In the past few months, the European Union has made significant advancements towards transparency and comparability of sustainability data. Especially for what concerns the goal of standardising the use of resources and the circular economy, the introduction of the ESRS E5 standard defined the field. This tool is part of the Europe Sustainability Reporting Standards (ESRS), a set of reporting standards created to assist companies in efficiently communicating and managing their sustainability performance while facilitating better access to funding.

Developed by the EFRAG (European Financial Reporting Advisory Group) prompted by the EU Commission, the ESRS became necessary ahead of the Corporate Sustainability Reporting Directive (CSRD) coming into force. The directive makes corporate sustainability reporting mandatory starting from the 2024 financial year for all EU companies with more than 250 employees, a turnover exceeding 20 million euros, and an annual budget of at least 40 million euros. In the coming years, the reporting obligation will progressively extend to include small and medium-sized businesses.

What are the ESRS standards?

The Delegated Regulation containing the European Sustainability Reporting Standards (ESRS) was published in the Official Journal on the 22nd of December 2023. EFRAG has provided 2 wide-ranging standards that focus on general requirements and information, and 10 topic-specific standards, including 5 focused on the environment (E), 4 focusing on society (S), and one focusing on governance (G). The environmental standards cover climate change (ESRS E1), pollution (E2), water and marine resources (ESRS E3), biodiversity and ecosystems (ESRS E4), and resource use and circular economy (ESRS E5).

The introduction of the ESRS E5 standard aims at directing companies towards a more responsible and sustainable approach for what concerns the use of resources and the implementation of circular economy principles. However, it is important to underline that, although the Delegated Regulation is binding in all its aspects and directly applicable in the Member States, the adoption of the ESRS E5 standard is required only if the company considers circularity a significant factor for its business.

What the ESRS E5 standard for resource use and circular economy provides

“There are some particularly important aspects in this standard,” explains to Renewable Matter Alessandra Borghini, Manager of the Circular Economy Business Unit at Ergo Srl, a spin-off of the Scuola Superiore Sant'Anna in Pisa. “First of all, the standard looks at the value chain, meaning the entire supply chain, from upstream to downstream. This is significant both from the general perspective of sustainability and the circular economy, because it’s no longer enough to only take into consideration the extent of one's organization."

ESRS E5 requires companies to provide a detailed overview, including impact analysis and risks and opportunities assessment, management criteria, implemented strategies, sustainability goals, and specific information on material flows incoming and outgoing, including waste management.

Why the ESRS E5 standard is useful

The goal is to stimulate a business model focused on maximizing the value of resources over time, promoting practices of renewability, reuse, regeneration, and recycling, and at the same time underlining the importance of related financial impacts. The relevance of these aspects derives from the principle of double materiality introduced by the Corporate Sustainability Reporting Directive. While a single materiality approach would require companies to report how ESG factors influence operations and financial performance (outside-in direction), a double materiality approach also requires an assessment of the impact on the environment and society (inside-out direction).

“This standard introduces the topic of impact analysis and, even more important, that of risks and opportunities assessment, a point that arises from the concept of dependence, on which we must base our sustainability awareness”, continues Borghini. “Economic and social systems, in this particular case especially the economic side, depend on natural capital. Compromising it means putting the continuity of your business at risk."

According to Borghini, the true benefits of these standards lie in the possibility of using them as a support tool to direct companies’ strategies. “This allows us to finally think in terms of positive impacts and not just negative impacts, highlighting the opportunities that come from regeneration of natural capital."

This article is also available in Italian / Questo articolo è disponibile anche in Italiano

Image: Danist Soh, Unsplash

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