ESRS and the Food Industry: What to Know and Which ESRS Topics are Material?

The European business landscape is undergoing a significant transformation. Over the next few years, it's estimated that more than 50,000 companies across Europe will be affected by the introduction of the European Sustainability Reporting Standards (ESRS).

These standards follow the Corporate Sustainability Reporting Directive (CSRD) and represent a major shift toward greater corporate accountability in sustainability reporting.

But what exactly are the ESRS, and how will they impact the food industry? As food companies prepare for these new requirements, it's important to understand the key metrics involved and which topics are material to their operations.

What Are the ESRS?

The European Sustainability Reporting Standards (ESRS) are part of the CSRD, which sets the rules for how companies should report their environmental, social, and governance (ESG) performance.

Think of the ESRS as a detailed guidebook for companies to disclose their sustainability efforts in a clear and standardized way. This makes it easier for investors, consumers, and other stakeholders to understand a company's true impact and make informed decisions.

The ESRS is part of the broader CSRD. Together, these regulations require companies to report on both the financial and non-financial impacts of their activities, with a focus on sustainability performance. The ESRS framework consists of 12 standards, divided into two categories:

A.Cross-Cutting Standards: These serve as the foundational elements for your reporting.

B. Topical ESG Standards: These encompass environmental, social, and governance issues. Each standard must address four specific disclosure areas: governance, strategy, management of impacts, risks, and opportunities, as well as metrics and targets defined in the general disclosures.

A. Cross-Cutting Standards: The Foundation

These are the must-haves for all companies, regardless of size or industry. They make sure everyone’s on the same page.

ESRS 1: General Requirements

ESRS 1 establishes the general rules and principles companies must follow when reporting their sustainability information. It focuses on:

• Double Materiality: Companies must report both how sustainability issues impact their financial performance and how their business activities impact the environment and society. For instance, if you're a food company, material issues like climate change, water scarcity, and ethical sourcing are directly tied to your operations and reputation. This approach ensures that companies are not only transparent about their impacts but also about how sustainability affects their financial health.
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• Value Chain: The impact must be reported across the full value chain, including upstream (e.g., suppliers) and downstream (e.g., customers). This includes both direct and indirect impacts. For example, how your suppliers' environmental practices or labor conditions could affect your company’s sustainability performance.
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• Reporting Principles: Companies must ensure the report is complete, accurate, timely, and provides a fair representation of their sustainability performance. Additionally, they are encouraged to describe their use of financial, manufactured, intellectual, human, social & relationship, and natural capital within their value chain—highlighting how these resources are utilized as input and transformed into value for both the company and stakeholders (output). For example, financial capital enables investment in sustainable infrastructure (manufactured capital), while human capital fuels innovation.

This framework ensures that companies demonstrate not just compliance but also a genuine commitment to integrating sustainability into their business operations and strategies.

ESRS 2: General Disclosures

ESRS 2 provides the specific content that companies need to disclose about their business. It covers:

• Business Model and Strategy: This section explains how sustainability is integrated into your business model and overall strategy. For example, it highlights how businesses leverage intellectual and human capital for innovation in sustainability practices.
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• Governance: Companies need to disclose the governance structures they have in place to oversee sustainability issues. This includes assigning responsibility and ensuring oversight within the company for ESG (Environmental, Social, and Governance) matters.
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• Material Risks and Opportunities: Companies must identify and address significant sustainability risks and opportunities, such as climate change risks or shifts in consumer preferences toward more sustainable products.
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• Policies and Targets: Clear disclosure of your sustainability goals and policies, along with progress on those goals. This could include specific commitments related to natural capital (e.g., reducing carbon emissions) or social capital (e.g., improving supplier working conditions).
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• Performance Indicators (KPIs): Providing specific, measurable KPIs that are standardized across industries allows comparability. These might include tracking resource efficiency (natural capital) or measuring social impacts in terms of employee satisfaction and community engagement (social capital).

What is Expected from Companies

In practical terms, companies need to provide a comprehensive report that:

• Adheres to the principles and guidelines of ESRS 1, ensuring the report is reliable and complete.
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• Includes specific disclosures as outlined in ESRS 2, focusing on how sustainability impacts their business model, governance, risks, and performance.
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• Provides data on material risks, policies, and performance across key areas such as climate, biodiversity, water management, social factors, and governance structures.
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• Ensures the report is machine-readable, allowing digital accessibility and comparability across the EU using the provided digital taxonomies.

This reporting ensures stakeholders, regulators, and the public can assess how a company contributes to and is affected by sustainability trends, aligning with the EU's goals for transparent, standardized corporate sustainability disclosure.

B. Topical Standards: Detailed ESG Disclosures

Topical standards cover environmental, social, and governance aspects in detail.

1. Environmental Standards (ESRS E1-E5)

• ESRS E1: Climate Change: Companies must report on their greenhouse gas (GHG) emissions across all scopes and their strategies for mitigation. For example, a major food processing company might highlight initiatives aimed at reducing Scope 3 emissions through collaboration with farmers to adopt sustainable agricultural practices.
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• ESRS E2: Pollution: This standard requires disclosures about various pollution sources and mitigation strategies. A beverage bottler, for instance, could detail its approach to minimizing plastic waste by transitioning to biodegradable packaging.
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• ESRS E3: Water and Marine Resources: Companies should provide information on water use efficiency and protection of aquatic ecosystems. A brewery might report efforts to conserve water, such as implementing closed-loop systems that minimize freshwater withdrawal.
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• ESRS E4: Biodiversity: Businesses must disclose their impacts on biodiversity and initiatives to protect ecosystems. A cereal manufacturer may explain partnerships with farmers to prevent deforestation and promote regenerative agricultural practices.
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• ESRS E5: Circular Economy: Reporting on waste management and recycling efforts is essential. A food packaging company could showcase its commitment to a circular economy by adopting a zero-waste policy that ensures by-products are reused.

Social Standards (ESRS S1-S4)

Social standards assess a company’s influence on employees, supply chains, and communities.

• ESRS S1: Own Workforce: Companies should disclose information about labor conditions and diversity initiatives. A global snack brand may report on efforts to enhance diversity within its workforce, particularly in leadership roles.
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• ESRS S2: Workers in the Value Chain: Businesses must address labor practices in their supply chains. A chocolate manufacturer might reveal steps taken to combat child labor in cocoa sourcing, emphasizing transparency in supplier audits.
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• ESRS S3: Affected Communities: Companies are expected to report on their community impact. A large agribusiness may highlight programs that support local farmers by educating them on sustainable practices, benefiting both the environment and local economies.
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• ESRS S4: Consumers and End-Users: This standard focuses on product safety and consumer welfare. A processed food company might disclose efforts to reformulate products by reducing sodium and sugar content to address public health concerns.

3. Governance Standards (ESRS G1)

Governance standards relate to corporate ethics and conduct.

• ESRS G1: Business Conduct: This standard addresses policies on anti-corruption, executive compensation, and responsible tax practices. A multinational food company could report on its ethical sourcing guidelines and alignment with anti-corruption measures.
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• ESRS G2: Internal Control and Risk Management: Companies must disclose how their internal controls manage sustainability risks. A large dairy company may report on mechanisms established to monitor supply chain risks, including carbon emissions and deforestation, ensuring that ESG risks are integrated into overall business decisions.

What ESRS topics are material to other food companies?

While these ESRS topics are often a priority for companies like Arla, Danone, and Unilever, it's important to remember that materiality is not one-size-fits-all.  The ESRS are designed to be flexible, allowing companies to prioritize the topics that are most relevant to their business and stakeholders.  And with sector-specific standards on the horizon, we can expect even more tailored guidance for industries like food and consumer goods in the future.

The examples provided below showcase the different topics each company focuses in based on their 2022 sustainability report.

Arla

For Arla, a dairy cooperative owned by farmers, the connection to nature is undeniable. This makes certain ESRS topics particularly relevant:

• ESRS E1 - Climate Change: Dairy farming is a significant contributor to greenhouse gas emissions, primarily methane from cows. Arla recognizes this and is actively working to reduce its carbon footprint through initiatives like sustainable feed production and manure management. Reporting on these efforts under ESRS E1 demonstrates their commitment to tackling climate change.
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• ESRS E6 - Biodiversity: Arla's operations depend on healthy ecosystems. Responsible land use, protecting biodiversity on farms, and minimizing impacts on water resources are all key to their long-term success. ESRS E6 provides a framework for reporting on these crucial aspects.
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• ESRS S1 - Own Workforce: As a cooperative, Arla's strength lies in its people – both farmers and employees. Ensuring fair wages, safe working conditions, and opportunities for development are essential. ESRS S1 guides their reporting on employee well-being and social responsibility.

Read more about Arla Sustainability

Danone

Danone, with its focus on food and beverages, faces unique sustainability challenges:

• ESRS E1 - Climate Change: From ingredient sourcing to production and distribution, Danone's value chain has a climate impact. Reducing emissions through renewable energy, efficient logistics, and sustainable packaging are priorities. ESRS E1 helps them track and report progress.
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• ESRS E3 - Water and Marine Resources: Water is a critical ingredient for many of Danone's products. Responsible water management in their operations and across their supply chain is essential. ESRS E3 provides a framework for transparently reporting on water usage and conservation efforts.
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• ESRS S2 - Workers in the Value Chain: Danone sources ingredients from around the world. Ensuring fair labor practices, safe working conditions, and equitable treatment of farmers and workers throughout their supply chain is crucial. ESRS S2 guides their reporting on these social aspects.

Learn More on Danone Sustainability

Unilever: Sustainable Living, Brand by Brand

Unilever, a consumer goods giant, has a broad portfolio of brands and a global reach. This brings a diverse set of sustainability considerations:

• ESRS E1 - Climate Change: Unilever aims to reduce its environmental footprint across the lifecycle of its products. This includes sourcing sustainable ingredients, reducing emissions from manufacturing and transport, and promoting responsible consumption. ESRS E1 helps them measure and report their progress.
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• ESRS E5 - Pollution: From packaging waste to water pollution, Unilever's operations can impact the environment. Minimizing waste, reducing pollution, and promoting a circular economy are key focus areas. ESRS E5 provides a framework for reporting on these efforts.
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• ESRS S4 - Consumers and End-users: Unilever's products reach millions of consumers daily. Ensuring product safety, responsible marketing practices, and promoting sustainable consumption habits are all part of their responsibility. ESRS S4 guides their reporting on consumer-related aspects.

Learn More on Unilever Sustainability

‍CSRD vs. ESRS: What’s the Difference?

The CSRD is the overarching directive that mandates corporate sustainability reporting, while the ESRS provides the specific standards companies need to follow. Essentially, the CSRD sets the rules for who must report and when, while the ESRS outlines what they need to report on.

Steps to Help You Get Familiarized with ESRS Reporting Requirements

The European Sustainability Reporting Standards (ESRS) can seem daunting at first, but with a structured approach, food companies can tackle them efficiently. Here’s an in-depth guide to help you navigate ESRS, ensuring compliance and building transparency in your sustainability efforts.

Step 1: Understand the Standards

• Review the Standards: Begin by studying the ESRS materials available on the EFRAG website. The site offers detailed documents, FAQs, and additional guidance on each standard.`
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• Compare Other Standards: Explore well-established reporting frameworks like the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB) for additional perspectives on sustainability topics. This can help you understand how to align existing practices with the ESRS.

Step 2: Identify Your Material Topics

Materiality is central to the ESRS framework. This process involves identifying which sustainability issues are most relevant to your company and stakeholders, such as environmental impacts, social considerations, and governance practices.

• Materiality Assessment: Perform a materiality assessment to determine the ESG (Environmental, Social, Governance) topics that are most significant to your operations and stakeholders. This involves looking at your company’s entire value chain to understand where the biggest impacts are.
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• Example: For a beverage company, a critical material issue might be water usage. The company would evaluate how water is used in sourcing ingredients, in the production process, and through distribution. Further, engaging local communities around bottling plants helps identify any concerns regarding water scarcity or contamination.
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• Stakeholder Engagement: Engage with various internal and external stakeholders. This includes employees, suppliers, investors, customers, and affected communities. Their feedback will give you an understanding of what they consider material to your company’s sustainability efforts.

Step 3: Measure Your Performance

Once your material topics are identified, the next step is collecting reliable data on those areas. Accurate measurement is crucial for effective reporting.

• Data Collection: Develop or enhance your data collection systems to track key environmental, social, and governance metrics. Common metrics include:
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  • Environmental: Greenhouse gas (GHG) emissions, water consumption, waste generation, energy efficiency.
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  • Social: Employee well-being, diversity metrics, community engagement.
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  • Governance: Supply chain management, corporate ethics, compliance policies.
• Use technology platforms to streamline data collection from across the organization, reducing manual processes and increasing accuracy. Software solutions that integrate with existing enterprise systems can help automate this process.

Step 4: Develop & Implement Policies

After collecting data, it’s time to develop policies that address the material topics identified during the assessment phase.

• Policy Development: Create clear policies and codes of conduct that align with your sustainability goals. These should cover areas like climate change, human rights, and responsible sourcing.
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• Sustainability Integration: Ensure sustainability is embedded in your company’s overall strategy, rather than treated as a separate initiative. This includes considering sustainability impacts in decision-making, investments, and operational processes.

Practical Approach:

• Form cross-functional teams that include departments like procurement, HR, and operations to ensure these policies are integrated at all levels.
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• Train employees on the importance of these policies and how they affect daily operations.

Step 5: Set Ambitious Targets

Setting clear targets is crucial to demonstrate your commitment to continuous improvement. These targets should be SMART—specific, measurable, achievable, relevant, and time-bound.

• Target Setting: Based on your material topics, develop targets that reflect both the importance of sustainability in your business and the scale of your ambitions.

Examples:‍

• Reduce Scope 1 and 2 greenhouse gas emissions by 20% by 2030.
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• Increase the percentage of sustainably sourced ingredients to 80% within five years.
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• Achieve a 10% improvement in water efficiency across production facilities within three years.
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• Commit to Continuous Improvement: Sustainability isn’t static. Regularly revisit your targets to ensure they remain ambitious and aligned with the latest industry standards and regulatory requirements. Set a cadence for performance reviews, incorporating feedback from stakeholders and considering new risks and opportunities.

Step 6: Report Transparently

Transparency is a core tenet of effective ESG reporting. Your sustainability report should clearly communicate how your company is performing against the ESRS standards.

• Structure Your Report: Use widely accepted frameworks like the GRI Standards or SASB Standards as a blueprint for structuring your report. Ensure that the report includes both qualitative and quantitative disclosures, providing a holistic view of your company’s sustainability efforts.

‍Elements to Include:

• ‍A summary of your materiality assessment and stakeholder engagement process.
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• Clear breakdowns of your performance on key sustainability metrics (e.g., emissions, waste, water usage).
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• Stories or case studies that bring to life the real-world impact of your efforts.
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• Visuals & Storytelling: Make your report engaging. Use charts, graphs, and infographics to visualize data, making it easier for stakeholders to digest. Storytelling, such as showcasing specific initiatives or community projects, adds a human element to the numbers.
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• ‍Transparency About Challenges: Be honest about your challenges and where there is room for improvement. Transparency fosters trust and demonstrates your company’s commitment to long-term sustainability.

Conclusion

The ESRS marks a significant step towards greater corporate transparency and accountability in sustainability. By providing a standardized framework for reporting, it allows for comparability across companies and industries, enabling stakeholders to make informed decisions. For the food industry, with its significant environmental and social impacts, embracing the ESRS presents an opportunity to demonstrate leadership in sustainability, build trust with consumers, and contribute to a more sustainable future. While the task may seem daunting, by following a structured approach and prioritizing material topics, food companies can navigate the ESRS effectively and turn compliance into a strategic advantage.

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