ESRS 2

The European Sustainability Reporting Standards (ESRS) were established to create reporting guidelines for Environmental, Social, and Governance matters amongst European countries. The ESRS 1 standard outlines the general principles and concepts for the preparation of sustainability reports. ESRS 2 then expounds upon this by providing disclosure requirements to support transparency and consistency within reports. For additional information on ESRS 1, see our related article here.  

This article focuses on the new technical advice on ESRS 2 disclosure requirements and its impact on reporting companies.  

Overview

ESRS 2 serves as the starting point for sustainability reporting by outlining mandatory disclosure requirements and guiding firms on the information they must gather. It establishes the foundation for the remaining ESRS standards and focuses companies on relevant sustainability issues and concerns.

In November 2025, the European Financial Reporting Advisory Group or EFRAG issued technical advice in relation to ESRS 2 to the European Commission, which will issue final standards in 2026. EFRAG’s draft significantly simplifies and streamlines the disclosure requirements. First, it reduces word count and other requirements, making the standards easier to read and understand. Along with this, voluntary disclosures were eliminated or made into requirements. This simplification steers companies in a clearer and narrower direction.¹

The technical advice for ESRS 2 introduces the disclosure framework in the Basis for Preparation (BP) section. The purpose of this section is to require disclosures of the key facts needed to understand the rest of the disclosures and give context to business information. Following the BP section, ESRS 2 is divided into 3 main sections: Governance (GOV), Strategy (SBM), and Impact, Risk, and Opportunities (IRO). The standards conclude with the General Disclosure Requirements (GDR). Overall, the layout of ESRS 2 has been designed to require disclosure of how a company is organized and managed to identify and prevent threats to sustainability.²

Governance

The governance of a firm refers to the executive leaders, board of directors, and other management roles. Relating sustainability to governance is important for a company because it provides oversight and structure for environmental, social, and governance issues. Establishing structures and policies to support sustainability efforts ensures that a company will align its strategy and decision making with its sustainability objectives.    

ESRS 2 includes a governance section to understand the responsibilities of management and their processes, controls, and procedures used to oversee material impacts, risks and opportunities. GOV-1 requires disclosures of the composition of the board of directors, including gender ratios and relevant expertise in sustainability. To exemplify the wording and structure of ESRS, below is an excerpt from the new draft regarding GOV-1:  

Additionally, GOV-1 seeks to answer the questions: What sustainability-related information is given to the board? Do they consider this information in their decision-making and processes?  

GOV-2 aims for companies to disclose incentives for management related to sustainability goals. Finally, GOV-3 covers due diligence, which outlines the steps to identify, prevent, mitigate, and account for negative consequences to people, the environment, and the value chain.  

Overall, the governance disclosures are generally qualitative disclosures of the company governance structure and how sustainability is integrated into its business model. The section provides transparency to how the company incorporates or does not incorporate sustainability into its decisions and processes.    

Strategy 

Strategy refers to the processes that an organization employs to acquire competitive advantage. A company’s business model and value chain go hand in hand with its strategy. ESRS 2 requires disclosures based on the business model and value chain to establish how sustainability is or is not incorporated into the business.  

Similar to the GOV section, Strategy outlines 3 main disclosure requirements. SBM-1 covers the value chain, business model, and strategy of a company. The value chain is all the activities and resources used to create a product or service and manage it throughout its life for a company. This includes upstream and downstream relations the company utilizes as well. The new draft reduced detailed requirements on a company’s business model and value chain.⁴

SBM-2 includes a section focusing on key stakeholders. It aims to disclose “an understanding of the undertaking’s stakeholder engagement and whether, and how, stakeholders’ interests and views are brought to the attention of its administrative, management, and supervisory bodies and inform its strategy and business model.”⁵  

SBM-3 addresses at a high-level how material impacts, risks and opportunities may affect a company’s strategy and business model and financial effects. In the updated November 2025 draft, it was proposed that both qualitative and quantitative information be disclosed about the current and anticipated financial effects of risks and opportunities.⁶ A summary of the required quantitative and qualitative disclosures is shown below.  

In regard to quantitative information, if the company cannot provide quantitative data regarding current and expected financial effects, it must explain why they are incapable of doing so. The company must then provide qualitative information of said effects that includes identifying the financial line item that is at risk and then reporting on the combined quantitative financial effects of that risk.  

The SBM section prompts companies to look ahead to potential risks and determine how to best respond. Understanding how sustainability issues may affect the business model of a company in the long term is critical. Tracking changes in risks offers insights and helps companies identify strategic responses and priorities.  

Impacts, Risks and Opportunities    

The impacts, risks and opportunities section intends to showcase the process of identifying and disclosing material matters. Financial materiality in the sustainability context can be defined as risks or opportunities that may influence the company's financial stability, operational efficiency, or affect the decisions of the stakeholders. In addition to this, impact materiality relates to the company’s positive or negative impact on people or environment.⁷

IRO starts with a general disclosure of the company’s process to identify sustainability IROs and assess their materiality including stating methodologies used and the amount of stakeholder consideration. After this, IRO-2 mandates reporting the results of the materiality assessment. An explanation of each required disclosure in IRO-2 is listed below.  

The purpose of the IRO section is to provide transparency to a company’s materiality assessment methods and reasoning. Doing so enables stakeholders and other key players to understand the sustainability risks a company faces, quantitatively and qualitatively.  

Conclusion

ESRS 2 is designed to set the foundation for the rest of the ESRS standards. The proposed draft simplified sustainability reporting by removing voluntary disclosures and including specific, concise guidelines that are easier to implement and report for companies of all sizes. In doing so, ESRS 2 allows all companies to focus on issues that are most material to them and effectively manage identified risks or opportunities.  

1. PWC Viewpoint: Deep Dive Into the Simplified ESRS

2. ESRS 2 -General disclosures

3. ESRS 2 General Disclosures November 2025 ESRS 2

4. EFRAG Simplified ESRS at a Glimpse

5. ESRS 2 General Disclosures November 2025 ESRS 2

6. ESRS 2 General Disclosures November 2025 ESRS 2

7. ESG ReportingHub ESRS 1

Other Sources Consulted:  

CSRD's ESRS 2: General Disclosures, Part 1

ESRS 2 Explained | General Disclosures under the EU Sustainability Reporting Standards      

ESRS Simplification Series – Part 2: What's New in ESRS 2?

Sustainability Materiality Matrices Explained  

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