Patrick Moloney
November 15, 2023
ESRS E5 – From the materiality assessment to driving new circularity progress
All over Europe, companies recently followed the new EU Corporate Sustainability Reporting Directive (CSRD) to complete their first double materiality assessment. We caught up with two of our experts who have helped many clients through the process and towards ESRS E5: Patrick Moloney, Director, Strategic Sustainability Consulting, and Caroline Kötter-Bendtsen, Associate Manager, Strategic Sustainability Consulting.
Patrick: It stands for European Sustainability Reporting Standards and ESRS E5 is specific to Resource Use & Circular Economy. But maybe it’s helpful if I start by quickly explaining CSRD and double materiality first.
The Corporate Sustainability Report Directive (CSRD) is the new EU legislation that requires all large companies and listed SMEs to follow more comprehensive rules concerning the reporting of their businesses’ social, environmental and governance impacts, and the risks and opportunities associated with the business and operational activities they conduct. It’s the first time the European Commission has defined a detailed standard for non-financial data. Affecting approximately 50,000 companies, the first must comply when reporting on the 2024 financial year. Under the CSRD, companies also need to report according to European Sustainability Reporting Standards (ESRS).
A double materiality assessment is compulsory when aligning with the CSRD and acts as the basis for defining which ESRS standards and specific disclosure requirements the company must report on. ‘Double’ materiality refers to the fact that each company needs to consider the relevance of an ESG event from two different perspectives: 1) considering the impact the company has on the environment and society, so an inside-out view, and 2) the risks and opportunities associated with such an event – an outside-in view.
As we helped clients through their first double materiality assessment, we witnessed many concluding that the new reporting standard ESRS E5 on Resource Use & Circular Economy is material to them. And when our clients began the process to familiarise themselves with the requirements in the new standard, they tended to be overwhelmed by the breadth of the disclosure requirements and well as the level of detail expected. But we believe that ESRS E5 should be embraced as an opportunity to get high-quality guidance on what circular economy policies, targets, metrics, action plans should include.
“Our hope is that companies will embrace ESRS E5 as an opportunity to get high-quality guidance on what circular economy policies, targets, metrics, action plans should include.”
Caroline: ESRS E5 focuses specifically on resource use and circular economy – it’s one of five sustainability reporting standards focusing on environmental issues introduced by the CSRD. Understanding the disclosure requirements is a good place to start, and ESRS E5 can essentially be grouped into three categories:
- How are the material impacts, risks and opportunities identified? This relates to the double materiality process.
- How are material impacts managed? This is where policies and actions come into play.
- How are the material impacts measured? This focuses on targets, KPIs and financial effects.
The ESRS provides more detailed requirements and guidance as to what should be reported and using which datapoints. I’ll share a simplified overview of the disclosure requirements below:
Patrick: Yes, it’s common that clients think it seems straightforward – until they read the standard and understand the breadth of the disclosure requirements and the level of detail required! But the intention of the standards is certainly not to overwhelm companies. The very nature of resource use and circular economy is complex and broad and can typically not be addressed in the short term. So if the double materiality assessment concludes that resource use and circular economy should be disclosed under ESRS E5, it’s important to make a start, while understand that both performance and the reporting will improve along the way, and that the company will reap the benefits with time.
Caroline: Yes, that’s correct. Our hope is that companies will embrace ESRS E5 as an opportunity to get high-quality guidance on what circular economy policies, targets, metrics, action plans should include. We believe in three compelling arguments for prioritising ESRS E5:
- To become more resilient: ESRS E5’s requirements can serve as guidance to understand, manage, and improve relevant circularity aspects of the business which may help increase resilience against critical risks, such as material shortages, and upcoming regulations, such as the next update of the EU Eco-Design Directive.
- To boost competitiveness: By showcasing strong reporting and performance through ESRS E5, companies can demonstrate that they have gone one step further than competitors who might not yet have made use of circular initiatives to reduce their carbon footprint.
- To meet changing customer and investor demands: Having strong data through ESRS E5 makes it more likely that companies are prepared to respond effectively to more demanding customer and investor inquiries about circularity, including those as part of new tender requirements that make circularity a necessary part of every bid.
Circular economy actions may help solve various environmental challenges and can lead to performance improvements that could be reported under the four environmental standards: reducing carbon emissions, biodiversity loss, pollution, and water consumption. Bearing this in mind, we really hope that companies consider ESRS E5 as a priority when deciding on which ESRS they should dedicate special attention to.
Patrick: Absolutely. We’ve assessed how to approach ESRS E5 in a way that we believe makes the most efficient use of resources while generating the highest expected return for the business.
That’s why we’ve developed a white paper that captures our recommendations, helping simplify the move from the materiality assessment to reporting on ESRS E5 and clarifying what should be reported based on the level of ambition. So, if you see the new requirements as an opportunity to develop more robust circular economy policies that include targets, metrics, and action plans – or if you’re opting for compliance to start with, watch out for our white paper that will be published in the very near future.
Want to know more?
Patrick Moloney
Director, Strategic Sustainability Consulting
+45 51 61 66 46
Debbie Spillane
Global MarComm Lead
+45 53 67 10 43