This post is continuing a text posted last week.
In their current state and before the future addition of sector-specific standards, the ESRS contain two types of standards, cross-cutting standards and topical standards. There are two cross-cutting standards, ESRS 1 General requirements and ESRS 2 General disclosures. As the names imply, ESRS 1 lays the groundwork for implementing any of the other standards and ESRS 2 contains disclosures that all companies implementing the CSRD should make, regardless of any other considerations. The topical standards are spread across three groups that not surprisingly align with the ESG label, Environment, Social, and Governance. There are five environmental and four social standards, complemented by a single governance standard.
One can find all the conceptually central terms of the ESRS in the cross-cutting standard ESRS 1 General requirements. The arguably most discussed one is “double materiality.” What is it and what, while at it, is single materiality? To begin with, “materiality” means “relevance.” If something is material for your business, it is relevant. “Double materiality” refers to financial materiality and impact materiality. If something is financially material, it influences the financial bottom line of a business. This has also been described as the world’s impact on the business itself. If something is impact material, it has an impact on anything or anyone that is not part of the business itself. Hence, this has also been described as the business’ impact on the world at large, or at least parts of it. Financial materiality touches upon the most fundamental reasoning at the heart of any business entity – being financially sound and sustainable. Impact materiality is what the CSRD and other sustainability initiatives are attempting to establish – for environmental, social, and governance sustainability considerations to take an equal place alongside financial sustainability in a business entity’s strategy, planning, and operations. Sometimes one may encounter the term “single materiality” which always means financial materiality. A business entity that instead only focuses on impact materiality with no regard whatsoever for its financial performance is, frankly, hard to imagine in a capitalist system.

The question of single or double materiality is a crucial one for a business entity’s materiality assessment. In the ESRS, this assessment is meant to guide the business’s reporting efforts: assess what topic is material for your business in either the financial or impact sense, then proceed to report on that topic. The idea is to spare a given business from spending time, effort, and resources on irrelevant, that is, non-material, matters. The decision of what kind of materiality perspective to take simultaneously amounts to the decision of which fundamental approach to sustainability to take. It is easy to understand that this has a massive impact on the practical sustainability work of a business.
Besides double materiality, ESRS 1 General requirements also introduces sustainability due diligence as a central term, explicitly referencing the UN Guiding Principles on Business and Human Rights (UNGPs). ESRS 1 calls on businesses covered by the CSRD to conduct assessments of material impacts, risks, and opportunities using due diligence. This is intended to help them identify, prevent, mitigate, and account for how they address any negative impact. This language is close to the one the UNGPs use for the more detailed instructions on human rights due diligence. Businesses are also required to act and prioritise with due diligence when the double materiality assessment has identified several impacts and the need to act exceeds their capacity.
Another aspect that warrants a brief elaboration is the use of the term “stakeholder” throughout the CSRD and ESRS. Contemporary discussions pay less attention to it compared to “double materiality” and “due diligence” because it is an established concept already. It is more remarkable when recalling that its proponents once established it against the one-time predominance of “shareholders” as the only group deserving of a for-profit business entity’s attention. Stakeholders of a business are not only those holding shares but anyone who has interests connected to its operations. Accordingly, the ESRS succinctly defines stakeholders as “those who can affect or be affected by the undertaking” (ESRS 1, p. 9). Within this definition, the ESRS conceive of two main groups of stakeholders: those affected negatively or positively on the one hand and users of sustainability reports on the other hand. The latter group implicitly includes shareholders, among many others. This illustrates how the group of entities a business needs to consider has grown almost exponentially over the years. Maybe even more importantly, this group of entities is highly unlikely to shrink again.
This short rundown demonstrates that CSRD, ESRS, and concepts contained within them are part of a long development and expansion of non-financial business responsibilities. While these developments are slow and have suffered setbacks more than once, the overall direction over the decades is still a consistent one: from self-governed business voluntarism to legally required obligations, from only reporting to acting and operating with due diligence, from disparate standards for different topics to the integration of environmental, social, and governance concerns, from exclusive obligations to shareholders to obligations to a growing range of stakeholders, and from only obliging huge corporations to increasingly addressing relatively smaller businesses as well.
The latter is just another reason for any company to keep an eye on developments in corporate sustainability legislation. The CSRD and the CSDDD in its current draft differ in their scope of application but, most importantly for small and medium-sized enterprises (SMEs), both Directives call on covered entities to implement the provisions throughout their supply chains, albeit to varying degrees. This means that entities not directly covered by the Directives, such as smaller SMEs, may very well face calls from their larger business partners that are covered by the Directives to improve their sustainability efforts.

We will discuss the ESRS in more detail going forward.
Now that you’ve gained insights into ESRS and CSRD, it’s time to take the next step towards a sustainable future. At MorrowX, we’re passionate about simplifying sustainability for you. Whether you’re a business organisation looking to enhance your environmental and social impact or an SME eager to begin your sustainability journey, we’re here to guide you.
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