In our last newsletter, we presented the European Sustainability Reporting Standards (ESRS) and the standards of the Global Reporting Initiative (GRI), highlighting some similarities and differences and discussing the interoperability between the standards. We demonstrated that companies that already report in accordance with the GRI Standards are well positioned for reporting in accordance with the ESRS. In this newsletter, we would like to take a closer look at the relevant differences so that companies know exactly what to look out for when making the transition from the GRI Standards to the ESRS.

Stricter Requirements – More Detailed Disclosures

The first difference between the ESRS and the GRI Standards that we want to address is that the ESRS are more prescriptive than the GRI Standards in terms of the disclosures that companies are required to make. The main reason for this may be that the ESRS are binding standards. Both the GRI Standards and the ESRS aim to improve the comparability and transparency of sustainability reporting. However, due to its voluntary nature, the GRI Standards are more flexible and adaptable to the different environments in which companies operate. This is reflected in the fact that companies reporting under the GRI Standards can choose to report strictly “in accordance” or merely “by reference”. The second option is particularly suitable for companies that do not have certain data available.

The ESRS are more comprehensive than the GRI Standards as they include significantly more data points, particularly in the environmental area. An example of this is the climate change standard, ESRS E1, which differs from the other standards. In principle, information on a topic only needs to be disclosed if the company considers it to be material (more on this below). However, even if the reporting entity concludes that the topic is not material, it must provide a detailed explanation of how and why it has reached this conclusion if it wishes to omit disclosures about climate change.

The ESRS also contain significantly more data points than the GRI standards. The ESRS go into greater depth than the GRI Standards, particularly regarding environmental matters. This is reflected in the fact that companies reporting to the ESRS simultaneously report “with reference” to the GRI Standards, while reporting to the GRI Standards does not meet all the requirements of the ESRS. This becomes clear when comparing ESRS E4 (Biodiversity) with GRI 304: Biodiversity 2016. For every disclosure requirement in GRI 304, there is a corresponding disclosure requirement in ESRS E4. However, the opposite is not true. For example, only according to ESRS E4 companies have to disclose

  • whether and how dependencies on biodiversity and ecosystems and their services have been identified and assessed at own site locations and in value chain,
  • whether and how systemic risks to own business model have been considered and
  • whether a biodiversity and ecosystem protection policy covering operational sites owned, leased, managed in or near protected area or biodiversity-sensitive area outside protected areas has been adopted.

This increased level of detail presents new challenges for companies and often requires a thorough review of reporting processes and possibly improvements in data collection and management. There are now many providers of sustainability reporting software tools that can assist companies in various areas of data collection and management.

For some companies, the use of such tools may be necessary to meet the new requirements. However, it is important that companies carefully assess whether this is the case before making a purchase. This should include an inventory of existing data sources and systems, as well as an analysis of existing sustainability data and data quality. Given the large number of providers of sustainability reporting software tools, it is also important to find out what your specific expectations of such a tool are. This will help you select the most appropriate tool and ensure that it meets your organization’s needs.

The Concept of Double Materiality

Another difference between the GRI Standards and the ESRS relates to the materiality analysis that companies must perform as part of their reporting. In both the GRI Standards and the ESRS, the materiality analysis determines the topics on which a company must report. However, the materiality analysis is conducted according to different criteria.

According to the GRI Standards, the actual and potential negative and positive impacts on the economy, the environment and people are relevant for determining impact materiality. The GRI Standards therefore take an external perspective.

In contrast, the ESRS include the concept of double materiality, which is a combination of an external and an internal perspective. According to the ESRS, a sustainability issue is material and therefore reportable if it has a significant potential or actual impact on the economy, people or the environment (impact materiality) and/or if it has or can have a significant financial impact on the organization (financial materiality). For example, when analyzing materiality under the ESRS, companies must also consider how their dependence on natural and social resources may lead to financial risks and opportunities.

Thus, the difference is that the ESRS include a financial, inward-looking perspective when determining materiality. However, impact materiality and financial materiality are closely linked. Impact materiality is the starting point from which financial materiality is built.

Companies should therefore first determine which issues are material in terms of their impacts. The process already used in GRI reporting to identify material issues can be adopted for ESRS reporting. Companies that have already comprehensively analyzed their economic, environmental and human impacts in their GRI reporting are therefore well positioned for a double materiality analysis under the ESRS. Companies should then only analyze the material issues from a financial perspective.

An impact on sustainability may be financially material from the outset or may become financially material if it is reasonably expected to have an impact on the company’s financial position in the short, medium or long term. In identifying material issues, the ESRS also require organizations to consider how their dependence on natural, human and social resources can be a source of financial risks and opportunities, regardless of their potential impact on those resources.

The conceptual difference in materiality analysis can be illustrated by the example of water scarcity: Suppose a food company operates in a region that is increasingly suffering from water scarcity. Under the GRI Standards, the company would need to analyze how its water withdrawal affects the local water supply and what measures it is taking to minimize this impact (impact materiality). Under the ESRS, the company would also need to assess how water scarcity affects its own operations, for example through higher water costs, lost production or regulatory measures that restrict water use (financial materiality). Double materiality therefore requires the company to comprehensively analyse and report not only on external impacts, but also on internal financial risks and opportunities.

Strategic, Forward-looking Approach

The GRI Standards and ESRS require not only the disclosure of sustainability data, such as a company’s carbon footprint or diversity of management, but also a description of the company’s sustainability strategy.

The GRI standards require companies to report on the management of material issues. This means that they must describe not only the specific impacts of their operations on the economy, the environment, and people, but also the measures taken to manage these issues, the effectiveness of these measures, and the processes used to evaluate this effectiveness.

The requirements of the ESRS in this respect partly overlap with those of the GRI Standards but are more differentiated. The ESRS require companies to describe the impacts of their business activities along the entire value chain and to assess whether these represent opportunities or risks to their core business (known as Impact, Risk and Opportunities, IROs). They must also explain the targets and indicators they use to define and measure progress.

Reporting on impacts, risks and opportunities is an ongoing process and should reflect the current situation as well as future developments. Companies are therefore required to provide both current and forward-looking information on material sustainability issues. While the GRI standards focus primarily on the short term, the ESRS also require consideration of the medium and long term. Therefore, a company reporting under the ESRS must use the following three time horizons:

  • Short-term time horizon: The period chosen by the company for reporting.
  • Medium-term time horizon: The period from the end of the reporting period and covering up to five years.
  • Long-term time horizon: The period starting after the end of the medium-term time horizon.

This comprehensive approach of the ESRS requires companies to provide a detailed account of their sustainability strategy and its impact both in the present and in the future.

External Assurance of the Report

Another difference lies in the external assurance of the sustainability report. Strictly speaking, this relates to the CSRD and not the ESRS. However, we have included this point because of its high practical relevance.

The CSRD requires companies to have their reports verified by qualified and independent auditors. According to the current draft of the CSRD Transposition Act, only the auditor of the company’s annual or consolidated financial statements or another auditor will be entitled to do this in Germany. However, the sustainability report cannot be verified by other assurance providers, e.g. technical experts such as TÜV. The purpose of this mandatory third-party assurance is to increase the credibility of the reported data and to ensure that the reports meet the legal requirements.

The CSRD requires limited assurance in the first few years, before potentially requiring reasonable assurance to be provided from 2028 onwards. In contrast, the GRI Standards recommend, but do not require, external assurance. However, if such assurance is provided, the GRI Standards provide guidelines for reporting.

Conclusion

Despite the similarities between the GRI Standards and the ESRS highlighted in our previous newsletter, there are significant differences to which companies subject to the CSRD will need to adapt to. In particular, the stricter requirements and higher level of detail required by the ESRS are likely to present a challenge already when it comes to data collection.

For companies that have already conducted an impact materiality assessment as part of their GRI reporting, the double materiality analysis should be less challenging. The same applies to the strategic and forward-looking approach required by the ESRS.

Given the mandatory nature of the CSRD and ESRS, companies should consider preparing a test report to prepare themselves for the new requirements and ensure compliance with this new framework.