The European Commission adopted the first set of European Sustainability Reporting Standards (ESRS) on July 31, 2023. These standards are part of the Corporate Sustainability Reporting Directive (CSRD), which aims to enhance transparency and comparability in sustainability reporting across the EU.
The ESRS cover a comprehensive range of environmental, social, and governance (ESG) topics. They provide detailed disclosure requirements for companies to report on their material sustainability impacts, risks, and opportunities.
The adoption of the ESRS is indeed a significant step towards improving sustainability reporting in the EU. It's estimated that around 50,000 companies will be covered by the new rules, compared to about 11,700 companies under the previous Non-Financial Reporting Directive (NFRD).
The ESRS are designed to align with international best practices and provide stakeholders with reliable and comparable information on companies' sustainability performance. They aim to promote the integration of sustainability considerations into companies' decision-making processes and demonstrate their commitment to sustainable development.
It's worth noting that the ESRS will be phased in over time, with different categories of companies required to comply at different stages between 2024 and 2028.
However, the regulatory landscape has shifted considerably since the original adoption. In February 2025, the European Commission adopted the Omnibus I simplification package, proposed to reduce the number of companies subject to mandatory sustainability reporting by approximately 80%. Under the proposal, only companies with more than 1,000 employees and either a turnover above EUR 50 million or a balance sheet total above EUR 25 million would remain subject to the CSRD.
The Commission has also proposed deleting the requirement to adopt sector-specific ESRS, keeping the assurance requirement at limited (rather than reasonable) assurance, and committing to a broader revision of the ESRS to substantially reduce the number of data points. EFRAG had been asked to deliver draft revised standards by 31 October 2025, and the Commission expects the revised ESRS to apply from financial year 2027 onwards. A "quick-fix" delegated act was also adopted to ensure that wave one companies (those already reporting for financial year 2024) are not required to report additional information for financial years 2025 and 2026 beyond what they reported for 2024.
Why was the CSRD adopted?
The Corporate Sustainability Reporting Directive (CSRD) emerged from the European Union's need to address sustainability challenges. It replaces the Non-Financial Reporting Directive (NFRD) and aligns with the European Green Deal's goal of creating the first climate-neutral continent by 2050. The CSRD expands non-financial reporting requirements for large companies and listed entities, including SMEs, covering areas such as climate-related risks, social impact, environmental consequences, and corporate governance.
Recognizing the importance of sustainability risks and opportunities in determining a company's long-term success, the CSRD aims to create a standardized framework for sustainability reporting. This framework is designed to facilitate company comparisons, improve financial modeling accuracy, and enhance transparency for investors and stakeholders.
The CSRD represents significant progress in implementing sustainable finance and non-financial reporting practices. It reflects the growing importance of sustainability in economic activities and emphasizes businesses' responsibility to ensure responsible social and environmental impacts.
The European Commission adopted the European Sustainability Reporting Standards (ESRS) on July 31, 2023, which companies subject to the CSRD will use for reporting. These standards cover environmental, social, and governance issues, including climate change, biodiversity, and human rights. The reporting requirements will be phased in over time for different companies.
The application of the CSRD will occur in four stages, starting with companies already subject to the NFRD in 2025 (for the financial year 2024) and extending to third-country undertakings with significant EU presence by 2029 (for the financial year 2028). This phased approach allows companies time to adapt to the new reporting requirements.
When will the new requirement take effect?
Interoperability: convergence with other standards and frameworks
The Corporate Sustainability Reporting Directive (CSRD) aims to enhance convergence in sustainability reporting. It is part of broader global efforts to provide uniformity to the fragmented ESG disclosure landscape. To improve comparability of sustainability information between companies, the European Sustainability Reporting Standards (ESRS) were developed. These standards enhance interoperability with existing standards and frameworks.
During the development of the IFRS Sustainability Disclosure Standards (SDS), EFRAG engaged in regular technical dialogue with the International Sustainability Standards Board (ISSB). This collaboration aimed to ensure alignment between the ESRS and global sustainability reporting standards.
EFRAG and the Global Reporting Initiative (GRI) have also worked together to achieve a high degree of interoperability between their respective standards. In November 2023, they signed a new Memorandum of Understanding (MoU) to further substantiate the benefits of this alignment and continue collaborating on technical support for reporting companies. Their partnership extends to fostering interoperability of digital XBRL taxonomies, including a simplified tagging system and digital correspondence table between both standards.
The increased interoperability between the ESRS and other standards is expected to significantly reduce the reporting burden for many companies. This alignment aims to eliminate the need for companies to report the same sustainability information multiple times through separate, overlapping standards.
To further support this interoperability, the IFRS Foundation and EFRAG published joint guidance material in May 2024 to illustrate the high level of alignment between the ISSB Standards and ESRS. This guidance provides practical support for companies to efficiently comply with both sets of standards, particularly in climate-related disclosures.
European Sustainability Reporting Standards by EFRAG
The Corporate Sustainability Reporting Directive (CSRD) includes the adoption of EU Sustainability Reporting Standards (ESRS).
Conditional on a materiality analysis, the company needs to report on each item: Governance (sustainability governance and organization), Strategy (integrating material sustainability impacts, risks, and opportunities into strategy), Impact, risk, and opportunity management (policies, action plans, resource allocation and risk management), Metrics and targets (current achievements and progress against stated targets).
It is important to understand the architecture of the ESRS in detail. The first set comprises 12 standards: two cross-cutting standards (ESRS 1 General Principles and ESRS 2 General Disclosures), five environmental standards (E1 Climate Change, E2 Pollution, E3 Water and Marine Resources, E4 Biodiversity and Ecosystems, E5 Resource Use and Circular Economy), four social standards (S1 Own Workforce, S2 Workers in the Value Chain, S3 Affected Communities, S4 Consumers and End-users), and one governance standard (G1 Business Conduct). ESRS 2 General Disclosures is mandatory for all companies regardless of the outcome of their materiality assessment. All other topical standards (E1 through G1) are subject to materiality: companies only report on those topics that are determined to be material through their double materiality assessment. However, ESRS E1 Climate Change includes a specific requirement for companies that conclude climate is not material to provide a detailed explanation of how they reached that conclusion, reflecting the expectation that climate change will be material for the vast majority of reporting companies.
How to draft an ESRS report according to EU legislation CSRD
The following steps represent key phases within the CSRD compliance process. Nonetheless, the specific phases will vary for each company and must be tailored to meet their individual requirements.
The Key Benefits and Challenges of CSRD for Businesses
While the CSRD marks a considerable advancement, it presents certain challenges. Companies encounter various obstacles in aligning their operations with the stringent requirements of the directive. Nonetheless, those organizations that comply with CSRD standards stand to gain several advantages.
Conclusion
The CSRD and its accompanying ESRS represent the most ambitious mandatory sustainability reporting framework in the world. While the Omnibus simplification proposals have introduced significant changes to the scope, timeline, and ambition of the framework, the underlying architecture of the ESRS, with its double materiality approach, comprehensive topical coverage, and digital reporting requirements, remains the reference point for sustainability reporting in the European Union.
For organisations that fall within the scope of the CSRD (whether under the original or proposed revised thresholds), the practical imperative is clear: invest in a robust double materiality assessment, establish the data collection infrastructure needed to meet ESRS disclosure requirements, ensure connectivity between sustainability and financial reporting, and prepare for limited assurance of reported information. For organisations that fall outside the mandatory scope, the ESRS nonetheless provides a valuable voluntary reporting framework that aligns with global best practice and positions companies favourably in the eyes of investors, customers, and regulators. The direction of travel in European sustainability reporting is unambiguous, even as the pace and scope are subject to ongoing political calibration.
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