ESG – What is it and who does it concern?
ESG is currently a very hot topic affecting both large and small firms. The acronym ESG stands for Environmental, Social and Governance. ESG is used to evaluate companies in terms of their business practices, environmental impact, sustainability, and ethics. Data from ESG reports are used by investors (as part of the annual report), business partners, and regulators to assess risks, opportunities, and a company’s long-term impact.
Which standards are used for ESG reporting?
In the European Union, two standards are most commonly used for ESG reporting – GRI and CSRD. Both focus on a company’s impact across all three reporting areas, but they differ in several key points.
The first difference is the type of standard. GRI reports are voluntary and are therefore not enforced by any authority. Conversely, CSRD is a mandatory EU directive; failure to comply can lead to sanctions. It is currently mandatory for large firms, such as financial institutions, but in the future, it will apply to a much broader range of companies that meet defined criteria.
The scope of GRI is focused more on ESG topics from a stakeholder engagement perspective rather than financial impact. CSRD emphasises the disclosure of ESG risks, impacts, and financial materiality to meet regulatory requirements.
Current criteria for CSRD reporting
(These criteria are valid as of 27 February 2025. They may change in the near future following the approval of the Omnibus reform package by the EU.)
Implementation of the CSRD will take place in phases. The first phase has already occurred, and companies falling into the second phase are currently preparing for reporting. Here is a detailed overview of the timeline:
Phase 1: Public Interest Entities (PIEs)
- Large publicly traded companies (on EU regulated markets)
- Banks and insurance companies
- Companies with more than 500 employees
These firms must publish their first CSRD report in 2025, covering data from 2024.
Phase 2: All large companies
Companies that meet two of the three following criteria:
- More than 250 employees
- More than €40 million in net turnover
- More than €20 million in total assets
The first CSRD report must be published in 2026, covering the year 2025.
Phase 3: Listed SMEs, small and non-complex credit institutions, and captive insurance undertakings
- Listed small and medium-sized enterprises (SMEs)
- Small and non-complex banks
- Captive insurance companies
The first mandatory report is due in 2027, covering 2026. These entities have the option to delay reporting until 2028 if they require more time.
Phase 4: Non-EU companies with significant activity in the EU
- Non-EU companies with a turnover exceeding €150 million within the EU
- Must have at least one large subsidiary or branch in the EU
These companies must publish a CSRD report in 2029, which will include data from 2028.
IMPORTANT: Even if your company does not fall into any of the above categories, it does not mean that ESG does not concern you. ESG reporting also includes Upstream and Downstream activities, meaning data is required from suppliers and the customer chain. Therefore, if you supply a larger company, they will likely request data from you, such as greenhouse gas emissions, workforce structure, or ethical business policies.
How is ESG structured?
From a CSRD perspective, there are European Sustainability Reporting Standards (ESRS), which are the official standards for ESG reporting. ESRS consists of three main areas with their own topics and sub-topics that define disclosure requirements. In total, there are over 1,000 data points, but not all are relevant for every company. To determine these, companies should conduct a double materiality assessment and identify relevant topics. Furthermore, there are mandatory disclosures specified in the ESRS 2 section.
Environmental (E) focuses on:
- Climate change policies and carbon footprint
- Resource consumption (water, energy, raw materials)
- Pollution and waste management
- Biodiversity protection
Social (S) focuses on:
- Employee diversity, inclusion, and working conditions
- Human rights and fair pay
- Customer satisfaction and product safety
- Community engagement and philanthropy
Governance (G) focuses on:
- Board composition and diversity
- Executive remuneration and accountability
- Anti-corruption policies and compliance
- Shareholder rights and business ethics
Conclusion
Having an ESG report will be essential for large companies, and at the very least, providing key data will be vital for smaller companies in the near future. It will help firms gain new business partners or access more favourable loans thanks to lower interest rates. All companies should prepare for this. For more information on ESG or environmental topics, follow our profile on LinkedIn. If you have any questions regarding ESG or emission/carbon footprint calculations, please do not hesitate to contact us.
