ESRS Explained: What the Standards Require, Who Must Apply Them and How to Start

The most common starting error is to open a datapoint list before resolving four gateway questions: who is legally in scope, which reporting entity is covered, which standard version applies and which matters are material. ESRS implementation works in the opposite order. Legal scope establishes the reporting obligation; ESRS 1 establishes the preparation logic; ESRS 2 provides cross-cutting disclosures; and the topical standards supply disclosures for material environmental, social and governance matters.

Figure 1. The ESRS reporting architecture. London Reporting Academy learning visual.

The Corporate Sustainability Reporting Directive (CSRD) amended the Accounting Directive. Omnibus I amended that legal architecture again in 2026, including the main scope thresholds and the timetable. Member States must transpose the relevant Omnibus I provisions by 19 March 2027. This means that a group cannot determine its enforceable obligation from an ESRS document alone: it must read the applicable national law, any transitional or exemption measures and, for issuers, the relevant transparency-law route.

At EU Directive level, the main individual and consolidated scope for financial years beginning on or after 1 January 2027 is targeted at undertakings or groups that exceed both EUR 450 million net turnover and an average of 1,000 employees during the financial year. The phrase “on the balance sheet date” is the legal measurement point; it does not add a balance-sheet-total threshold. Special rules continue for issuers, credit institutions, insurers, subsidiaries, financial holding undertakings and third-country groups. Article 4 of this package addresses those tests in detail.

The revised 2026 architecture retains two cross-cutting standards and ten topical standards. The standards work as a connected system rather than twelve independent checklists. ESRS 1 and ESRS 2 apply across the statement. Topical standards are used when the related topic is material, subject to the materiality of the information within the applicable disclosures. Entity-specific disclosures close gaps where a material impact, risk or opportunity is not covered, or not covered with sufficient granularity, by ESRS.

ESRS 1 is the operating manual for the statement. It explains how to identify material impacts, risks and opportunities; assess the materiality of information; determine the reporting undertaking and value-chain boundary; handle estimates, uncertainty, acquisitions, disposals and omissions; and structure the final statement. Under the revised text, fair presentation applies to the sustainability statement as a whole. The company is not expected to satisfy every information need of every individual user; it must provide decision-useful material information for the defined user groups.

ESRS 2 is the cross-cutting disclosure standard. It organises information around governance, strategy, the management of impacts, risks and opportunities, and metrics and targets. In practice, a reporting team should not draft ESRS 2 in isolation. Governance statements must be consistent with board minutes and delegated authorities; strategy disclosures must connect to the business model and financial planning; and topic-management disclosures must tie to the decisions made in the double materiality assessment.

Double materiality combines two perspectives. Impact materiality considers the undertaking’s actual and potential positive and negative impacts on people and the environment, including through business relationships. Financial materiality considers sustainability-related risks and opportunities that affect, or could reasonably be expected to affect, financial performance, financial position, cash flows, access to finance or cost of capital over the short, medium or long term. A matter is material when it is material from either perspective; it does not need to satisfy both.

The revised ESRS explicitly supports a top-down approach. A team may begin with the business model, sectors, geographies, products, activities, relationships and known sustainability issues, and use that picture to focus detailed assessment work. It is generally unnecessary to score every theoretically possible impact, risk or opportunity. However, a top-down process still needs evidence, coverage checks and documented reasons for excluding plausible matters.

The sustainability statement is prepared for the reporting undertaking: the same undertaking or group covered by the related management report and financial reporting perimeter. That starting point does not mean every ESRS metric uses an identical operational boundary. Some information concerns own operations; other requirements extend to upstream or downstream value-chain actors where material impacts, risks or opportunities arise. Metric-specific instructions may define additional inclusions, exclusions or calculation treatments.

A practical boundary register should reconcile the consolidation perimeter to subsidiaries, joint operations, associates, joint ventures, leased assets and relevant business relationships. It should then identify the boundary used for each material disclosure, data source and estimate. Revised ESRS include reliefs and proportionate approaches for value-chain information, acquisitions, disposals, partial value-chain scope and joint operations. These are controlled reliefs, not permission to omit the value chain wholesale.

The statement is included in a dedicated section of the individual or consolidated management report. Under revised ESRS 1, it is organised into four parts: general information, environmental information, social information and governance information. The company may include a clearly identified executive summary and may present EU Taxonomy disclosures in a separate appendix where the applicable conditions are met. Incorporation by reference is conditional and must preserve accessibility, timing, assurance scope and traceability.

The Accounting Directive requires an assurance opinion on sustainability reporting, initially at limited-assurance level under the applicable legal framework. Assurance readiness therefore starts before drafting: definitions, data owners, systems, calculations, estimates, controls, evidence retention, management review and governance approvals should be designed into the annual cycle. A late “assurance clean-up” is usually more expensive and creates greater disclosure risk.

The management report must also be prepared in the required electronic reporting format, with sustainability information marked up once the relevant digital-tagging rules apply. Even before mandatory tagging, a stable data dictionary and disclosure index help keep the narrative, quantitative tables, taxonomy disclosures and source evidence synchronised.

Why this works: it identifies the reporting entity, period, version, double-materiality basis and value-chain coverage. What must be adapted: the exact legal basis, version, boundary differences, estimates, omissions, assurance status and any transition reliefs actually used.

Which national law applies to the undertaking, parent and issuer, and has Omnibus I been transposed?

Does the entity or group exceed both the relevant turnover and employee thresholds for the period?

Is reporting required at individual, consolidated or third-country level, and are exemptions available?

Which ESRS delegated regulation is in force, and is an FY2026 transition choice available?

Is the sustainability statement boundary reconciled to the financial reporting entity?

Does the double materiality method cover own operations and relevant business relationships?

Have material matters been mapped to ESRS 2, topical standards and entity-specific gaps?

Are data definitions, estimates, controls, evidence and approvals ready for limited assurance?

Is the statement structured for the management report and future digital tagging?

Has the board or appropriate governance body approved the key judgements and release?