The first standard defines the concepts that companies should apply when preparing a sustainability report in line with the ESRS. You can think of this standard as a conceptual framework with several chapters that introduce a range of new concepts and ideas about reporting.

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These are the most important concepts set down by ESRS 1:

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‣ The materiality study: the materiality approach is one of the key concepts of the new standards, and helps companies examine which information they should and shouldn’t include in their reports. In a materiality study, companies should explore together with their stakeholders whether a particular topic, for example climate change or human rights violations, is material to their operations. Essentially, a topic is material if it is relevant to both the company itself and its stakeholders. A topic may be relevant because the company itself has an impact on it or because it poses (or may in the future pose) a risk or opportunity for the company in question. The draft version removes certain standards from the materiality analysis (i.e. ESRS 2, the climate standard and certain parts of the standard about a company’s own workforce for companies with more than 250 employees). As a result, the corresponding data points have become mandatory for all companies.

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‣ Timeframe: companies reporting according to the CSRD should take several requirements into account concerning the timing of their report:

• The sustainability report should coincide with the reporting period of the annual financial report.
• In their sustainability reports, companies should not limit themselves to looking back at their performance in the past year. They should also look forward, in the form of targets, transition plans and roadmaps.
• Companies should consider the short, medium and long term.
• Companies should demonstrate their progress by comparing the information and data they report to a base year.

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‣ Structure of the sustainability report: the sustainability report should be integrated into the company’s annual financial report, and should conform to the following structure:

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• general information
• environmental information (including the KPIs required by the EU Taxonomy)
• social information
• information about good governance

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Each of these environmental, social and governance disclosures must include the indicators that emerged from the materiality study, as well as a number of KPIs mandated by the EU Taxonomy.

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The structure of the report should ensure that the information is accessible and understandable to stakeholders. In addition, the report should be machine-readable; i.e. it should be formatted in an XHTML format and provided with digital tags.

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ESRS 1 also introduces the concept of due diligence for sustainability. A clear definition is included in the standard, and it clarifies how due diligence is embedded in the ESRS as a whole. The ESRS does not include requirements on how companies should change their business practices in the context of due diligence. For that, the European Commission is currently developing the Corporate Sustainability Due Diligence Directive. That directive is intended to centrally address the negative impacts that companies exert on human rights and the environment through their value chain. What companies have to report on, however, is addressed in the ESRS.

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The second cross-cutting standard, ESRS 2, sets out the general information that companies have to include in their sustainability report. This standard, at least according to the draft version, applies to all companies, and thus will not be subject to the materiality test.

ESRS 2 contains four pillars:

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• Good governance: the first pillar provides information on the way(s) in which companies must report on the management and board of directors. How diverse is their composition? What are their roles and responsibilities in terms of the company’s ESG impacts, risks and opportunities? How do they monitor progress? How is ESG expertise represented in these bodies, or how do the management and board have access to such expertise? What does the ESG reporting framework look like? How is ESG performance integrated into the bonus system? How does the company’s ESG risk management work? How does the company organise internal checks of the reporting process?
• Strategy: companies are asked to describe their strategy, business model and value chain in their sustainability report. All elements of the strategy that relate to or have an impact on the various sustainability topics should be mentioned. The report should also make clear how the company’s strategy and business model take into account stakeholders’ interests and perspectives, as well as the outcome of the materiality analysis.
• Management of impacts, risks and opportunities (IROs): as already mentioned, the materiality study is a key element of future sustainability reporting. Companies will not only have to describe their material IROs, they will also have to indicate how they proceeded to identify the material topics. In the general section, companies must state which ESRSs have been included in their report; in addition, they must explain which ESRSs or information they have omitted, and why. Companies should also describe in their report what policies and action plans they are developing in response to the material IROs. The topical standards therefore refer to these general reporting requirements in ESRS 2 as well.
• Targets and KPIs: finally, in their sustainability report companies should also disclose what targets and KPIs they have set to monitor the effectiveness of the policies and action plans.