An explanation of ESRS and IFRS interoperability
The International Sustainability Standards Board (ISSB) was launched in 2021 at COP26 in Glasgow, alongside the announcement that it would consolidate both the Value Reporting Foundation (VRF) and the Climate Disclosure Standards Board (CDSB). Therefore, right from its inception, it had the intention of standardising the ESG space, through the aforementioned consolidation but also through the international visibility it gained at COP26 and the resulting governmental support. As a result, the ISSB’s IFRS S1 and S2 standards, which were published in 2023, have already gained international support and regulatory implementation.
IFRS S1 is a general sustainability standard which is not very prescriptive. It provides a framework that allows companies to monitor their sustainability-related financial risks and opportunities with a more company-specific, tailored approach. The IFRS S2 standards provides a more prescriptive metric list but follows the same, largely structural foundation. To find out more about the IFRS S1 and S2 standards, read our whitepaper titled “IFRS S1 and S2: the metrics explained."
2023 also saw the publication of the European Sustainability Reporting Standards (ESRS). The ESRS are the standards adopted by the European Commission for the EU’s Corporate Sustainability Reporting Directive (CSRD) regulations. So, in order to comply with CSRD, companies must report against the ESRS. CSRD was created to amend and expand the scope of the existing Non-Financial Reporting Directive (NFRD), changing from covering around 11,700 companies to approximately 49,000. CSRD will also bring greater transparency through its more substantial disclosure requirements, including a list of over 75 metrics with corresponding data points. To download the full ESRS metric list, click here.
ESRS is substantial in size, with many disclosure requirements laid out across ESRS 1, 2, E1, E2, E3, E4, E5, S1, S2, S3, S4 and G1. The approach is quite prescriptive but does leave most of the disclosures up to the outcome of the materiality assessment, a process which the entity also has to report on. Read our ultimate guide to CSRD compliance to find out more.
Similarities and differences between the ESRS and IFRS S1 and S2
EFRAG have released an interoperability paper mapping the IFRS S1 and S2 frameworks to the ESRS.
The largest and most obvious qualitative difference between ESRS and IFRS, as highlighted in EFRAG’s paper, is the concept of double materiality. Whilst IFRS refers to impacts only in the sense that they may pose financial risks or opportunities to the entity, ESRS requires entities to report impacts if they are either material to the entity or to people and planet. Reflecting this, the ESRS refer to stakeholders as a broader group with no finite definition, whereas IFRS refers to stakeholders as the primary users of sustainability-related financial information.
‘All of IFRS S2’s metrics are included in ESRS’ climate change requirements, but ESRS requires further disclosures, under various sustainability topics from biodiversity and ecosystems to workers in the value chain.’ Trish van Soesbergen, ESG Specialist at KEY ESG
Although IFRS S2 mandates climate-related financial disclosures, other sustainability topics are not specifically referred to in IFRS S1. This lack of prescription makes materiality assessments begin with a relatively blank canvas. On the other hand, ESRS lists industry-agnostic sustainability matters to be considered in the materiality assessments, giving reporting entities a starting point for their analysis. It also has requirements for the double materiality assessment process. This is opposed to the IFRS, which doesn’t have requirements, leaving the materiality assessment process up to the reporting entity. ESRS industry-specific standards are to be implemented in 2026.
Both standards recognise that the entity’s value chain can be a significant source of potential sustainability-related risks and opportunities. They also both require entities to disclose across short, medium and long-term time horizons. In both frameworks, a report should present information comparatively to the previous report, and the information should be verifiable and understandable. Estimations should also be disclosed and any errors identified should be reported in the next report, according to both frameworks.
To find out more about the overlaps and interoperability of ESRS and IFRS, click here for EFRAG’s guidance.
Alternatively, contact us for more information on the distinctions between IFRS and ESRS reporting. Or, request a demo to find out how our ESG software can streamline the reporting process by automating data collection and allowing you to report under several different frameworks with ease.
