Regulatory Alignment
The ESRS are aligned with several other frameworks, standards, and regulations, both at the European and international levels. In designing the ESRS, EFRAG, the entity which wrote the ESRS, worked with a number of entities including the GRI, the TNFD, and IFRS, to enhance convergence and interoperability of standards. This alignment allows companies to streamline their reporting efforts, avoiding the need to duplicate work across multiple standards. As a result, companies should be able to allocate resources more effectively and reduce reporting costs.
Undertaking a mapping exercise to determine what information companies already have available from other frameworks and understanding the key differences between them would be beneficial. Novata has provided a high-level summary of the similarities and differences below.
IN BRIEF
An important part of the CSRD is EU Taxonomy alignment. At the core of the EU Taxonomy is a classification system to identify whether company activities meet the definition of a sustainable economic activity based on two criteria: (1) Contributing to at least one of six environmental objectives in the Taxonomy; and (2) Doing no significant harm (DNSH) to other objectives while respecting basic human rights and labour standards.
The environmental objectives of the Taxonomy are: (1) climate change mitigation, (2) climate change adaptation, (3) sustainable use and protection of water and marine resources, (4) transition to a circular economy, (5) pollution prevention and control, and (6) protection and restoration of biodiversity and ecosystems.
REGULATION
DESCRIPTION
ESRS COMPATIBILITY
The Sustainable Finance Disclosure Regulation (SFDR)
The SFDR is an existing EU regulation that requires financial market participants (FMPs)—such as banks, investment firms, and pension funds—and financial advisors to disclose information about their sustainability risks and opportunities, as well as the sustainability of the products and services they offer. These two regulations feed into one another, with many FMPs unable to report much of their principal adverse impact (PAI) information unless their investee companies have provided the underlying data. Much of the SFDR information, including PAI indicators, is being asked of companies within the CSRD.
Full
European Taxonomy (EU Taxonomy)
The EU Taxonomy establishes a classification system for sustainable economic activities. The ESRS requires companies to report whether their economic activities are eligible (i.e., the activities are listed as having the potential to be sustainable). It is a “green” taxonomy, with a focus on lower-carbon business models, which means that some companies might not qualify for alignment in the first place. If they are eligible, they need to establish how much of their activity is aligned, i.e., the economic activities meet specific EU Taxonomy regulation criteria. Therefore, companies should screen their activities, assess their Taxonomy status, and report the relevant KPIs (turnover, CapEx, OpEx).
The Corporate Sustainability Due Diligence Directive (CSDDD or CS3D)
Part of the European Green Deal, this Directive was adopted in 2024. It requires very large companies to undertake due diligence of their activities and those of their suppliers to identify, prevent, mitigate, and account for their impacts on human rights and the environment. It complements the SFDR, EU Taxonomy, and the CSRD by adding more granularity to the types of information disclosed and, crucially, the processes companies must have to support sustainable and responsible value chains.
FRAMEWORK/STANDARD
CDP
The CDP's disclosure process is voluntary, but it is supported by over 680 institutional investors with over US$130 trillion in assets under management. In 2022, over 18,700 organisations disclosed their environmental data through CDP. Due to much of the information required for the CDP submission (i.e., business model and strategy resilience, metrics and targets, risk and opportunity identification), it is a complementary framework and companies that are already reporting to CDP will be well-positioned to align to the ESRS disclosure requirements.
Mostly
IFRS Sustainability Disclosure Standards 1 & 2 (S1 and S2)
The IFRS Standards are intended to create a global baseline for sustainability disclosures. The standards are, so far, voluntary; however, more than 20 jurisdictions have introduced or are taking steps to introduce the Standards into legal or regulatory frameworks. The European Commission and EFRAG have worked closely to ensure a very high degree of interoperability between the two sets of standards, so companies that are required to report in accordance with the ESRS will largely report the same information as the IFRS Standards. It is important to remember that the IFRS Standards are steered more towards decision-relevant information for investors, whereas the ESRS is a reporting framework for all key stakeholders. EFRAG and ISSB released interoperability guidance for the Standards and the ESRS.
Global Reporting Initiative (GRI) Standards
The GRI Standards are a widely used set of interconnected sustainability standards to support companies in reporting the impact of their activities in a structured way. The ESRS disclosure requirements draw inspiration from these standards, and companies could include disclosures based on GRI Standards when developing their company-specific disclosures. EFRAG and the GRI released an interoperability index in 2024 to support companies’ reporting efforts.
Sustainability Accounting Standards Board (SASB) Standards
The SASB standards identify sustainability topics and related performance metrics that are likely to have financially material impacts on companies in 77 industries. According to EFRAG, companies can voluntarily use the SASB standards to help develop their entity-specific metrics. Therefore, the ESRS are aligned with the SASB Standards in terms of their focus on materiality and investor needs. Nevertheless, the ESRS are broader in scope than the SASB Standards and cover a wider range of industries.
Partially
Task Force on Climate-related Financial Disclosures (TCFD)
The TCFD recommendations are a set of disclosures that companies can use to report on their climate-related risks and opportunities. Whereas the TCFD recommendations ae a voluntary framework, they have been made part of national regulations and have spread to more than a dozen jurisdictions including Switzerland, South Africa, and the UK. The ESRS, particularly ESRS E1 (climate change), is aligned with the TCFD with regard to the focus on climate-related risks and opportunities (and the ESRS requires climate scenario analysis to assess the resilience of a business strategy). However, the ESRS are more detailed and prescriptive than the TCFD recommendations and cover a wider range of sustainability topics. Additionally, ESRS E1 requires a climate transition plan aligned with 1.5 degrees Celsius, making it more ambitious than the TCFD recommendations.
Task Force on Nature-Related Financial Disclosures (TNFD)
The TNFD recommendations enable businesses and financial institutions to assess, report, and act on nature-related dependencies, impacts, risks, and opportunities. According to the TNFD and EFRAG's correspondence mapping, all 14 of the TNFD's recommendations are reflected in the ESRS. Both recommendations focus on the need for nature-related disclosures, incorporate double materiality, and are organised around the TCFD's disclosure pillars.
