New Year, New Reporting Requirements: The ESRS

What is the ESRS about? In short, it’s sustainability reporting

Last year the European Commission adopted the EuropeanSustainability Reporting Standards (ESRS) for use by all companies subject to the Corporate Sustainability Reporting Directive (CSRD), which compels companies to use standards in their sustainability reporting. The goal is to make corporate sustainability reporting more consistent, as happens with financial accounting and reporting.

The ESRS sets down what the standard is. It covers a range of environmental, social, and governance issues, including climate change, biodiversity and human rights. From 2025, any EU company falling under the CSRD* must file an annual report on how sustainability influences their business. Alongside cross cutting requirements and disclosure related to governance, strategy, management, metrics and targets, businesses will be disclosing material   risks and opportunities, and the impact of their activities on people and the environment.

Double materiality: a new reckoning

Double materiality is a critical element built into the ESRS. It means both impact materiality and financial materiality must be assessed and reported. What makes something material? To establish impact materiality, positive and negative sustainability-related impacts that are connected with the undertaking’s business are assessed. To arrive at financial materiality, the financial effects of a combination of the likelihood of occurrence and the potential magnitude of risks and opportunities is calculated.  Using robust information, businesses must assess both these areas in short, medium and long term scenarios.

Ambition to understand and address causality, impacts and dependencies

Double materiality is a clear move to awaken companies to their responsibility to cease unwanted impacts on people and nature. It also serves to make more apparent the causality between failure to do so and the adverse impacts on companies’ bottom lines  which can affect the viability of their own business.

There’s high ambition in ESRS as it asks companies to demonstrate they are utilising well-researched qualitative and quantified evidence of their impacts and dependencies. including on the financial price tags of both. Businesses will need to look both up and down their value chains, including through products and services, and through business relationships, to gather this information.

So how can data on HCVs help?

The High Conservation Value approach focuses on current or potential future sites for commodity production which still harbour important values for nature and people. Once these values have been identified, they are managed in a manner that ensures they are not at risk from land use changes. For many commodities - like timber, pulp and paper, oil palm, sugar, cotton, rubber, cocoa and more - there is huge opportunity to secure amazing  natural and social assets for the long term, through well-structured assessments of those values’ significance to our world, and of how we depend on them, from local to global implications.

With HCV Screening across landscapes, and through more detailed HCV Assessments at the site level, businesses can look ahead and plan for what needs to be maintained or enhanced, as well as build the social capital and knowledge about how best to achieve this protection. The HCV tools  can help inform a business, at any stage, on their impacts as well as dependencies.

Species diversity, landscape level ecosystems and ecosystem mosaics, rare, threatened or endangered ecosystems or habitats, and related ecosystem services are covered by the HCV approachs, linking directly to areas the ESRS requires companies to strategize  for, assess, and report on.  Gaining a clear picture of these building blocks is invaluable to assessment.

HCV-related data can also help inform identification of production-related dependencies according to the site and its context. Easy examples are related to water, climate regulation effects and pollination. Operational dependencies in the form of social dependencies can be surfaced because stakeholders of all types are central when implementing HCV Approach, which includes following and documenting processes of Free Prior and Informed Consent with local communities and indigenous peoples.

Taking a moment to reflect on all this, the Natural Capital Coalition Protocol is useful in how it explains material dependencies on natural capital as when if consideration of its value, as part of the set of information used for decision making, has the potential to alter that decision.

We do need altered decisions to achieve sustainable business. The ESRS is asking for specifics: consideration of biodiversity and ecosystems in business strategy and business models; policies related to these; and actions being taken. This analysis needs to be supported with impact metrics. For many companies, HCVs can provide an easy-to-understand and easy-to-build-on framework for knowing what their risks and opportunities are, and for making decisions about how to manage their impacts better through HCV management and monitoring.

How we’d like HCVs and the HCV Approach to help ESRS reporting

We would like to see more businesses -

• using HCVs as a structured framework for understanding the most important building blocks of impacts and dependencies, and risks and opportunities, that they may have, and
• taking the information generated from using the HCV Approach as a starting point on their journey for transformative changes towards sustainability.

We’d also like to see companies utilising the HCV information they may already have access to more effectively. Companies may hold this directly, or gain access to it through their value chain relationships, and can use it to better effect in their analysis and leverage for ESRS reporting. With HCVs referenced in many global voluntary sustainability standards for commodities, and with some cases of nationwide assessments of the likelihood of presence of HCVs to inform land use planning, there is a wealth of information to draw upon.  Actions to protect and enhance HCVs affected by business should be a key part of achieving any nature positive strategy.

We’d like to work in partnership with companies to get more specific on matching HCV information to the ESRS. Our shared aim is achieving the global sustainable development goals to build a greener, fairer, better world by 2030.

Contact us

If you would like to find out more about HCVs, the HCV Approach and related tools and deployments, and how it could help you with sustainability reporting, please take a look at www.hcvnetwork.org or email us at info@hcvnetwork.org.

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‍*Who does the ESRS affect?

The CSRD will apply to all companies with:

1. Over 250 employees

2. More than 40€ million in annual revenue

3. More than 20€ million in total assets

4. Publicly-listed equities and have more than 10 employees or 20€ million revenue

5. International and non-EU companies with more than 150€ million annual revenue within the EU and which have at least one subsidiary or branch in the EU exceeding certain thresholds

Any EU company that meets that criteria is required to file an annual report on how sustainability influences their business, as well as the company's impact on people and the environment.  The ESRS outlines how and what information and ESG metrics companies need to report to European regulators to comply with the CSRD.

For a quick and easy to access summary, we suggest taking a look at KPMG’s talkbook.