The European Sustainability Reporting Standards (ESRS) – A Practical Guide for Businesses report available here

The European Sustainability Reporting Standards (ESRS) are transforming the way companies report their environmental, social, and governance (ESG) impacts. Designed under the Corporate Sustainability Reporting Directive (CSRD), these new rules aim to bring greater transparency, accountability, and comparability to corporate sustainability disclosures.

This guide, prepared by KPMG’s Global Corporate and Sustainability Reporting Leadership Team, explains the foundations, requirements, and practical steps for companies transitioning to ESRS reporting. While ESRS builds on existing standards like IFRS Sustainability Disclosure Standards, the Global Reporting Initiative (GRI), and TCFD, it is far more detailed and complex.

The EU’s Green Deal set the ambitious goal of achieving climate neutrality by 2050, and ESRS is a key tool in tracking corporate progress toward that goal. Although the largest companies are the first to report, eventually over 50,000 firms—including non-EU companies with a significant presence in the EU—will need to comply.

Why ESRS Matters

For businesses, sustainability reporting is no longer just a PR exercise—it’s a regulatory requirement that affects financial strategy, investor relations, and corporate risk management.

Investors and regulators want clear, standardized data on how companies impact the environment and society.

Companies that fail to comply risk fines, loss of investor confidence, and reputational damage.

Those who get it right can attract ESG-focused investors, improve operational efficiency, and enhance brand credibility.

The key game-changer in ESRS is “double materiality”, meaning companies must report not only on how sustainability issues impact their business but also how their business impacts society and the environment.

How ESRS Works: A Simplified Overview

1. What Companies Must Report
 
ESRS requires firms to prepare a sustainability statement that is fully integrated with financial reporting. This statement is structured around:
 
Governance: How sustainability is managed at the board and executive level.
 
Strategy: How sustainability risks and opportunities affect the company’s business model.
 
IRO Management (Impacts, Risks & Opportunities): The policies and actions taken to manage sustainability issues.
 
Metrics & Targets: Measurable data to track sustainability performance.

Going forward we will expand the guidance, drawing from how companies are adapting to the new reporting environment and providing further insight and guidance on emerging issues as well as illustrative examples. Whether you are well advanced on your implementation journey, or taking the first steps, we hope this publication will help you to meet the challenges – and realise the opportunities enhanced reporting can bring.

KPMG

2. The Role of “Double Materiality”
 
Unlike traditional financial reporting, ESRS uses double materiality, meaning companies must evaluate:
 
Impact Materiality: How their operations, products, and supply chain affect people and the planet.
 
Financial Materiality: How environmental and social factors create risks or opportunities that could impact company finances.
 
For example:

A fast fashion brand may need to disclose the human rights risks in its supply chain (impact materiality).
 
A food company operating in a drought-prone region must report how climate change threatens water supply and financial stability (financial materiality).
 
3. Breaking Down ESRS Reporting Standards
 
There are three types of ESRS reporting standards:
 
1. Cross-Cutting Standards (ESRS 1 & ESRS 2)
Provide general requirements and overarching disclosure principles.
 
ESRS 1: The foundation for sustainability reporting.
 
ESRS 2: The minimum disclosure requirements for governance, strategy, risk management, and performance measurement.
 
2. Topic-Specific Standards
 
Companies must report on key ESG issues, grouped as:
 
Environmental (E1–E5) – Covers climate change, pollution, water resources, biodiversity, and circular economy.
 
Social (S1–S4) – Covers workers, communities, consumers, and human rights.
 
Governance (G1) – Covers business conduct, ethics, and anti-corruption efforts.
 
3. Sector-Specific Standards (Future Phase)
 
Will provide industry-specific sustainability disclosure requirements for sectors like energy, banking, and manufacturing.

What This Means for Businesses: Five Key Steps to Prepare

1. Understand If ESRS Applies to You
 
Large EU-based companies must report from 2025 (based on 2024 data).
 
By 2028, smaller firms and non-EU companies with EU operations must also comply.
 
Even if your company is not legally required to report, investors and business partners may demand ESRS-aligned disclosures.
2. Conduct a Double Materiality Assessment (DMA)
 
Identify which ESG issues matter most to your company and stakeholders.
 
Use data-driven assessments to evaluate financial and impact materiality.
 
Prepare for scrutiny—regulators and investors will challenge weak materiality assessments.
 
3. Upgrade Sustainability Governance & Data Collection
 
Assign clear accountability for ESG reporting at the board and executive level.
 
Strengthen internal data systems to track carbon emissions, human rights risks, and financial impacts.
 
Expect limited assurance audits from 2025, with plans to transition to full assurance (like financial audits) in the future.
 
4. Align Sustainability and Financial Reporting
 
Integrate sustainability data into financial statements—this is no longer a separate CSR report.
 
Ensure consistency between financial risk disclosures and ESG reporting.
 
Avoid “greenwashing”—investors will compare sustainability claims with real-world performance.
 
5. Engage with Stakeholders and Value Chain Partners
 
Suppliers, investors, and regulators all expect transparent, verifiable data.
 
ESRS requires value chain disclosures—companies must report on both upstream (suppliers) and downstream (customers) risks.
 
Expect challenges in collecting reliable sustainability data from suppliers, especially in regions with weaker ESG reporting frameworks.
 
Challenges and Common Pitfalls
 
1. Data Gaps and Complexity
 
Many firms lack the necessary data systems to meet ESRS requirements.
 
Tracking Scope 3 emissions (indirect emissions from supply chains) is especially difficult.
 
2. Regulatory Uncertainty
 
The European Commission and local regulators are still refining rules.
 
Non-EU companies face uncertainty about compliance requirements.
 
3. Costs of Compliance
 
Small and medium-sized enterprises (SMEs) may struggle with the financial and administrative burden.
 
Investing in sustainability software, consultants, and audits is costly but necessary.
 
4. Avoiding Greenwashing
 
Companies must back up sustainability claims with data.
 
Regulators and investors are cracking down on misleading ESG disclosures.
 
Final Thoughts: The Future of Corporate Sustainability Reporting
 
ESRS is a game-changer in corporate reporting, setting a new standard for sustainability transparency. Companies that proactively embrace ESRS will gain a competitive edge, attracting ESG-focused investors and enhancing their reputation. Those that delay compliance will face increasing regulatory pressure, investor skepticism, and reputational risks.
 
While the transition to ESRS will be challenging, it is also an opportunity for companies to integrate sustainability into their core business strategy—not just to comply with regulations but to build long-term resilience in a rapidly changing global economy.
 
The next few years will define which businesses lead the sustainability movement—and which ones struggle to keep up.