Understanding the key components of an ESRS gap analysis

In an era where environmental, social, and governance (ESG) transparency is no longer optional, businesses face growing pressure to align with evolving sustainability standards.

Among these, the European Sustainability Reporting Standards (ESRS) serve as the backbone for ESG compliance under the EU’s Corporate Sustainability Reporting Directive (CSRD). Conducting an ESRS gap assessment or analysis is essential for companies striving to meet these stringent requirements while fostering trust among stakeholders and driving sustainable growth.

Below we’ll provide a comprehensive breakdown of the ESRS gap analysis process, exploring its purpose, key components, challenges, and practical solutions. By the end, businesses will understand how to effectively navigate this critical step toward achieving compliance and elevating their ESG reporting practices.

What is an ESRS gap analysis?

An ESRS gap analysis is a systematic method of evaluating a company’s current ESG reporting practices against the requirements outlined in the European Sustainability Reporting Standards. These standards, developed as part of the CSRD, establish a robust framework for disclosing sustainability-related information to enhance transparency and accountability.

Key purposes of an ESRS gap analysis:

• Compliance: Ensuring alignment with ESRS guidelines to meet regulatory obligations.
• Transparency: Enhancing the quality and credibility of ESG disclosures for stakeholders.
• Strategic improvement: Identifying opportunities to strengthen sustainability practices and reduce potential risks.

By pinpointing deficiencies and prioritising areas for improvement, an ESRS gap analysis helps businesses prepare for the audit readiness required under the CSRD.

Why conduct an ESRS gap analysis?

Ensuring compliance with ESRS standards

Compliance with ESRS standards is mandatory for large companies and listed SMEs under the CSRD. Conducting a gap analysis provides a clear roadmap for meeting the disclosure requirements and avoiding potential penalties.

Identifying weaknesses in reporting practices

An ESRS gap assessment highlights inconsistencies, omissions, or inefficiencies in current ESG reporting processes. Addressing these gaps ensures that companies present accurate and comprehensive information to regulators and stakeholders.

Enhancing stakeholder trust

Transparency in sustainability reporting builds trust with investors, customers, and employees. Demonstrating a commitment to ESG principles through robust reporting fosters stronger relationships and reinforces corporate reputation.

Supporting long-term business goals

Aligning with ESRS standards helps companies address material risks and opportunities, paving the way for sustainable growth and resilience in an increasingly ESG-focused market.

Key components of an ESRS gap analysis

Review of Current Reporting Practices

The initial phase of an ESRS (European Sustainability Reporting Standards) gap analysis involves thoroughly reviewing the company’s existing environmental, social, and governance (ESG) data, disclosures, and reporting processes. This review helps determine whether the company’s current reporting practices align with regulatory requirements and the evolving needs of stakeholders. By understanding the current state of reporting, organisations can identify any potential shortcomings or areas that need improvement.

Focus areas:

• Scope and quality of the reported ESG data, ensuring completeness and accuracy.
• Alignment with established global frameworks such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB).
• Assessment of internal controls in place to ensure the proper collection, management, and reporting of ESG data.

Through this review, businesses gain a clear understanding of the effectiveness of their current ESG practices, and whether any adjustments are necessary to meet the ESRS requirements.

Comparison to ESRS requirements

In this stage, businesses perform a thorough comparison of their existing reporting practices against the mandatory and voluntary disclosures required by the ESRS. This benchmarking process involves:

• A comprehensive understanding of ESRS standards, including both mandatory and optional disclosures.
• Utilising structured benchmarking tools such as ESRS Excel templates to map out the existing reporting gaps.
• Identifying areas of improvement, particularly in key aspects such as governance, climate-related disclosures, and social impact reporting, which are vital for compliance with the ESRS.

This step enables businesses to pinpoint where their current disclosures fall short, making it easier to prioritise areas for enhancement.

Materiality assessment

A critical part of the gap analysis is the materiality assessment, which identifies the sustainability topics that are most significant to stakeholders and most impactful for the business. This aligns with the double materiality principle outlined in the ESRS, which emphasises both the external impacts of a company on society and the environment, as well as how sustainability issues affect the company itself.

The steps involved include:

• Mapping stakeholder priorities through surveys, interviews, or workshops to understand their key concerns.
• Analysing the intersection of these stakeholder expectations with the business’s operational and financial impacts.
• Integrating the findings from the materiality assessment into the gap analysis to ensure the company addresses the most pressing sustainability issues, as these will be the focus of future disclosures.

Gap identification and prioritisation

The final phase of the gap analysis process involves identifying and categorising the ESG gaps based on their significance and urgency. These gaps are prioritised to help businesses focus on the most critical areas, ensuring efficient allocation of resources for necessary improvements. Prioritisation also assists in meeting regulatory deadlines and in enhancing the company’s readiness for ESRS compliance.

This step typically involves:

• Categorising gaps according to their materiality and regulatory importance.
• Identifying any high-priority areas, such as governance structures, climate-related disclosures, or supply chain transparency, that need immediate attention.
• Developing a roadmap for addressing these gaps, focusing on both short-term improvements and long-term strategies to ensure continuous compliance.

Ultimately, prioritising these gaps enables businesses to maximise their compliance readiness while enhancing their overall sustainability performance.

Challenges in conducting an ESRS gap analysis

While the ESRS gap analysis process is critical, businesses often encounter challenges, including:

Complex data requirements

The ESRS standards demand detailed and accurate ESG data, which can be challenging to collect and consolidate, particularly for companies with decentralised operations.

Lack of in-house expertise

Navigating the intricacies of ESRS standards and the broader regulatory landscape may be daunting for companies without dedicated ESG teams.

Adapting to evolving regulations

The dynamic nature of sustainability regulations necessitates continuous updates to reporting practices, which can strain resources and operational capacity.

How to overcome these challenges

Leverage ESG software solutions

Tools like IBM Envizi streamline data collection, analysis, and reporting, making it easier to meet ESRS requirements. These platforms provide real-time insights, automated benchmarking, and centralised data management to simplify the gap analysis process.

Engage ESG consultants

Partnering with experienced ESG advisory services, such as those offered by Ikano Insight, provides businesses with the expertise needed to navigate complex requirements. Consultants can guide companies through materiality assessments, stakeholder engagement, and gap prioritisation.

Invest in training and ducation

Building internal capacity through ESG training ensures that teams are equipped to manage sustainability reporting and adapt to regulatory updates effectively.

Practical steps for conducting an ESRS gap analysis

Step 1: prepare for the analysis

• Assemble a cross-functional team to oversee the process.
• Define the scope of the analysis, including reporting boundaries and key focus areas.
• Identify relevant data sources and tools for data collection.

Step 2: map current practices to ESRS standards

• Use ESRS Excel templates or similar tools to document existing disclosures.
• Compare findings to the specific requirements outlined in the ESRS framework.

Step 3: conduct a materiality assessment

• Engage stakeholders to identify priority topics.
• Align assessment outcomes with the double materiality principle.

Step 4: identify and prioritise gaps

• Categorise gaps based on their materiality and compliance impact.
• Develop an actionable plan to address high-priority areas.

Step 5: implement improvement

• Enhance ESG data collection processes.
• Integrate findings into corporate strategy and reporting practices.
• Use software solutions like IBM Envizi for ongoing monitoring and optimisation.

Examples of best practices in ESRS gap analysis

Example 1: A retailer’s approach to climate reporting:

A European retailer conducted an ESRS gap analysis to improve its climate-related disclosures. Using ESG software, the company identified gaps in Scope 3 emissions reporting and implemented targeted measures to enhance data accuracy and transparency.

Example 2: A manufacturer’s materiality alignment:

A manufacturing firm engaged Ikano Insight’s ESG advisory services to align its reporting with stakeholder expectations. Through a comprehensive materiality assessment, the company prioritised social impact disclosures, strengthening its alignment with ESRS standards.

Take the next step: achieving ESRS compliances

Conducting an ESRS gap analysis is a vital step for companies aiming to achieve compliance with the European Sustainability Reporting Standards. By identifying and addressing deficiencies in current ESG reporting practices, businesses can enhance transparency, build stakeholder trust, and drive sustainable growth.

Ikano Insight’s ESG Optimiser solution simplifies this process through three distinct services: advisory expertise, the IBM Envizi platform, and advanced ESG analytics. Whether you need guidance on materiality assessments, data consolidation, or compliance strategies, our team is here to help.

To learn more about how Ikano Insight can support your ESG journey, visit Ikano Insight.

By prioritising thorough and timely gap analyses, businesses can not only meet regulatory expectations but also unlock opportunities for innovation and resilience in a sustainability-driven world.