Corporate activities and sustainability have become inextricably linked in recent years. In particular, the European Union (EU) adopted the Corporate Sustainability Reporting Directive (CSRD) at the end of 2023, which requires companies to report transparently and comprehensively on their sustainability efforts.

And the European Sustainability Reporting Standard (ESRS) has emerged as a specific reporting standard for compliance with this CSRD.

The ESRS is a set of guidelines that defines how companies should report material information on ESG (environmental, social and governance) issues. In the future, compliance with the ESRS will be essential for companies operating in the EU market.

A blog post on the ESRS is available on aiESG as of December 2023.

[Commentary] ESRS (European Sustainability Reporting Standard).


This paper summarises the overview and then explains the latest information and its impact on Japanese companies. As sustainability initiatives continue to gain importance, understanding the ESRS will be a key point for EU companies.

Note that we have also written articles in the past about the CSRD, which directs the ESRS as a standard, and a better understanding of the CSRD will lead to a better understanding of the ESRS. See also.

Commentary] CSRD: The EU version of the Sustainability Reporting Standard just before it comes into force - the impact on Japanese companies.
[Commentary] CSRD: The European Union's Corporate Sustainability Reporting Directive Latest news.

Table of Contents
1. overview of the ESRS
　Summary of ESRS requirements
　Relationship between ESRS and CSRD.
2. Current situation surrounding the ESRS
　Implementation.
　Sectoral requirements of the ESRS
　The ESRS for SMEs: an overview
　　Current status of the ESRS-LSME.
　ESRS for non-EU companies
3. A step towards globalisation: working with IFRS
4. Response by Japanese companies
5. summary

1. overview of the ESRS

The ESRS is a reporting standard based on the Corporate Sustainability Reporting Directive (CSRD), which requires companies to report comprehensive sustainability-related information.

It consists of 12 reporting criteria on ESG (environmental, social and governance) and aims to provide more detailed and clear reporting on a company's sustainability efforts.

The introduction of the Standard will enable companies to more effectively measure, manage and report on their sustainability performance. It will also enable investors and other stakeholders to better understand and assess a company's sustainability efforts.

The ESRS applies to all companies operating in the EU market, not just EU companies (which are defined as companies headquartered in the EU). As sustainability initiatives become increasingly important for the competitiveness of companies in the future, compliance with the ESRS will become an essential issue for companies.

Summary of ESRS requirements.

Figure 1: ESRS overview diagram.
(Translated and revised up-to-date version of EFRAG agency presentation material:https://www.youtube.com/watch?v=a1pdAO62bH0)

The 12 reporting criteria are categorised as shown in Figure 1.

.
ESRS E1: Climate change.
ESRS E2: Pollution.
ESRS E3: Water and marine resources.
ESRS E4: Biodiversity and ecosystems.
ESRS E5: Resource use and the circular economy

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ESRS S1: In-house workforce
ESRS S2: Workers in the value chain
ESRS S3: Affected communities.
ESRS S4: Consumers and end-users

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ESRS G1: Business activities


These standards apply to all eligible companies; companies subject to the company conditions specified by the CSRD must comply with the requirements of the ESRS.

On the other hand, 'sectoral criteria', 'criteria for SMEs' and 'criteria for non-EU companies' will be discussed and set separately.

Relationship between ESRS and CSRD.

Sustainability reports under the CSRD must comply with the ESRS, which is separately provided for in the Commission's Delegated Legislation.
The ESRS, a sustainability standard based on the CSRD, is being developed by the European Financial Reporting Advisory Group (EFRAG), and as of December 2023 it will be a cross-cutting standard.ESRS Part 1.is in force.

2. the current situation surrounding the ESRS

Implementation

The full application of the ESRS is mandatory in relation to the application of the CSRD to some large groups of companies in the EU from 2024 (the report will be issued in 2025).

	Conditions for application: fulfil two or more of the three requirements for two consecutive financial years.*Microenterprises are exempted from the application if they meet at least two of the requirements.	Operational start date
NFRD-eligible companies (large companies)	EU-regulated market listings and banks with at least 500 employees, e.g.	From 1 January 2024.
large-scale	More than 250 employees OR net turnover of more than EUR 40 million OR balance sheet total (total assets) of more than EUR 20 million	From 1 January 2025.
mid-scale	Less than 250 employees OR total turnover of less than EUR 40 million OR total balance sheet (total assets) of less than EUR 20 million.	From 1 January 2026.
small scale	Less than 50 employees OR total turnover of less than EUR 8 million OR balance sheet total (total assets) of less than EUR 4 million.	From 1 January 2026.
Micro-enterprises (exemption conditions)	Less than 10 employees OR sales of less than EUR 700 000 OR balance sheet total (total assets) of less than EUR 350 000	No plans to apply (if conditions are met).
Non-EU companies	Prerequisite: the non-EU ultimate parent company has a total turnover in the EU of more than EUR 150 million for the last two consecutive terms & additional conditions (either one of which must be fulfilled): (1) the EU subsidiary is a large or listed company OR (2) the total turnover in the EU of the EU branch exceeds EUR 40 million.	From 1 January 2028.

As Table 1 shows, all large EU business groups will be covered from 1 January 2025. For medium-sized and smaller groups of companies and non-EU companies (non-EU companies), the application will be applicable after that date.

Covered companies are under pressure to comply with the ESRS in accordance with the application of the CSRD. However, against a background of still ongoing discussions on sectoral requirements for their preparation, the European Parliament has decided to adopt the sectoral requirements in theDecision to postpone for two years.I am doing.

Sectoral requirements of the ESRS

The sectoral requirements of the ESRS were to be fully applied to all relevant sectors from 2024. However, as of March 2023, the Commission decided to postpone the application of the ESRS to certain sectors and the sectoral requirements were scheduled to be adopted by the end of June 2024.

In May 2024, the European Commission decided to put together the sectoral requirements as of 2026 by postponing them for a further two years. This means that companies (especially for EU companies subject to the CSRD by 2024~2026) are expected to focus on the general standards of the ESRS and the cross-cutting standards of the general disclosure requirements.

sector	Current Phase	Next steps.	Anticipated start date of the next phase.
Oil and gas	Initial draft - Approved	SRB Discussion (TBD*)	undecided
Coal, quarrying and mining	Initial draft - Approved	SRB Discussion (TBD*)	undecided
road transport	Initial draft - under verification	undecided	undecided
Agriculture, livestock and fisheries	Initial draft - in preparation	undecided	undecided
automobile	Initial draft - under investigation	undecided	undecided
Energy production and utilities	Initial draft - under investigation	undecided	undecided
Food and beverages	Initial draft - under investigation	undecided	undecided
Textiles, accessories, footwear and jewellery	Initial draft - under investigation	undecided	undecided

▪ On the ESRS for SMEs: an overview.

The ESRS for listed SMEs ('ESRS-LSME') has been identified as being more simplified than the standard for large companies. As an anticipated timeline, the expected entry into force date is 1 January 2026 and an opt-out instrument will be reserved for listed SMEs (those subject to the CSRD) for a period of two years.

This means that from 1 January 2026, when it enters into force, until 31 December 2028, SMEs subject to the CSRD can choose not to comply with the relevant ESRS-LSME. However, from 1 January 2029 onwards, all eligible companies must be ESRS-compliant.

Current status of the ESRS-LSME.

The European Financial Reporting Advisory Group (EFRAG), which manages the ESRS, started public discussions on the ESRS-LSME through a draft publication as of 22 January 2024. The collection of opinions here ended on 21 May 2024, but we can confirm that the procedure has progressed to the coordination stage through a questionnaire survey of various bodies.

At the time of writing (July 2024), no further developments have been identified, but EFRAG has stated that discussions are underway with a view to entry into force from 2026.

... ESRS for non-EU enterprises.

The European Parliament has indicated its intention to develop supplementary standards for non-EU companies (companies outside the EU). Initially, it was planned to publish this supplementary information here by 30 June 2024, but the European Parliament has announced that the publication will be postponed until 30 June 2026. At the latest in 2029, non-EU companies will be forced to publish their sustainability reports in line with the application of the CSRD.

The European Parliament has issued a statement saying that deferral will help to centrally address cross-cutting standards. It will be important for Japanese companies to start considering how to respond to cross-cutting standards.

3. a step towards globalisation: working with IFRS

EFRAG is working with the International Sustainability Standards Board to ensure harmonisation on sustainability reporting standards. This aims to reduce the burden on companies by strengthening the cross-checking between both the ESRS and the ISSB Sustainability Standards.

In May 2024, the IFRS Foundation and EFRAG to facilitate alignment of ISSB and ESRS standardsInteroperability guidancepublished by the Commission. It aims to eliminate the need for companies to address multiple standards separately, mainly by considering the following responses

Common definitions and terminology: ensuring consistency in the use and definition of terms in both standards
Harmonisation of requirements: taking into account the specific needs of each standard and aligning the requirements with the scope of the standard as far as possible.
Modular approach: allows companies to apply both standards in a complementary way and avoids duplication of reporting efforts.

Although the CSRD/ESRS covers the European region, it can be expected that the internationalisation and integration of the regulation will develop in the future by linking it to sustainability reporting standards in other regions.

4. response of Japanese companies

The first step for Japanese companies to take is to check the conditions under which their company is subject to the CSRD.

(*): all classes of securities (e.g. shares, bonds) transferable on the capital market. If only debt securities are issued, the nominal value per unit must be less than EUR 100 000. Otherwise, answer 'no' to this question.
(**): in this case, the sustainability report is prepared at the level of the non-EU parent company excluding subsidiaries (i.e. on a stand-alone basis rather than on a consolidated basis).
¹: 2 out of 3: average of at least 250 employees, net turnover of at least EUR 40 million and balance sheet total of at least EUR 20 million
²:2 out of 3: 10 < average number of employees ≤ 250, EUR 700 000 < turnover ≤ EUR 40 million, EUR 350 000 < balance sheet total ≤ EUR 20 million

Figure 2: Action to be taken by Japanese companies Flow diagram (Author's translation of material from mazars).
(https://www.forvismazars.com/group/en/content/download/1151519/58967343 )

The Japan External Trade Organisation (JETRO) has summarised the application process as follows in its Practical Guidance on ESRS Application for Japanese Companies Subject to CSRD (p.15), published as of May 2024. This summarises mainly the initial to mid-term stages of the application process, but it confirms the need to establish a cross-departmental cooperation system within Japanese companies.

The Japan External Trade Organisation (JETRO) has summarised the application process as follows in its Practical Guidance on ESRS Application for Japanese Companies Subject to CSRD (p.15), published as of May 2024. This summarises mainly the initial to mid-term stages of the application process, but it confirms the need to establish a cross-departmental cooperation system within Japanese companies.

stage	What to do at each stage.
1. understanding of the system itself	This is the stage at which your company understands the 'applicable timing' and 'scope' of the CSRD, as well as the specific disclosure requirements of the ESRS. Q. Are there subsidiaries and other entities within the consolidated group that are subject to CSRD? Q. Who will take the lead in the response, the Japanese parent company or the EU subsidiary? Q. Who is in charge? This requires recognition and agreement between departments and companies on the timetable for application and the setting of mid-term targets for the purpose of measuring progress.
2. gap analysis of in-house sustainability information (from a bird's eye view)	The ESRS requires public disclosure of quantitative and qualitative indicators. Therefore, you need to understand your company's current sustainability reporting status. Non-financial information disclosed externally by the Japanese parent company (e.g. sustainability reports, integrated reports, etc.). Internal regulations for sustainability items. ∙ Results of the response to relevant regulations in each EU Member State and sector. -Sustainability item questionnaires from suppliers. Results of questionnaires/interviews with stakeholders inside the company, etc. Knowing and understanding these will help you conduct a high-level gap analysis (clarifying what you do and do not do) and allow you to check the difficulty of adapting to the ESRS disclosure requirements within your company. At this stage, a rough judgement is fine.
3. double materiality assessment	Double materiality is a concept that assumes that the 'materiality of the impact of non-financial information' at the time of reporting has two influences: i. the impact it would have on corporate management (for investors) and ii. the impact it would have on social and environmental aspects (for more stakeholders). Through the gap analysis, it is expected to identify items that are material to the company and identify the sustainability items, ESRS disclosure requirements and data points that are subject to disclosure. Furthermore, it is important to describe the double materiality assessment process at this stage, as it is required to be disclosed in ESRS 2. In addition, tentative discussions are required regarding third-party guarantee providers and double materiality assessments.
4. more detailed gap analysis	It is expected that a more detailed gap analysis will be carried out on the 'topics identified as important' through the double materiality assessment. At this stage, it is important to confirm the analysis through the following checks Are policies in place? Is the content of the policy compatible and comprehensive with the disclosure requirements of the ESRS standards? Is there numerical disaggregation of the disclosure subject? How have they been disaggregated? Whether the repair methods are appropriate in light of ESRS standards. Are the objectives defined? Are the objectives sufficiently detailed and clear?
5. development of a roadmap	Based on the results of a detailed gap analysis, a plan (roadmap) for ESRS compliance is developed, including the responsible department and responsible person, timing of implementation, priorities, etc.

5. summary.

The ESRS is a sustainability reporting standard that applies to all companies operating in the EU market, not just those in the EU; as of 2024, the standard will begin to apply to some large companies and will be extended in the future.
Japanese companies doing a certain amount of business in the EU will also be subject to the CSRD/ESRS from 2028 at the latest. It will therefore be important to go through a coping plan as early as possible and prepare for a smooth transition to the ESRS.

Note that the ESRS and sectoral requirements for SMEs are still under discussion and are expected to enter into force from 2026. This means that there is more leeway for EU companies to focus on cross-cutting standards.
The ESRS plays an important role in making a company's sustainability efforts transparent and increasing stakeholder understanding.

As sustainability initiatives become increasingly important in the future, an understanding of the ESRS cannot be ignored by Japanese companies.

aiESG offers ESG analysis services for the supply chain of manufactured goods, so if you are a company looking to apply international standards such as the ESRS and have any questions, please contact us.

Enquiry:
https://aiesg.co.jp/contact/


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