March 14, 2024

Business meets nature and biodiversity: decoding the CSRD & ESRS

By Gary Franke and Pieter van Exter

Halting biodiversity loss and protecting nature in business operations emerged as a compelling narrative in 2023. The adoption of the Global Biodiversity Framework at the United Nations Biodiversity Conference (COP15) in December 2022 set the scene, followed by new nature-based frameworks entering the stage in 2023: the Science Based Targets for Nature (SBTN) and the Taskforce on Nature-related Financial Disclosures (TNFD). The biggest reporting development for companies in 2023, encompassing the entire spectrum of environmental, social and governance (ESG) topics was the Corporate Sustainability Reporting Directive (CSRD). 

All celebrated as pivotal moments for nature and all sending strong signals to the private sector to incorporate nature, biodiversity and broader sustainability considerations into their business strategies and operations. In this article we will delve into the CSRD, zoom in on the environmental reporting dimension (the ‘E’ in ESG), and explore the complexities of reporting on topics such as biodiversity and ecosystems, and water and marine resources. We’ll discuss key practicalities, main obstacles, and provide guidance for businesses in gearing up for nature and biodiversity reporting.

The Corporate Sustainability Reporting Directive explained

The CSRD is an EU directive that requires companies to disclose detailed information on their environmental and social impacts, governance, and sustainability practices. Born from the European Green Deal, it marks a significant evolution from its predecessor, the Non-Financial Reporting Directive (NFRD). With its broader scope, the CSRD impacts approximately 50,000 companies and is not just a European affair; its ripples are felt across the global business pond, either directly or through company supply chains. 

The directive mandates comprehensive reporting on a wide range of sustainability topics such as climate change, nature and biodiversity, and human rights, alongside updates on corporate sustainability policies, risks, and management approaches. The CSRD seeks to improve and standardize the quality of corporate sustainability disclosures, fostering transparency and accountability. By elevating sustainability reporting to a similar level of importance as financial reporting, the CSRD is anticipated to have a significant impact on the way companies approach and manage their ESG impacts. 

According to a recent study by PwC, the CSRD is already having an effect. Many businesses that participated in the survey (from Germany, Austria, Switzerland, and the Netherlands) have started to adopt the new reporting guidelines – confirming that sustainability is becoming increasingly embedded in corporate strategies.

ESRS, the heart of the CSRD

At the heart of the CSRD are the European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG)​​. The ESRS are a set of guidelines developed to standardize sustainability reporting across the European Union, enabling companies to provide comprehensive and comparable data on their ESG impacts. The ESRS comprise the following standards:

  • Cross-cutting standards
    ESRS 1 and ESRS 2 are cross-cutting standards which apply to all sustainability matters. These standards lay the foundation for the reporting framework by defining general reporting principles, fundamental CSRD concepts such as double materiality (considering both the impact of sustainability issues on the company and the company’s impact on sustainability issues), reporting boundaries (the scope of what is reported), and overarching disclosures that all companies within the CSRD scope are required to make. These general reporting principles help to drive consistency and comparability across sustainability reports.
  • Topical standards
    The topical standards guide companies in detailed reporting on specific environmental, social, and governance matters. The broad range covered by these standards allows companies to report comprehensively and holistically on their sustainability performance. Topics include climate change, nature and biodiversity, human rights, and social welfare.

(Double) materiality

When it comes to the topical standards, companies are only required to report on those that are material. Materiality is about determining the significance of information that should be disclosed to stakeholders, and identifying which aspects of a company’s operations, strategies, risks, and opportunities are important enough to influence decisions of investors, shareholders, and other stakeholders. In other words, businesses need to identify the sustainability information – whether it be standards, disclosure requirements, or specific data points – that is relevant to their operations based on a materiality assessment. 

The ESRS focus on the concept of double materiality, which encompasses two perspectives: how sustainability issues affect the company and how the company and its operations  impact sustainability issues. Broadly, double materiality includes:

  • Financial materiality (the outside-in perspective)
    This considers how ESG issues affect the company’s financial performance, risks, and valuation. It’s about assessing how sustainability-related risks and opportunities could impact the financial condition or operational performance of the company.
  • Environmental and social materiality (the inside-out perspective)
    This looks at the impact of the company’s operations, products, and services on the environment and society. It reflects the company’s influence on external sustainability issues, such as climate change and biodiversity.

The double materiality approach aims to provide a comprehensive view of a company’s overall sustainability performance, offering insights into its societal and environmental impact as well as its exposure to sustainability-related risks and opportunities.

The environmental dimension of CSRD: ESRS E1-E5

There is a growing recognition of the critical role that environmental elements play in sustaining life, supporting economies, and ensuring the well-being of our planet. Nature underpins our global economy, with over half of the world’s GDP moderately or highly dependent on nature. The CSRD supports comprehensive environmental disclosures through the ESRS topical standards E1-E5. These standards are groundbreaking in their detailed requirements for reporting on topics such as climate change, pollution, water and marine resources, biodiversity and ecosystems, and resource use and circular economy. They demand a level of transparency and action previously unseen in corporate reporting.

The environmental standards and the specific topics they address.

ESRS E1: Climate Change

E1 requires companies to report their climate impact, actions to mitigate climate change, and adaptation strategies. It seeks to enable transparent and comparable disclosure on corporate greenhouse gas emissions, energy consumption, and climate resilience, supporting stakeholders in assessing a company’s environmental commitment and risk management.

ESRS E2: Pollution

E2 aims to ensure companies disclose their pollution output, including air, water, and soil pollution, and the measures they are taking to reduce these. This standard promotes transparency about pollutants released and waste management practices, helping stakeholders understand a company’s environmental impact and efforts towards pollution control.

ESRS E3: Water and Marine Resources

E3 requires companies to report on their use and impact on water bodies and marine ecosystems. It focuses on sustainable water use, impact on aquatic ecosystems, and water management strategies, enabling stakeholders to gauge a company’s water stewardship and conservation efforts.

ESRS E4: Biodiversity and Ecosystems

E4 mandates companies to detail their impact on biodiversity and ecosystems, including habitat preservation and restoration efforts. This standard highlights a company’s role in protecting and enhancing biodiversity, offering insights into its environmental responsibility and ecosystem impact management.

ESRS E5: Resource Use and Circular Economy

E5 centers on how companies manage resource consumption and embrace circular economy principles. It covers resource efficiency, waste reduction, and recycling initiatives, reflecting a company’s commitment to sustainable resource use and minimizing environmental footprint through circular practices.

A deep dive into ESRS E3: Water and Marine Resources

The ESRS E3 standard is a set of guidelines that helps companies report their impacts and dependence on freshwater and marine resources. Here’s a breakdown of what this means.

ESRS E3 offers a comprehensive look at how companies interact with various water bodies, including rivers, lakes, and underground water sources. For example, companies must disclose details about how much water they use, where they take water from, and how they treat and dispose of wastewater. However, it’s not just about how much water is used. Businesses are required to evaluate and report on the management of Impact, Risks, and Opportunities (IROs) associated with their water use. This involves a thorough analysis of how water-related risks and opportunities can influence both the company’s operations and the surrounding environment.

The specifics: key reporting aspects of ESRS E3

The E3 standard includes five environmental disclosure requirements (E3-1 to E3-5) as well as one ESRS 2 requirement (ESRS 2 IRO-1):

  • Impact, Risk, and Opportunity management (ESRS 2 IRO-1)
    Companies must describe their processes for identifying impacts, risks, and opportunities related to water and marine resources.

  • Policies (E3-1)
    Businesses are required to disclose their policies for managing impacts, risks, and opportunities concerning water and marine resources. This covers strategies for water procurement, efficient treatment, pollution prevention, water-efficient product design, and, if applicable, sustainable seawater use.

  • Actions and resources (E3-2)
    Details on the actions taken and resources allocated for managing water and marine resources must be provided. This includes efforts to mitigate impacts, reduce consumption, and contribute to the regeneration of marine ecosystems.

  • Targets (E3-3)
    Companies should report their water-related targets, explaining how these are influenced by ecological limits and aligned with global or national frameworks. Goals should address water management in water-scarce regions and the sustainable handling of marine resources.

  • Impact metrics (E3-4)
    Businesses must report detailed metrics on water consumption, including total usage, consumption in water-stressed regions, and information on water reuse and recycling. Water intensity metrics must also be provided.

  • Financial effects (E3-5)
    Companies should report potential financial effects (both positive and negative) arising from water and marine resource-related impacts, risks, and opportunities. Where possible, these should be quantified in monetary terms.

In essence, the ESRS E3 standard is all about making sure companies are not just responsible users of water but are actively contributing to the health and sustainability of water and marine resources, especially in high-risk areas. It’s a call to action for businesses to be more transparent and engaged in preserving these vital resources.

A deep dive into ESRS E4: Biodiversity and Ecosystems

The ESRS E4 standard focuses on how businesses interact with biodiversity and ecosystems. It emphasizes the importance of transparency regarding a company’s positive and negative impacts on and relationships with various environments, including land, freshwater, and marine ecosystems, as well as the plants and animals that inhabit them. This standard is all about understanding the variety of life in all its forms, from the diversity within species to the ecosystems they inhabit, and how businesses affect this biodiversity. It also considers the company’s interactions with indigenous and other affected communities.

The specifics: key reporting aspects of ESRS E4

The E4 standard includes six environmental disclosure requirements (E4-1 to E4-6) as well as two from ESRS 2 (ESRS 2 SBM-3; IRO-1):

  • Transition plan and consideration in strategy and business model (E4-1)
    Companies must share their plan to align their business model and strategy with goals to preserve biodiversity and meet specific targets, like those in the EU Biodiversity Strategy for 2030. This involves explaining how their business development is compatible with these environmental goals.
  • Impact, Risk, and Opportunity management (ESRS 2 IRO-1)
    Companies must describe their processes for identifying impacts, risks, and opportunities related to biodiversity and ecosystems.

  • Material IRO and their interaction with strategy and business model (ESRS 2 SBM-3) Businesses need to explain how their strategy and business model are designed to withstand challenges related to biodiversity and ecosystems. This explanation should include the scope and results of their analysis on this resilience, the considered timeframe, stakeholder engagement, and any key assumptions made. 

  • Policies (E4-2)
    Companies must share detailed strategies on how they address their impacts on biodiversity and ecosystems. This includes outlining measures to mitigate risks and capitalize on opportunities related to nature conservation, detailing how their business processes (from sourcing materials to product development) contribute to the preservation and improvement of natural habitats and diversity of species.

  • Actions and resources (E4-3)
    Companies should report on specific actions taken and resources allocated to protect or restore biodiversity and ecosystems. This includes a description of efforts to compensate for or mitigate negative impacts on nature.

  • Targets (E4-4)
    Businesses are required to set and report on targets related to biodiversity and ecosystems, including providing details on the progress towards these objectives and how they are grounded in scientific evidence.

  • Impact metrics (E4-5)
    Businesses must disclose their impacts on biodiversity and ecosystem changes. This could involve reporting on the proximity of operations to sensitive areas or impacts on species. These metrics need to be verifiable, and both technically and scientifically robust.

  • Financial effects (E4-6)
    Companies should report potential financial effects (both positive and negative) that stem from risks and opportunities that emerge from the company’s impacts and dependencies on biodiversity and ecosystems. This includes an estimation of the risks and opportunities in monetary terms, where feasible.

The ESRS E4 highlights the interconnectedness of environmental issues, showing how biodiversity and ecosystems are linked to other areas like pollution, water resources, and circular economy practices. It stresses the importance of companies being responsible stewards of nature, ensuring their operations do not harm, but rather contribute positively to the environment and restoration.

CSRD key obstacles and developments

Here we explore some of the key challenges facing the private sector in its implementation of the CSRD, focusing on the hurdles of ESRS E3-E4 in particular, and highlighting relevant recent developments.

CSRD implementation challenges

The PwC survey highlighted four main challenges for companies when implementing the CSRD: the complexity of the technical implementation, lack of resources, high time pressure, and lack of expertise. This shows the variety of obstacles that companies are facing and highlights the need for them to tackle several issues at once. 

The challenge of technical complexity stems from two main drivers:  the requirement to consider the entire value chain when assessing impacts, and the collection and consolidation of quantitative data. For most industries, the bulk of environmental impact doesn’t come from a company’s direct operations, but rather from its value chain. Collecting and consolidating data from across the supply chain is complex. It is often scattered and not collected in a consistent way. In some cases, businesses may not have even started collecting any data yet. This means they will need to engage with their suppliers and service providers to get the information and data points they require, which can take considerable effort, especially if they have a large supplier base and vast amounts of data. Ensuring data accuracy, completeness, and consistency from supply chain data requires transparency and traceability across the supply chain.

Nature and biodiversity reporting: challenges of ESRS E3-E4

Besides the obstacles mentioned above, implementing the ESRS E3 and E4 standards pose additional challenges for companies, largely due to the comprehensive scope of these standards demanding detailed reporting on complex and interrelated topics. Furthermore, ESRS E3 and E4 introduce terminology and concepts that are likely to be new for many companies.

From Metabolic’s own engagement with companies to understand the challenges they face regarding the ESRS, we have identified the following obstacles when tackling the E3 and E4 standards:

  • Nature and biodiversity demand a geospatial perspective
    ESRS E3 and E4 explicitly require companies to identify and manage their impacts, risks and opportunities related to the topic standard. To assess the level of risk that a company is exposed to, the use of geospatial data with information about the local circumstances is required. For example, one of the data points concerns the total amount of freshwater sourced in areas of high water stress. Overlaying impact data with contextual geospatial data is a new concept for many companies and requires additional expertise. 

  • Supply chain data points are often incomplete
    Some data points for ESRS only cover the direct operations of an organization, while others cover the full value chain. For the value chain, we found that almost every company we talked to experiences gaps in their data and are looking for ways to close that gap effectively while also using robust proxies to estimate the overall impacts and risk level.

  • Selecting the right metrics is difficult
    Unlike more straightforward metrics like carbon emissions, impacts on nature and biodiversity cannot be captured through a single metric. There is no single measurement for nature change like the carbon dioxide equivalent, CO2e, for climate. Climate has one driver with equal global impact, whereas nature represents sustainability in 3D. It requires a contextual understanding, involving multiple drivers and location-specific impacts.

  • Extensive stakeholder engagement is required
    The standards emphasize the importance of engaging with stakeholders; individuals or groups that have interests that are or could be affected by the company’s activities and through its value chain, including indigenous and other affected communities. This adds another layer of complexity for businesses, and demands effective communication and engagement strategies as it’s not always clear for companies how and where they should prioritize their stakeholder engagement.

Overall, the comprehensive requirements stated in ESRS E3-E4 present significant challenges for businesses in terms of understanding nature and biodiversity, environmental footprint analysis, data collection, stakeholder engagement, and strategic adaptation.

Navigating the data management maze

Sustainability departments are typically the drivers of CSRD implementation. However, accounting and finance teams are also deeply involved, and partially taking the lead at times, according to the PwC report. Whereas these two departments often have little interaction, the CSRD is shaping a new trend of multidisciplinary teams. This shows how the directive is changing the way companies organize themselves and continue to operate, as financial reporting and sustainability reporting increasingly align. 

It’s also worth mentioning that 52% of the companies surveyed by PwC intend to use software for CSRD reporting. There is currently a wide range of solutions available with differences spanning the user friendliness to the depth of detail with which the technical topics can be mapped. As reporting requirements change and best practices in this space continue to evolve, companies need to remain informed and a suitable software solution can accompany and facilitate this process.

To conclude, implementing the CSRD poses many new challenges for the private sector. It involves establishing new business processes, collecting new types of data, adopting new software solutions, and, if needed, making changes to the organization. Ultimately, at its core, the CSRD represents a data management challenge. To truly tackle the nature and biodiversity crisis, the key is to make this management process easier and more user-friendly for companies. Simplifying it comes down to having access to the right tools and data sets to enable accurate, informative and effective reporting on nature and biodiversity.

The road ahead

There is a long way to go for companies, both to grasp the holistic approach of the ESRS framework, and to get organized around data collection and management. Adjusting to the new requirements may not be easy but there are many added benefits of implementing robust nature and biodiversity reporting practices. Companies can achieve greater operational efficiencies, develop new sustainable innovations, enhance their corporate reputation and attract new investors. By focusing on the most material issues, organizations can start allocating resources more effectively, mitigate risks, and capitalize on opportunities to improve their sustainability performance and shift towards a nature-positive future.

Link, the nature and biodiversity assessment platform

Link, by Metabolic Software is a science-based platform for nature and biodiversity assessments. It helps companies locate and evaluate their nature-related impacts and risks, and quickly pinpoint biodiversity hotspots in their supply chains.

All the metrics under one holistic view
Selecting the right metrics is hard, and nature is complex as it involves multiple drivers and location-specific impacts. Link provides a holistic view and powerful insights on drivers of nature and biodiversity loss, such as deforestation, land degradation, soil pollution, water pollution, and water stress. These insights allow companies to prioritize and allocate resources wisely, saving time and money while maximizing their contributions to a sustainable future.

On par with leading nature and biodiversity frameworks and standards
Link is aligned with leading nature and biodiversity frameworks and standards, including CSRD (E3-E4), SBTN, and TNFD. Our platform translates the complexity of nature and biodiversity into a user-friendly and educational experience to level-up knowledge, and help companies build in-house expertise.

Single source of truth for nature and biodiversity assessments
With the organizational changes that the CSRD heralds, Link can be a company’s single source of truth for nature and biodiversity accounting. It offers different levels of granularity for leadership, sustainability, supply chain, finance, and reporting – empowering everyone with the data, knowledge, and methodologies required for success.

Get on the right track, and leverage Link for corporate sustainability reporting
It is not easy for businesses to stay on top of nature and biodiversity requirements. Our team of sustainability experts are ready to guide companies through the process and ensure that they are well-prepared for nature and biodiversity reporting in full alignment with CSRD requirements.

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