ESG and Sustainability Reporting

What Is ESG?

ESG stands for Environmental, Social, and Governance — the three dimensions used to assess a company’s impact and behaviour beyond financial results:

• Environmental (E): How a company manages its environmental impact: greenhouse gas emissions, energy consumption, water use, waste management, biodiversity, and climate-related physical and transition risks
• Social (S): How a company manages its relationships with employees, suppliers, customers, and communities: labour practices, diversity and inclusion, health and safety, supply chain conditions, and community impact
• Governance (G): How a company is directed and controlled: board composition and independence, executive compensation, anti-corruption, shareholder rights, and transparency

ESG analysis was originally developed by investors to assess non-financial risks and opportunities in their portfolios. It has since evolved into a comprehensive corporate reporting framework, now mandated by EU law.

The EU Regulatory Framework: CSRD and ESRS

Corporate Sustainability Reporting Directive (CSRD)

The CSRD (EU Directive 2022/2464) is the EU framework that makes sustainability reporting mandatory for a large and growing number of companies. It replaces the previous Non-Financial Reporting Directive (NFRD) and dramatically expands the scope and depth of required disclosures.

Who must report under CSRD?

The CSRD is being phased in progressively:

• From 2025 (reporting on FY 2024): Large listed EU companies already subject to NFRD (approximately 50,000 companies EU-wide; approximately 2,000 in Spain)
• From 2026 (reporting on FY 2025): Other large EU companies meeting two of three criteria: more than 250 employees, more than EUR 50 million turnover, or more than EUR 25 million total assets
• From 2027 (reporting on FY 2026): Listed SMEs and certain non-EU companies with significant EU operations (smaller scope requirements; opt-out until 2028 available)
• From 2029 (reporting on FY 2028): Large non-EU companies with EU turnover above EUR 150 million

European Sustainability Reporting Standards (ESRS)

The ESRS are the detailed reporting standards developed by EFRAG (European Financial Reporting Advisory Group) under the CSRD. They specify what must be disclosed in each ESG dimension. The standards include:

• ESRS 1: General requirements (applicable to all reporting companies)
• ESRS 2: General disclosures
• Topical standards: ESRS E1 (Climate Change), E2 (Pollution), E3 (Water), E4 (Biodiversity), E5 (Resource Use); ESRS S1 (Own Workforce), S2 (Workers in the Value Chain), S3 (Affected Communities), S4 (Consumers); ESRS G1 (Business Conduct)

Not all standards are mandatory for all companies — the application depends on the materiality assessment.

Double Materiality Assessment

A distinctive feature of the CSRD is the double materiality concept:

1. Financial materiality (outside-in): How ESG issues affect the company’s financial performance and risk
2. Impact materiality (inside-out): How the company’s activities affect society and the environment

Companies must assess both dimensions and report on all topics that are material from either perspective. This is more demanding than the single (financial) materiality used in IFRS reporting.

ESG Reporting in Spain

CNMV Requirements for Listed Companies

The CNMV (securities regulator) has required listed Spanish companies to include a Estado de Información No Financiera (Non-Financial Information Statement) in their annual reports since 2018 (implementing the NFRD). This is being superseded by CSRD compliance.

Spanish Transposition of CSRD

Spain is transposing the CSRD into national law. The Spanish transposition is introducing CSRD requirements for companies within the Spanish legal system, including requirements for statutory third-party assurance (initially limited assurance, later reasonable assurance) of sustainability reports.

Reporting Location

The CSRD sustainability statement is published within the management report (informe de gestión), integrated with the annual accounts. This integration with financial reporting is deliberate — sustainability disclosures should be connected to financial disclosures.

The ESG Audit Requirement

The CSRD requires sustainability information to be subject to assurance — initially limited assurance (roughly equivalent to a review), progressing to reasonable assurance (equivalent to a full audit) in future years. This means:

• The statutory auditor (auditor de cuentas) can provide assurance on the sustainability report
• Independent third-party assurance providers can also be engaged
• The audit report on annual accounts will reference the sustainability statement

This requirement significantly increases the rigour required for sustainability data: it must be auditable, with documented data collection processes, defined methodologies, and appropriate controls.

ESG for SMEs: Supply Chain Implications

Even if a small or medium Spanish company is not directly subject to CSRD reporting requirements, its customers (who are subject to CSRD) will increasingly require ESG data from their suppliers. This happens through:

• Value chain disclosures under ESRS S2 (Workers in the Value Chain): Large companies must report on the labour conditions in their supply chains
• Scope 3 emissions reporting under ESRS E1: Large companies must report their Scope 3 greenhouse gas emissions, which include emissions from their suppliers (Scope 3 Category 1: Purchased Goods and Services)
• Procurement policies: Many large companies are adopting supplier codes of conduct and requiring sustainability certifications as conditions of supply

This means that Spanish SMEs supplying to large companies — in manufacturing, logistics, professional services, and other sectors — should begin measuring and documenting their ESG performance proactively.

Getting Started with ESG Reporting

For companies beginning their ESG journey, the recommended steps are:

1. Materiality assessment: Identify which ESG topics are most relevant to your business and stakeholders
2. Baseline measurement: Establish current performance across relevant metrics (energy consumption, CO₂ emissions, employee turnover, gender pay gap, governance policies)
3. Gap analysis: Compare current practices against ESRS disclosure requirements
4. Governance structure: Assign board-level responsibility for sustainability and define internal reporting responsibilities
5. Data systems: Implement data collection processes for ESG metrics with appropriate controls
6. Disclosure: Prepare the sustainability statement in compliance with applicable ESRS standards

Frequently Asked Questions

Is a standalone ESG report sufficient or must it be integrated with the annual accounts? Under CSRD, the sustainability statement must be included within the management report (informe de gestión), which is filed as part of the annual accounts. A standalone ESG report is not compliant with CSRD requirements (although companies may additionally publish separate sustainability reports for communication purposes).

What are Scope 1, 2, and 3 greenhouse gas emissions? Scope 1: Direct emissions from the company’s own operations (burning fuel in vehicles and equipment, natural gas heating). Scope 2: Indirect emissions from purchased electricity and heat. Scope 3: All other indirect emissions in the value chain — from suppliers (upstream) and customers and end-of-life treatment (downstream). Scope 3 is typically the largest category for most businesses and the most challenging to measure.

Does ESG reporting apply to Spanish branches of foreign companies? The CSRD applies based on the entity or group structure. A Spanish branch of a non-EU company may be captured if the group has significant EU operations and meets the non-EU company thresholds (EUR 150 million EU net turnover from FY 2028). Independent Spanish subsidiaries meeting the large company thresholds are captured regardless of their parent company’s nationality.

What assurance standard will apply to ESG reports in Spain? The CSRD mandates limited assurance initially (equivalent to ISAE 3000 limited assurance standard in audit terminology). The European Commission is developing a dedicated European Sustainability Assurance Standard (ESAS). Spain’s ICAC (accounting regulator) is working on its domestic transposition of assurance requirements.

Can AI tools help with ESG data collection and reporting? Yes. A growing ecosystem of software tools assists companies in collecting, processing, and reporting ESG data (including emissions calculations, supply chain data collection portals, and ESRS template reporting tools). AI-assisted analysis of utility bills, transport records, and procurement data can significantly reduce the manual burden of ESG data collection.

How BMC Can Help

We assist Spanish and foreign-owned companies with CSRD compliance: conducting double materiality assessments, designing ESG data collection systems, preparing sustainability statements under ESRS, advising on supply chain ESG requirements, and coordinating with auditors for sustainability assurance engagements.