ESRS Standards Explained: A Plain-English Guide for SMEs

The European Sustainability Reporting Standards (ESRS) are 12 standards that define exactly what companies disclose under the Corporate Sustainability Reporting Directive (CSRD). Two are cross-cutting (ESRS 1, ESRS 2), five cover the environment (E1–E5), four cover social and workforce matters (S1–S4), and one covers governance (G1).

For small and growing businesses (SMEs) not directly subject to CSRD, the ESRS still shape what gets asked of you through supplier questionnaires. Understanding them helps you see the logic behind what clients request — and prepare a proportionate response using the Voluntary Sustainability Reporting Standard for SMEs (VSME).

This guide explains all 12 ESRS standards in plain English, shows how double materiality works, and maps where VSME simplifies each topic. For the topic list at a glance, see CSRD Topics: The 12 ESRS Areas SMEs Need to Know.

What Are the ESRS?

The ESRS are technical standards published by the European Financial Reporting Advisory Group (EFRAG) and adopted by the European Commission under the CSRD. They came into force in January 2024.

They tell large companies:

• What topics to report on (climate, workforce, governance, etc.)
• How to structure disclosures (policies, targets, metrics, governance)
• Which data points are mandatory vs. voluntary

Large listed companies started reporting under ESRS for financial years beginning on or after 1 January 2024. Under the 2026 Omnibus Stop-the-Clock Regulation (EU) 2025/780, Wave 2 companies (large non-listed firms) now report from financial year 2027/2028, and Wave 3 SMEs are delayed to FY 2028/2029. See updated CSRD deadlines by country for the full timeline.

SMEs are not required to use ESRS directly. Instead, EFRAG published the VSME Standard as a proportionate equivalent — covering the same topics at an achievable level of detail.

The 12 ESRS Standards at a Glance

ESRS 1 and ESRS 2 are cross-cutting — they apply to all reporting companies and set the framework. The remaining 10 are topic-specific, but companies only report in full on topics that are material to them.

ESRS 1 and ESRS 2: The Foundation

ESRS 1 — General Requirements

ESRS 1 sets the ground rules. It defines:

• Double materiality — the concept at the heart of CSRD (explained in detail below)
• Reporting principles — accuracy, comparability, timeliness
• Time horizons — short (1 year), medium (up to 5 years), long-term (beyond 5 years)
• Value chain scope — when to include upstream suppliers and downstream customers

For SMEs, ESRS 1 is the theory. The VSME applies these principles in a simplified form without requiring a formal materiality assessment.

ESRS 2 — General Disclosures

ESRS 2 is the one standard that is always mandatory for CSRD-reporting companies, regardless of materiality. It requires:

• Governance: Who oversees sustainability (board, committees, management roles)
• Strategy: How sustainability issues relate to the company’s business model
• Risk and opportunity management: How sustainability risks are identified and managed
• Targets and metrics: Company-level sustainability goals and performance data

For SMEs using the VSME, B1 (Basis for preparation), B2 (Policies and practices), and B11 (Governance) directly correspond to ESRS 2 disclosures.

Environmental Standards (E1–E5)

E1 — Climate Change

E1 is the most complex and typically the most material standard for any business with significant energy use or transport emissions.

It covers:

• Scope 1 emissions — direct emissions from owned operations (vehicles, on-site combustion)
• Scope 2 emissions — indirect emissions from purchased electricity and heat
• Scope 3 emissions — value chain emissions (business travel, purchased goods, freight)
• Energy consumption — total energy use and the share from renewables
• Climate transition plans — how the company will reduce emissions in line with EU targets

VSME equivalent: B3 (Energy and GHG emissions) covers Scope 1, 2, and GHG intensity. The Comprehensive Module’s C3 (GHG reduction targets) and C4 (Climate risks) go further.

E2 — Pollution

E2 covers releases to air, water, and soil — particularly relevant for manufacturing, chemical, agricultural, and automotive businesses. It includes VOC emissions, heavy metals, and nutrient pollution.

For most office-based or service businesses, E2 is typically not material.

VSME equivalent: B4 (Pollution) — requires disclosure only if pollution impacts apply.

E3 — Water and Marine Resources

E3 addresses water withdrawals, consumption, and discharges, particularly in water-stressed areas. Relevant for food production, textile, chemical, and hospitality sectors.

VSME equivalent: B6 (Water) — simpler quantitative disclosures.

E4 — Biodiversity and Ecosystems

E4 is one of the newer areas and often least familiar to SMEs. It covers impacts on land, species, and ecosystems — particularly relevant if your operations are near protected areas or you source materials from high-biodiversity regions.

VSME equivalent: B5 (Biodiversity) — asks whether sites are near protected areas and what mitigation measures exist.

E5 — Resource Use and Circular Economy

E5 covers inflows (materials, water, energy) and outflows (products, waste), with a focus on circularity — reducing waste, increasing recycling, and designing products for end-of-life.

VSME equivalent: B7 (Resource use and waste) — waste volumes, recycling rates, and circularity actions.

Social Standards (S1–S4)

S1 — Own Workforce

S1 is typically the most material social standard for any company with employees. It covers:

• Employment conditions — contracts, working hours, remuneration
• Health and safety — injury rates, sick leave, H&S management systems
• Diversity and inclusion — gender pay gap, diversity in management
• Training and development — hours per employee, career pathways
• Collective bargaining — union coverage and social dialogue

VSME equivalent: B8 (Own workforce), B9 (Diversity and pay), B10 (Health and safety).

S2 — Workers in the Value Chain

S2 addresses labour rights for workers upstream (in your supply chain) and downstream (contractors, logistics). It asks companies to identify human rights risks in their supply chains.

For most SMEs, this is addressed through C6 (Human rights) and C7 (Value chain) in the VSME Comprehensive Module.

S3 — Affected Communities

S3 covers local communities impacted by a company’s operations — land rights, community consultation, access to resources. More relevant for extractive industries, large infrastructure projects, and businesses operating in rural or developing regions.

S4 — Consumers and End-Users

S4 addresses product safety, accessibility, customer data privacy, and responsible marketing. Relevant for retail, healthcare, financial services, and technology businesses.

Governance Standard (G1)

G1 — Business Conduct

G1 covers how the company manages ethical risks:

• Anti-corruption and anti-bribery — policies, training, incidents
• Political lobbying and contributions — transparency on public affairs activities
• Supplier relationships — payment terms, fair dealing, no abusive practices
• Whistleblowing mechanisms — secure channels for reporting concerns

VSME equivalent: B11 (Business conduct and governance) covers the core anti-corruption and ethical conduct disclosures. The Comprehensive Module’s C9 (Anti-corruption) goes deeper.

Double Materiality: The ESRS Core Concept

Double materiality is the principle that companies must assess sustainability from two directions:

A topic is material — and therefore requires full ESRS disclosure — if it is significant from either direction.

Practical example for an SME manufacturer:

• Financial materiality: Rising energy costs and carbon taxes make E1 (climate) financially material — they affect your bottom line.
• Impact materiality: Your production process generates waste that pollutes a local river — E2 (pollution) is impactful, even if it has no direct financial effect yet.

Both directions matter, and both trigger reporting obligations.

For SMEs using the VSME, a formal double materiality assessment is not required. The VSME assumes that the most common material topics — energy, waste, workforce, governance — apply to all businesses and builds them into the Basic Module by default. Use the Double Materiality Assessment Wizard to identify which ESRS topics are most relevant to your business.

How the VSME Maps to ESRS

The VSME was designed to mirror ESRS at a proportionate scale. Here is how the two frameworks correspond:

This means your VSME Basic report already demonstrates alignment with the most commonly material ESRS topics. The Comprehensive Module fills in the gaps when clients or investors need deeper evidence.

Not sure which VSME level fits your business? Use the interactive recommender:

Which ESRS Topics Are Most Material for SMEs?

Based on the types of data requests SMEs most commonly receive from CSRD-reporting clients, these five topics tend to be material for the majority of businesses:

1. E1 — Climate/GHG — almost all businesses have energy bills and business travel
2. S1 — Own workforce — any business with employees
3. G1 — Business conduct — anti-bribery policies are now standard procurement requirements
4. E5 — Waste — any business generating material volumes of waste
5. E2 — Pollution — manufacturing, chemical, agricultural, and automotive businesses

Topics like E3 (water), E4 (biodiversity), S2–S4 (external stakeholders), and ESRS 2 strategy disclosures tend to become relevant as businesses grow or operate in more complex supply chains.

Frequently Asked Questions

Do SMEs have to report against the full ESRS?

No. Full ESRS only applies to large and listed companies under CSRD. Small and growing businesses (SMEs) can use the VSME Standard, which applies the same principles at a proportionate scale. The VSME has no mandatory assurance and significantly fewer data points than the full ESRS set.

What is the difference between ESRS and CSRD?

The CSRD is the law — it determines who must report and by when. The ESRS are the rules — they specify what to report and how. CSRD without ESRS would be like a law with no definitions. For the SME equivalent, the VSME takes the place of the full ESRS. See the complete guide to CSRD for SMEs for context on who is in scope.

Which ESRS standard is most commonly relevant to SMEs?

E1 (Climate Change) and S1 (Own Workforce) are the two most frequently requested topics in client supply chain questionnaires. Almost every business uses energy and has employees, making these the practical starting point for any sustainability disclosure.

What is double materiality and do SMEs need to assess it?

Double materiality requires assessing both how sustainability issues affect your business (financial) and how your business affects the world (impact). Under the VSME, SMEs do not need a formal double materiality assessment — the standard already assumes the most common topics are material. Larger SMEs or those entering complex supply chains may benefit from a basic assessment using the Double Materiality Assessment Wizard.

How many ESRS standards are there?

There are currently 12 ESRS standards: ESRS 1 and ESRS 2 (cross-cutting), E1–E5 (environmental), S1–S4 (social), and G1 (governance). ESRS 1 and ESRS 2 set the framework and apply to all companies; the remaining 10 are topic-specific and only require full disclosure if the topic is material to your business.

How do I know which ESRS topics I need to report on?

Large companies determine this through a formal double materiality assessment. For SMEs, the practical starting point is to focus on the topics that most obviously relate to your operations: energy use, waste, workforce, and governance. The VSME & ESRS Recommender tool can guide you to the right level of disclosure for your business size and sector.

Key Terms

• CSRD — Corporate Sustainability Reporting Directive (EU 2022/2464): the EU law requiring large companies to publish sustainability reports
• ESRS — European Sustainability Reporting Standards: the 12 technical standards that define what to report under CSRD
• VSME — Voluntary Sustainability Reporting Standard for SMEs (EFRAG, 2024): the proportionate equivalent of ESRS designed for small and growing businesses
• Double materiality — assessing both how sustainability issues affect your business financially and how your business impacts society and the environment
• EFRAG — European Financial Reporting Advisory Group: the body that drafts the ESRS and VSME standards
• Scope 1–3 emissions — Scope 1 is direct (your vehicles, combustion), Scope 2 is purchased energy, Scope 3 is the full value chain
• Materiality — a topic is material if it is significant enough to require disclosure, either financially or by impact
• Omnibus Regulation (EU) 2025/780 — the 2026 EU regulation that delayed CSRD Wave 2 and Wave 3 reporting deadlines

Conclusion

The 12 ESRS standards form a comprehensive framework for sustainability disclosure — but they were designed for large companies with dedicated sustainability teams. For small and growing businesses, the VSME provides the same logic at a fraction of the complexity.

Understanding the ESRS helps you see why your clients ask for the data they do, and how to answer their questions in a structured, credible way. Start with the VSME Basic Module — it covers the topics most commonly requested and builds the foundation for everything else.

See the glossary of CSRD, VSME, and ESRS terms for plain-English definitions of every key concept.