, detailed quantitative metrics, and forward-looking transition plans, representing the most prescriptive sustainability reporting regime globally.

Why It Matters

ESRS fundamentally changes the economics and expectations of corporate sustainability disclosure. Approximately 50,000 companies will fall within the CSRD's scope—including non-EU companies with significant EU revenues (€150 million+)—making ESRS the de facto global standard for companies operating in European markets. The standards are not voluntary guidelines; they carry the same legal weight as financial reporting requirements, with penalties for non-compliance set by each EU member state.

The scope of required disclosure is unprecedented. ESRS E1 (Climate Change) alone requires disclosure of Scope 1, 2, and 3 GHG emissions, transition plans aligned with the Paris Agreement, carbon pricing exposure, energy consumption by source, and climate-related financial impacts. ESRS S1 (Own Workforce) requires data on working conditions, equal treatment, collective bargaining coverage, health and safety incidents, living wage analysis, and training investment. Companies accustomed to selecting their own metrics and narrative framing face a standardized, auditable disclosure regime.

The double materiality requirement under ESRS distinguishes it from ISSB and SEC approaches. Companies must assess each sustainability topic from two perspectives: whether it creates financial risks or opportunities for the company (financial materiality), and whether the company's activities create significant impacts on people and the environment (impact materiality). A topic is reportable if it's material under either lens, resulting in broader disclosure scope than financially focused frameworks.

Assurance requirements escalate the stakes further. CSRD mandates limited assurance from the first reporting year, with a planned transition to reasonable assurance. This means sustainability disclosures will be independently verified—initially at a lower standard than financial audits, but ultimately converging toward comparable rigor. Companies must establish internal controls, documentation, and data governance sufficient to withstand external audit.

How It Works / Key Components

The ESRS architecture consists of two cross-cutting standards and ten topical standards. ESRS 1 establishes general principles—double materiality methodology, reporting boundaries, time horizons, and data quality requirements. ESRS 2 mandates specific disclosures required of all companies regardless of materiality, including governance structures for sustainability, strategy and business model descriptions, impact/risk/opportunity management processes, and metrics and targets.

The five environmental standards cover: E1 (Climate Change), E2 (Pollution), E3 (Water and Marine Resources), E4 (Biodiversity and Ecosystems), and E5 (Resource Use and Circular Economy). The four social standards address: S1 (Own Workforce), S2 (Workers in the Value Chain), S3 (Affected Communities), and S4 (Consumers and End-Users). G1 covers Business Conduct including anti-corruption, lobbying, and payment practices. Sector-specific standards are under development and will add industry-tailored requirements.

Each topical standard contains both disclosure requirements (DRs) and application requirements (ARs). Disclosure requirements specify the metrics, narrative descriptions, and data points that must be reported. Application requirements provide detailed guidance on how to measure and present those disclosures. The total number of individual data points across all ESRS runs into the hundreds—EFRAG's initial data point inventory identified over 1,100 discrete data points, though many are conditional on materiality.

Phased implementation provides some relief. Large public-interest entities (>500 employees, already under the NFRD) reported under ESRS starting in fiscal year 2024. Other large companies begin in fiscal year 2025. Listed SMEs have until fiscal year 2026 with an opt-out until 2028. Non-EU companies meeting the revenue threshold begin in fiscal year 2028. This staggered timeline gives companies time to build reporting capabilities, but early movers gain competitive advantage in investor relations and data infrastructure.

Council Fire's Approach

Council Fire supports clients through every phase of ESRS implementation—from double materiality assessment and gap analysis against current reporting, through data architecture design and internal controls development, to first-year reporting and assurance preparation. We help companies treat ESRS compliance as a strategic capability build rather than a compliance checkbox, extracting management insights from the reporting process itself.

Frequently Asked Questions

Do non-EU companies need to comply with ESRS?

Yes, if they meet the CSRD's third-country company thresholds: net EU turnover exceeding €150 million and at least one EU subsidiary or branch meeting specific size criteria. These companies must report under dedicated third-country ESRS standards (still being finalized) starting fiscal year 2028. Additionally, non-EU companies within the value chains of ESRS-reporting entities will face data requests—ESRS S2 requires reporting on value chain workers, which means EU companies will push data demands upstream and downstream to non-EU suppliers and partners.

How does ESRS relate to GRI, ISSB, and other frameworks?

ESRS was developed with high interoperability in mind. The standards share significant DNA with GRI—EFRAG and GRI collaborated during development, and most GRI-aligned disclosures map to corresponding ESRS requirements. EFRAG has published detailed interoperability guidance mapping ESRS to ISSB (IFRS S1 and S2), enabling companies to produce ISSB-compliant outputs from ESRS data with limited incremental effort. The key difference remains materiality: ESRS uses double materiality while ISSB uses single materiality, so ESRS disclosures are typically a superset of what ISSB requires.

What are the penalties for ESRS non-compliance?

Penalties are set by individual EU member states, but the CSRD requires them to be "effective, proportionate, and dissuasive." France has established fines up to €75,000 and imprisonment for obstructing auditor access. Germany ties penalties to existing commercial code enforcement. The more significant enforcement mechanism may be market-based: non-compliant companies face investor divestment, exclusion from ESG indices, and reputational damage. Auditors issuing opinions on annual reports that include sustainability information have professional liability if they fail to flag material misstatements—creating an additional accountability layer.