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The European Sustainability Reporting Standard (ESRS) encourages companies to identify future risks and opportunities to achieve sustainable business practices, and is divided into three main categories: environmental (E1~E5), social (S1~S4), and governance (G1). The ESRS is an inevitable issue for Japanese companies as well, since Japanese companies doing business in the EU market may also be subject to the ESRS from 2028. Therefore, early preparation and response are required.
aiESG has provided commentary on ESRS disclosure requirements in three separate articles. In previously published articles,ESRS Basic InformationFrom,Commentary on General RequirementsandSocial and governance aspectsI have explained about the following.
This article is the fourth in a series of ESRS commentaries. Focusing on the environmental standards E1~5, which many companies have already addressed, this article explains the purpose of the standards set forth by the ESRS and the specific disclosure items that companies should comply with.
1. What is ESRS?
The ESRS was introduced under the European Union's Corporate Sustainability Reporting Directive ("CSRD") as a framework for companies to transparently and consistently report environmental, social, and governance (ESG) information. It consists of 12 reporting criteria, ranging from environment-related criteria such as climate change, pollution, and biodiversity, to social criteria related to the company's internal workforce, workers and consumers in the value chain, as well as governance criteria (Figure 1). The purpose of these reporting standards is to make a company's sustainability performance transparent and to make it easier for investors and stakeholders to evaluate a company's sustainability performance.
Figure 1: ESRS overview diagram (aiESG BlogQuoted from)
As mentioned above, Japanese companies that are non-EU companies may be subject to the application of the CSRD/ESRS from 2028 if they are operating in the EU market. However, it is expected that Japanese companies will be subject to the CSRD/ESRS even before then. For example, Japanese companies may be required to take appropriate measures when their partner EU companies are forced to comply with the regulation (sooner or later). The CSRD/ESRS also requires companies to understand the sustainability status of the companies they are involved with. In some cases, companies may be indirectly required to comply with the regulations through transactions with EU companies.
Related articles:.
- Commentary: The Latest Trends in the European Sustainability Reporting Standards (ESRS)
- CSRD: The EU Sustainability Reporting Standard Just Before It Enters into Force: The Impact on Japanese Companies
- The European Union's Corporate Sustainability Reporting Directive (CSRD): An Update
2. About ESRS E1~E5
The ESRS's environmental disclosure standards are divided into five categories, from E1 to E5.
- E1: Climate Change
- E2: Contamination
- E3: Water and Marine Resources
- E4: Biodiversity and Ecosystems
- E5: Resource Use and Circular Economy
Each standard also requires disclosure requirements related to "Impact, Risk and Opportunity Management," "Indicators and Objectives," and, in E1 and E4, "Strategy. Based on these requirements, companies are required to report information in light of their circumstances. In addition, companies are required to provide a reasonable explanation of the reasons for any requirements that they decide not to disclose. This process increases the transparency of a company's activities and strengthens the relationship of trust with stakeholders.
The explanation of the regulations in each standard from this point onward will be based on assumed examples, which are not actual examples because the CSRD/ESRS has only been in operation for a short period of time. The purpose of this article is to help company personnel better understand the environmental standards and regulations of the ESRS and their role, and to put them into practice.
E1: Climate Change
| Case study: How will climate change affect businesses? Company A is a company in the automotive industry with a global supply chain. Since its European subsidiary has become a CSRD/ESRS-eligible company, the parent company has decided to integrate an ESRS section in its sustainability report. As a result of the actual double materiality assessment, the company has identified the risks that the recent rapid climate change will affect within its supply chain. In order to minimize those impacts, Company A published a climate change adaptation strategy using the ESRS E1 section. E1-1,E1-4,E1-6 Transition Plan for Climate Change Mitigation/GHG Emissions: Presented on the future action and investment plans for decarbonization after calculating the greenhouse gas emissions (Scope 1, 2, 3) throughout the supply chain. E1-4,E1-5 Energy consumption and climate change mitigation targets: Analyze the energy used in the manufacturing process and establish a step-by-step procedure for the adoption of renewable energy sources. E1-9 Financial Impact: Publicly announce that after analyzing short, medium, and long term climate risks, we will take action on climate risk response plans, energy consumption efficiency, and supply chain reviews. Through these initiative plans, the company is addressing the vulnerability of its supply chain to climate change from a long-term perspective. |
ESRS Three pillars required by E1
ESRS E1 is a standard that helps companies identify how they impact and respond to climate change. The assessment is based on three main pillars
- mitigation measure
・Report on greenhouse gas (GHG) reduction plan in line with the 1.5°C target of the Paris Agreement.
Example: Measures to introduce renewable energy and improve energy efficiency. - adaptation plan
Developed a strategy to address climate change.
Example: Establishment of a business continuity plan (BCP) to prepare for extreme weather risks. - Risks and Opportunities
Identify risks and opportunities posed by climate change from a financial perspective.
Example: Investments in new environmental businesses.
Introduction of disclosure requirements
| Disclosure Requirements | title | Contents |
| E1-1 | Transition Plan for Climate Change Mitigation | Disclose plans for emissions and investments in decarbonization consistent with the Paris Agreement's 1.5°C target, etc. |
| E1-2 | Climate Change Mitigation and Adaptation Policy | Policy disclosure of impacts, risks, and opportunities related to climate change, including energy efficiency and renewable energy deployment |
| E1-3 | Climate Change Actions and Resources | Disclosure of specific actions & resources to implement climate change policy, including capital and operating expenditures |
| E1-4 | Climate Change Mitigation Goals | Quantitative disclosure of targets and progress on GHG reduction, energy efficiency, and renewable energy deployment |
| E1-5 | Energy consumption and energy mix | Detailed disclosure of energy consumption and mixing of fossil fuels, nuclear power, renewable energy, etc. |
| E1-6 | Scope 1, 2, 3 and total GHG emissions | Companies disclose total GHG emissions and details of emission sources |
| E1-7 | GHG removal and carbon credits | Disclosure on GHG removal projects and carbon credit utilization |
| E1-8 | internal carbon price | If internal carbon pricing is used, disclose the range and type of pricing |
| E1-9 | Financial implications associated with physical and transition risks | Disclose financial implications arising from physical and transition risks in the short, medium and long term |
Imagine, for example, a future in which heavy rains and typhoons occur frequently. Companies that are prepared for these disasters will not only gain the trust of society and the market, but also ensure the stability of their business.Adaptation to ESRS E1 is the "compass" of a company's response to climate change and the first step in creating a corporate plan.The following is a list of the most common problems with the "C" in the "C" column.
E2: Contamination
| Case study: What pollution problems do companies face? Company B has been manufacturing chemical products for many years, and upon adoption of the ESRS, water pollution in the vicinity of its plants was identified as a significant issue, so the reporting requirement E2 (Pollution) was integrated into the company's sustainability reporting. E2-1 Pollution Policy: Develop a clear policy on air, water, and soil pollution prevention. In addition, disclose plans for pollution prevention measures throughout the supply chain. E2-2 Pollution-Related Actions and Resources: The company plans to invest in new purification equipment and revamp its production processes to significantly reduce emissions of pollutants. E2-3 Pollution-Related Objectives: emissions and the deadline for achieving the specific reduction targets. E2-4, E2-5 Contaminant InformationDisclosure of substances of concern in terms of emitted substances, and disclosure of emission indicators. Through these responses, Company B has been able to incorporate contamination issues throughout the value chain relevant to its business into its management plan. |
The three pillars required by ESRS E2
ESRS E2 is a standard to help companies understand their impact on pollution and build a sustainable business model. It is evaluated based on the following three pillars
- Pollution Prevention
Specific measures to minimize impacts on air, water, and soil.
Examples: implementation of remediation technologies and compliance with emission standards. - Zero Pollution Initiatives
Aiming for a sustainable business model, we will establish a system that does not emit pollutants.
Examples: use of renewable energy and closed-loop production systems. - Financial Risk Management
Analyze the financial impact of pollution-related risks and identify opportunities.
Example: New market opportunities through compliance with environmental regulations.
Introduction of disclosure requirements
| Disclosure Requirements | title | Contents |
| E2-1 | Pollution Policy | Disclose information on policies to prevent air, water, and soil contamination, as well as information on risk and opportunity management policies and pollution prevention measures throughout the value chain. |
| E2-2 | Pollution-related actions and resources | Disclose specific actions taken and resources expended to prevent pollution |
| E2-3 | Pollution-Related Objectives | Disclose "targets" set to prevent and control air, water, and soil pollution - specify ecological thresholds and legal requirements for targets |
| E2-4 | Pollutant emissions | Disclose information on applicable pollutants (including microplastics) - including emissions, changes over time, etc. |
| E2-5 | Substances of Concern and Substances of Very High Concern | Disclose information on production, use, and emissions of substances of concern and substances of very high concern |
| E2-6 | Financial implications of risks and opportunities associated with pollution | Disclose the financial implications of risks and opportunities associated with pollution and report the critical process of how long the impacts will last. |
The ability of a company to continue to grow in harmony with the local environment is an important value for employees, the local community, and customers.The items indicated in ESRS E2 are important triggers to recognize the impact of corporate activities on pollution.The first two are the following.
E3: Water and Marine Resources
| Case study: How should we respond to the challenges posed by water resource scarcity? Company C is a manufacturer that uses large amounts of water resources in many of its products. In preparing its sustainability report, it consulted the environmental requirements of the ESRS and found that E3 was a requirement that the company was required to disclose. The challenge was that water resources were becoming scarce in the areas where the company operated, increasing production costs and friction with the local population. Company C reported on current issues using the applicable criteria. E3-1 Water and Marine Resources Policy: New policies were developed to promote water consumption reduction and reuse. This is,E3-4 Water consumptionThe use of the figures published in the "Japan's Financial Reporting Standards" will enable the formulation of a long-term viewpoint. E3-2 Actions and Resources: Invested in water-saving technologies and wastewater reuse systems. E3-3 Goal setting: Set specific numerical targets to reduce water consumption by 20% over 5 years. Through disclosure, the company has begun to plan and act sustainably on water resource use. |
The three pillars required by ESRS E3
ESRS E3 is a standard to clarify corporate responsibility for water and marine resources. It is evaluated based on the following three pillars
- Impact Management
Assess the use of water resources and their impact on marine conservation, and manage them sustainably.
Example: Participation in water quality improvement projects and marine conservation activities. - Identifying Risks and Opportunities
Assessment of the short, medium and long term impact of water-related risks on the company's finances.
Example: Development of a response plan based on operational risks in water-stressed areas. - Transparent disclosure
Build trust by publishing detailed data, including water usage and percentage of recycled water.
Example: Reporting of annual water consumption and disclosure of specific results of water reuse.
Introduction of disclosure requirements
| Disclosure Requirements | title | Contents |
| E3-1 | Water and Marine Resources Policy | Disclose policies on water management, product and service design, and reducing water consumption throughout the value chain. |
| E3-2 | Actions and resources related to water and marine resources | Disclose actions taken and resources allocated to address identified risks and opportunities |
| E3-3 | Goals related to water and marine resources | Disclose goals that explain how they contribute to water risk management, water quality improvement, and sustainable management of marine resources |
| E3-4 | water consumption | Disclose data related to water consumption, including total water consumption, water consumption in areas of high water stress, amount of water reused, etc. |
| E3-5 | Financial implications of water and marine resource-related risks and opportunities | Disclose financial implications of risks and opportunities, including quantification of relevant commodity risks and financial implications over the short, medium, and long term |
Water resources are not unlimited in availability, and it is important for companies to be aware of their relevance to their activities.ESRS E3 is a corporate commitment to strategies to protect water resourcesThis enables the
E4: Biodiversity and Ecosystems
| Case study: How to manage the impact of corporate activities on biodiversity? Company D is a multinational company that exports agricultural products. Through supply chain analysis, the company identified the ecological impacts of large-scale agricultural land development as an issue. Through the adoption of the E4 criteria, the company produced a report that intertwined its management strategy with biodiversity. E4-2 Biodiversity Impact Management Policy: Set conditions for suppliers to implement ecosystem conservation. E4-5 Impact Indicators: Monitoring the impact of agricultural land development on biodiversity sensitive areas. E4-6 Financial Impact: (1) Quantify impacts and incorporate risks into financial strategies in the short and medium term. With the introduction of E4, the company began working with its supply chain to ensure that its operations and biodiversity are compatible. |
The three pillars required by ESRS E4
ESRS E4 is a standard for integrating biodiversity and ecosystem protection into corporate activities. The following three pillars are at its core
- Mitigation of Impact
Take action to minimize negative impacts on biodiversity.
Example: Participation in sustainable resource procurement and ecosystem restoration projects. - Managing Dependence and Risk
Identify the areas in which corporate activities depend on biodiversity, and identify risks.
Example: Addressing the risks posed to business by the overexploitation of natural resources. - Financial Perspective
Quantify the financial impact of biodiversity-related risks and integrate them into business models.
Example: Predicting the risk of land deterioration and developing a long-term business plan.
Introduction of disclosure requirements
| Disclosure Requirements | title | Contents |
| E4-1 | Biodiversity and ecosystem considerations in the strategy | Disclose how biodiversity and ecosystem impacts, dependencies, risks, and opportunities affect your company's strategy and business model - including how to respond across the value chain |
| E4-2 | Policies related to biodiversity and ecosystems | Disclose policies for managing impacts, dependencies, risks, and opportunities for biodiversity and ecosystems throughout the value chain - including sourcing in the supply chain and managing impacts on biodiversity in production practices |
| E4-3 | Actions and resources related to biodiversity and ecosystems | Disclose actions related to biodiversity and the resources allocated to them - including actions to address significant impacts on biodiversity |
| E4-4 | Biodiversity and ecosystem-related objectives | Disclose goals that explain how they relate to impacts, risks, and dependencies across the value chain |
| E4-5 | Impact indicators related to biodiversity and ecosystem change | Disclose indicators related to substantial impacts, including biodiversity sensitive areas, land use change, etc. |
| E4-6 | Financial implications from risks and opportunities related to biodiversity and ecosystems | Disclose the financial implications arising from short-, medium-, and long-term risks and opportunities - including quantification of financial implications and information on the level of related processes and uncertainties. |
When a company is in harmony with the environment, it enables long-term growth and gains the support of the community.ESRS E4 is a criterion that indicates a company's commitment to biodiversity-focused managementIt functions as a
E5: Resource Use and Circular Economy
| Company E is a food packaging company that uses a large amount of plastic and, in line with the adoption of the ESRS, has determined that its double materiality is a resource challenge due to increased plastic waste. E5-1 Policy: Announced a policy to increase the use of recycled plastic to 50%. E5-2 Actions and resources: Publicized the streamlining of the production process and the introduction of a waste management system. E5-4&E5-5 Resource inflows and outflows: Through data disclosure, the company makes transparent the percentage of recycled resources used and the effect of raw material reduction. In addition, the quantified amount of waste is disclosed. The articulation of these initiatives not only quantifies the efforts that Company E is currently undertaking, but also enables the company to develop a clear plan. |
Three pillars required by ESRS E5
ESRS E5 is a standard for optimizing resource use and promoting a circular economy. The following three pillars are at its core
- Improved resource efficiency
Use limited resources efficiently and reduce waste.
Example: Reduction of material loss and introduction of reusable materials in the production process. - Introduction of a circular economy
Minimize waste generation and promote the use of reusable resources.
Example: Focus on durability and recyclability from the product design stage. - Identifying Risks and Opportunities
Create new business opportunities by analyzing resource shortages and regulatory risks.
Example: Long-term cost savings through the use of renewable energy.
Disclosure RequirementsIntroduction of
| Disclosure Requirements | title | Contents |
| E5-1 | Policies related to resource use and circular economy | Disclose policies covering the company's overall operations and the entire value chain, covering recycled resource intentions and sustainable resource sourcing. |
| E5-2 | Actions and resources related to resource use and circular economy | Disclose actions taken and resources allocated to implement resource use and circular economy policies - such as improving resource efficiency, waste management, and applying circular business models |
| E5-3 | Goals related to resource use and circular economy | Disclose resource use and circular economy goals that explain how they relate to resource inflows and outflows and waste management |
| E5-4 | resource influx | Disclose data on resource inflows in business activities, including products, materials, and water, while reporting on the total amount of materials used and the percentage of recycled and sustainable resources used. |
| E5-5 | outflow of resources | Disclose resource runoff data, including durability and recyclability in product design and information on hazardous and non-hazardous waste - hazardous waste includes "toxic, flammable, corrosive, and potentially hazardous properties to human health and the environment" |
| E5-6 | Financial implications of resource use and circular economy-related risks and opportunities | Disclosure of financial impacts, including quantification of financial impacts based on risks and opportunities and explanation of assumptions about them |
When companies contribute to the realization of a circular economy, they make it possible to build a sustainable society where the environment and the economy are in harmony.ESRS E5 is the first step toward a management strategy that balances resource management and economic value.The first two are the following.
3. Summary
The ESRS environmental criteria (E1~E5) play an important role in helping companies make the transition to a sustainable economy. Through standards on climate change, pollution, biodiversity, water resources, and resource use, companies are required to properly manage their environmental impacts and clearly report risks and opportunities. This allows companies to be transparent in their approach to environmental issues and to increase the trust of their stakeholders.
In particular, it is important to take action as soon as possible, as the application of the ESRS is expected to spread to Japanese companies in the future. By following the specific disclosure requirements under each standard, companies will be able to reduce their negative environmental impacts and promote the transition to a sustainable business model.
aiESG has written a total of four articles in the "ESRS Commentary Series" to provide a concise understanding of the ESRS (including CSRD), which is still difficult to understand because it is a new regulation. We will continue to update this series as additional information becomes available.
In addition, aiESG has developed Japan's first tool for analyzing ESG impacts of supply chains at the product and service level. If you have any questions or concerns about CSRD/ESRS compliance, please contact aiESG.
Contact us:https://aiesg.co.jp/contact/
Related Articles
aiESG(2023) [Commentary No.1] Overview of ESRS (European Sustainability Reporting Standards)
aiESG(2024) [Commentary No.2] Overview of ESRS (European Sustainability Reporting Standards): ESRS1 and ESRS2
aiESG(2024) [Commentary No.3] Overview of ESRS (European Sustainability Reporting Standards): Society and Governance
