What Are ESRS? The EU Sustainability Reporting Standards Explained

The European Sustainability Reporting Standards (ESRS) are the technical framework that determines what companies subject to the Corporate Sustainability Reporting Directive must actually report. If CSRD defines who has a reporting obligation, ESRS defines exactly what they must disclose and how. Developed by EFRAG (the European Financial Reporting Advisory Group) on behalf of the European Commission, the standards form the operational backbone of the EU's corporate sustainability reporting regime.

The Structure of ESRS: 12 Standards Across Three Layers

The current ESRS framework comprises 12 sector-agnostic standards organized into three layers. Two cross-cutting standards apply to all companies regardless of topic: ESRS 1, which sets out general reporting requirements and principles, and ESRS 2, which mandates general disclosures on governance, strategy, and impact, risk and opportunity management. ESRS 2 is mandatory for all in-scope companies irrespective of the outcome of their materiality assessment.

The remaining ten are topical standards, covering environmental, social, and governance topics. The environmental standards run from ESRS E1 (Climate Change) through to E5 (Resource Use and Circular Economy), with intermediate standards covering pollution, water and marine resources, and biodiversity. Social standards cover the company's own workforce (S1), workers in the value chain (S2), affected communities (S3), and consumers and end-users (S4). A single governance standard, G1, addresses business conduct.

Companies do not automatically report against all ten topical standards. Which topics require disclosure is determined by the double materiality assessment, which each company must conduct before preparing its report. A topic is material if it meets either the impact materiality threshold (the company affects people or the environment) or the financial materiality threshold (sustainability issues affect the company's financial position). Climate, covered by ESRS E1, is almost always material on both dimensions for large companies, making it the most consistently reported and most technically demanding standard.

ESRS E1: Why Climate Is the Standard That Matters Most for Carbon Markets

ESRS E1 requires companies to disclose their climate strategy, transition planning, greenhouse gas emissions, carbon removals, and carbon credit purchases. Under E1-6, companies must report gross Scope 3 Emissions and Scopes 1 and 2, calculated using the GHG Protocol, without including removals or credits in those figures. Under E1-7, carbon credits purchased from the voluntary carbon market must be disclosed separately, with documentation covering volumes, project types, registry details, and quality attributes including additionality and permanence.

These disclosures are subject to limited assurance by an external auditor, which means the evidence behind each credit purchase, including registry confirmations and project documentation, must be audit-ready. The ICVCM Core Carbon Principles have emerged as the de facto quality reference point for credit disclosures under E1-7.

The E1 standard also requires companies to disclose a 1.5°C-aligned transition plan with interim targets, scenario analysis covering physical and transition climate risk, and anticipated financial effects from material climate-related risks and opportunities. These forward-looking requirements represent a significant step beyond previous voluntary frameworks such as TCFD and GRI, with which ESRS has been designed to be substantially interoperable.

The Simplified ESRS: What the Omnibus Changes

Following a mandate from the European Commission, EFRAG delivered draft simplified ESRS to the Commission in December 2025. The revision reduces mandatory datapoints by approximately 61 percent and removes all voluntary datapoints, making topical disclosures fully subject to the materiality assessment. If a topic is not material, it does not need to be reported. The Commission is expected to adopt a delegated act incorporating the revised standards in the first half of 2026, with application targeted for financial years beginning on or after 1 January 2027.

Wave 1 companies continue to report under the current ESRS framework, supplemented by quick fix reliefs introduced in mid-2025, until the simplified standards take effect. While the scope reduction lowers the compliance burden for many companies, early implementation experience from Wave 1 has indicated that the primary challenge is less about the reporting threshold and more about the data infrastructure required to produce audit-ready disclosures.

Key Takeaway

ESRS translates the CSRD's reporting obligation into a structured, auditable framework spanning environmental, social, and governance topics. For carbon market participants, ESRS E1 is the standard that carries most weight, governing how companies account for and disclose their gross emissions, transition plans, and carbon credit portfolios. As the simplified ESRS move through the delegated act process, the core structure and the climate obligations within it remain intact.