Monthly Archives: June 2024

Links between ESRS 1 AR 16 and Disclosure Requirements

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EFRAG has prepared an early-stage paper on the link between the sustainability matters listed in ESRS 1 AR 16 and the Disclosure Requirements (DRs), including Application Requirements (ARs), in the topical standards.

It can be helpful to identify the DRs and datapoints (DPs) that are linked to the matters (topics, sub-topics and sub-sub-topics) assessed as being material.

The list of matters in ESRS 1 AR16 shall be considered during materiality assessment for completeness.

Judgment is required to determine the information to be included in the reporting. The general criteria applied for this judgment are relevance and decision usefulness.

⭕ AR 16 topics are often interrelated. Based on the facts and circumstances of an undertaking, the materiality of a specific AR 16 topic of a topical ESRS can trigger reporting requirements in other topical ESRS.

➡ Since the sub-topics of energy and climate change mitigation are closely linked, it is expected that if one of both is material, the other is as well.

➡ DR E1-9 Anticipated financial effects is not expected to be disclosed if the matter is assessed as material only due to its impacts (and not also due to its risks or opportunities).

➡ For S1, Own Workforce, a holistic view is important as some of the AR 16 topics interrelate. This is the case for instance for working conditions and equal treatment which are issues that often interrelate. A fragmented approach to selecting some disclosure requirements and not others should be avoided.

For metrics, there is no systematic “one-to-one” relationship between a sub-topic or sub-sub-topic, as captured by AR16 (AR16 topic), and a topical disclosure requirement.

⭕ This means that, in general, all DRs in a topical standard are applicable to all AR16 topics covered by the topical standards, with a few exceptions to this rule.

⭕ Some metrics are likely to be relevant when any of the related AR16 topics in a topical standard are assessed to be material.

This is the case when there is evidence of such a direct link when the AR topic is directly mentioned in a datapoint (and not in the title of the DR).

This is the case for instance for microplastics in ESRS E2, for water withdrawals and water discharges in ESRS E3 or for waste in ESRS E5.

⭕When this direct link does not exist, the general rule applies.

➡ An appendix in this paper links each AR16 topic to the relevant DRs:

https://www.efrag.org/Assets/Download?assetUrl=%2Fsites%2Fwebpublishing%2FMeeting%20Documents%2F2406100838252877%2F05-02%20ID%20177%20draft%20explanation%20revised.pdf

Burning CSRD questions for companies entering audit mode

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How many sustainability topics are we expected to assess as material, and how many IROs are we expected to disclose in ESRS 2 SBM-3?

ESRS 1 and EFRAG IG 1 and 2 provide guidance and instructions.

First – the AR 16 table in ESRS 1

We are expected to analyze our IROs (impacts, risks & opportunities) for all topics and sub-topics listed in the AR 16 table in ESRS 1.

There are 92 granular, carefully selected, sector-agnostic topics listed as a starting point – often also covering other EU regulations and/or human rights issues.

To these, we have to add our own material sustainability topics if they are not already covered – just as we need to adapt the chart of accounts in financial reporting to fit our specific business.

This pre-defined topic structure will help ensure stakeholder understanding and comparability – just as the accounts do in financial reporting.

Second – the business context and value chain

We need to know and describe our specific business context and value chain (VC).

The person receiving our CSRD report is expecting to find the information necessary to understand our material IROs, connected to relevant sustainability topics as defined above.

IROs arise, or may arise, in the context of our business relationships in our upstream and downstream VC – which is not limited to direct contractual relationships.

Therefore, we need to identify material IROs throughout the entire the VC, with a focus on where in the VC they are likely to materialize, including strategically important “hotspots” for VC IROs.

Identifying potential “hotspots” can be done by cross-referencing countries where materials and services are produced, transformed, sold or disposed, to social, environmental and geopolitical risk databases.

VC is defined as the full range of activities, resources and relationships related to the company’s business model and the external environment in which it operates.

In other words, the activities, resources and relationships that we use and rely on to create our products or services – from conception to delivery, consumption and end-of-life, such as

  • human resources and assets in our own operations
  • materials and service sourcing in our supply chain
  • product & service sale and delivery in our marketing & distribution channels
  • the financing, geographical, geopolitical and regulatory environments in which we operate.

Upstream actors (e.g., suppliers) provide products or services that are used in the development of our own products or services.

Downstream actors (e.g., distributors, customers, waste management) receive or use our products or services, or waste stream generated by our customers or end-users.

The reporting group in our own operations is a good starting point, meaning the parent company and ALL its subsidiaries.

For certain environmental matters, this also includes operations where we have the ability to direct the operational activities and relationships of an entity, site, operation or asset – meaning that we have actual “operational control”.

Third – material IRO = material topic

If we identify material IROs in our own operations and/or upstream and downstream value chain, connected to a sustainability topic as defined by CSRD, then that topic is material.

This means that we need to report on how we monitor and manage the connected IROs.

However, CSRD does not mandate us to actually MANAGE the IROs – CSRD is an obligation to publish, not an obligation to act – the core objective being accuracy and transparency.

Fourth – material information needs to be disclosed reflecting gross values

Material IRO information has to be published under disclosure requirement SBM-3 in ESRS 2, mandatory for all companies subject to CSRD.

The information has to include a description of each material IRO – or group of IROs, if aggregation of information does not obscure the understanding of specific circumstances.

This includes where in the VC it is concentrated, what impacts on people and environment, and/or financial effects, it generates in the short, medium and long term.

It is also preferable to include a brief description of if and how we manage the IRO – even though this is not mandatory.

And it is not about what we WANT to publish, it’s about what we are EXPECTED to publish. In mandatory reporting, materiality is a user-driven concept.

Information about IROs is material when it may make a difference in a stakeholder decision, regardless if the person chooses not to take advantage of the information, or is already aware of it from other sources – and even if the information only provides feedback about (confirms or changes) previous evaluations.

In financial reporting we cannot omit to publish the required details of our liabilities, in addition to our assets. We are not allowed to choose what to account for in our balance sheet.

The same is now true for sustainability-related information – which could also be labelled “pre-financial” information.

Negative impacts & risks can be expected to become liabilities and positive impacts & opportunities to become assets.

And this is very important: information about IROs shall not be netted or compensated, it has to be neutral and reflect gross values (ESRS 1 QC 8).

This means that IROs need to be assessed and described as if they were not (yet) managed by the company.

We are allowed to present net information, in addition to gross values, if such presentation does not obscure relevant information and includes a clear explanation about the effects of the netting and the reasons for the netting.

Given this, it’s easy to conclude that SBM-3 in ESRS 2 is a key disclosure.

It allows the readers of our report to get an overview of if and how our company is connected to material impacts, risks and opportunities – and if and how we manage, or intend to manage, these IROs.

Which is the underlying purpose of CSRD.

Still wondering about numbers?

If you are still wondering how many sustainability topics we are expected to assess as material and how many IROs we are expected to publish, there are of course no specific numbers to answer this question. It depends on your business.

But, if we go through the different steps required, as described above, chances are that many (if not most) topics in the sector agnostic ESRS will be material – at least for producing companies.

It’s a bit different for pure service providers – depending on who your customers are, of course, as they are part of your VC.

And chances are that you will list numerous IROs (as the starting point is 92 granular sustainability topics).

If you do, this may show your stakeholders that you are aware of, and preferably, master your business context and operations, and have taken, or are planning to take, the necessary steps to future-proof your business.

If you don’t, chances are that you will learn this from your stakeholders and peers, once you’ve published your first CSRD report, that will likely be less detailed than the sustainability leaders on your market.

So, when push comes to shove, it’s really a question of if you want to be (perceived as) a sustainability leader or laggard.

#getCSRDready, #CSRD, #ESRS, #SustainabilityReporting