On August 8, the European Commission published a document with Frequently Asked Questions on the implementation of the EU corporate sustainability reporting rules.
We have compiled a number of key ESRS questions on the following topics:
- The language of the sustainability report
- Exemptions from reporting in specific circumstances
- Inclusion of information from subsidiaries/branches & third-country undertakings
- Value chain estimates, “reasonable effort” and expected requests for sustainability information from SMEs
- Mark-up and management report format
- Sustainability report audit and assurance option
You will find these valuable takeaways here to help you navigate ESRS implementation.
The language of the sustainability report
⭕In which language should the sustainability report be published? (Questions 35 and 49)
The linguistic regime for the sustainability report is laid down by each Member State in accordance with Article 21 of the Company Law Directive.
⭕Does the consolidated management report or the consolidated sustainability reporting of the parent undertaking have to be available in a language accepted by the Member State by whose national law the subsidiary undertaking is governed in order for the subsidiary to be exempted from publishing its own sustainability statement? (Question 21)
The Member State by whose national law the subsidiary undertaking is governed may require that the consolidated management report (or, where applicable, the consolidated sustainability reporting of the parent undertaking) is published in a language that such Member State accepts, and that any necessary translation into such language is provided.
In this case, these requirements must be met in order for the subsidiary undertaking to be exempted from publishing its own sustainability statement.
Exemptions from reporting in specific circumstances
⭕Does the consolidated management report/consolidated sustainability reporting of the parent undertaking have to be already published when its subsidiary publishes its own management report in order for the subsidiary to be exempted from publishing its own sustainability statement? (Question 20)
No. … Where that consolidated management report or consolidated sustainability reporting is not yet available at the time of publication of the subsidiary undertaking’s management report, the subsidiary undertaking claiming the exemption can make reference in its management report to a general weblink at which the relevant documents will be available in the future.
⭕How can an undertaking comply with the obligation to prepare and publish an individual or a consolidated sustainability statement when it is not required to prepare and publish an individual or a consolidated management report? (Question 25)
An undertaking that must report sustainability information and that is not required to prepare and publish an individual or a consolidated management report may publish the individual or consolidated sustainability statement in a separate document. … That separate document … must comply with the format and the mark-up requirements set out in Article 29d of the Accounting Directive.
⭕How can an undertaking comply with the obligation to prepare and publish a consolidated sustainability statement when it is exempted from preparing consolidated financial statements? (Question 26)
An undertaking that must prepare and publish a consolidated sustainability statement without having to prepare and publish the corresponding consolidated financial statements will need to include in the consolidated sustainability statement the financial information necessary to understand the undertaking’s impacts on sustainability matters and to understand how sustainability matters affect the undertaking’s development, performance and position.
⭕Can large undertakings admitted to trading on an EU regulated market avail of the exemptions …? (Question 24)
No.
Inclusion of information from subsidiaries/branches & third-country undertakings
⭕Does the consolidated sustainability statement of the third-country parent undertaking … have to include all its subsidiaries or only the EU subsidiaries? (Question 87)
The rules for the consolidation of the sustainability statement are the same ones as for the consolidation of the financial statements. …
The consolidated sustainability statement must include all its subsidiary undertakings, regardless of where the registered offices of such subsidiary undertakings are situated.
⭕What happens if the EU subsidiary/branch does not manage to collect all the necessary information for the preparation of the sustainability report? (Question 45)
In the event that not all the required information is provided, the subsidiary undertaking or branch shall draw up, publish and make accessible the sustainability report, containing all information in its possession, obtained or acquired, and issue a statement indicating that the third-country undertaking did not make the necessary information available (Art. 40a(2) fourth subparagraph of the Accounting Directive).
Value chain estimates, “reasonable effort” and expected requests for sustainability information from SMEs
⭕ESRS require undertakings to use estimates if they cannot obtain all necessary value chain information after having made reasonable efforts to do so (ESRS 1 par. 69). What constitutes “reasonable effort”? (Question 29)
The undertaking should determine reasonable effort … taking into consideration its specific facts and circumstances as well as the conditions of the external environment in which it operates.
What constitutes reasonable effort is therefore likely to vary from undertaking to undertaking.
It is expected that undertakings will more frequently have recourse to the use of estimates in the first years of application of the reporting requirements and that the use of estimates will become less common as the ability of undertakings and the actors in their value chains to share sustainability information improves over time.
In all cases the undertaking should consider whether the use of estimates is likely to affect the quality of the reported information.
Examples of criteria that could offer useful guidance to determine reasonable effort (separately or in combination):
- The size and resources of the reporting undertaking in relation to the scale and complexity of its value chain.
- The technical readiness of the reporting undertaking to collect value chain information, depending on prior experience (the technical readiness is expected to improve over time.)
- The level of influence and buying power (in relation to the actors in the value chain).
- The ‘proximity’ of the actor in the value chain (tier 1 supplier or a direct customer vs other actors in the value chain).
⭕What should an SME expect to receive in terms of requests for sustainability information as a consequence of the CSRD and ESRS? (Question 30)
Paragraphs 132-3 of ESRS 1 set out transitional provisions that limit the value chain information that undertakings within the scope of the CSRD have to report and/or collect from actors in their value chain during the first 3 years.
The extent to which SMEs are asked to provide sustainability information … will, during the first 3 years of implementation, be strongly influenced by whether undertakings … make use of these transitional provisions regarding value chain reporting.
… SMEs should expect undertakings that fall under the scope of CSRD to apply “reasonable effort” to collect from actors in their value chains the information they need in order to comply with ESRS.
In accordance with the answer to the previous question, the size and resources, the technical readiness and the proximity of the actor in the value chain are among the criteria that can be used to establish what constitutes “reasonable effort”.
Therefore, smaller SMEs that have never voluntarily reported sustainability information, that are not connected with severe negative impacts and are not 1st tier suppliers or customers … should, at least during the first years of application of the reporting requirements, be less exposed to expectations to have and share sustainability information.
Larger SMEs that have previously reported sustainability information (for example because they apply EMAS or other environmental or sustainability certification or reporting schemes) and SMEs that are 1st tier suppliers or customers … may be exposed to higher expectations to have and share sustainability information.
EFRAG is currently developing two sustainability reporting standards for SMEs: a mandatory one for listed SMEs (LSME ESRS) and a voluntary one for non-listed SMEs (VSME).
LSME ESRS will establish the maximum level of sustainability information that ESRS can require an undertaking that falls within the scope of the CSRD to obtain from SMEs in its value chain.
VSME will be designed to become a reference point for all actors in the market, to ensure that the reporting effort of CSRD and non-CSRD undertakings is proportionate.
Mark-up and management report format pending the adoption by the EC of a digital ESRS taxonomy
⭕What are the format requirements that undertakings need to comply with pending the adoption by the European Commission of a digital taxonomy for the mark-up of the sustainability statement? (Question 38)
Article 29d of the Accounting Directive requires undertakings … to prepare their management report in the electronic reporting format specified in Article 3 of the ESEF Delegated Regulation (i.e. in XHTML) and to mark-up the sustainability statement within the management report in accordance with the specific digital taxonomy [a set of rules] that will be adopted by way of an amendment to the ESEF Delegated Regulation … in order for the sustainability statement to become machine-readable.
Until the adoption of this digital taxonomy, undertakings are not required to mark-up their sustainability statements.
Considering that the sustainability statement will become machine-readable only once it is both included in an XHTML document and marked-up with a digital taxonomy, pending the adoption of the digital taxonomy undertakings are also not required to prepare the management report in XHTML.
Sustainability report audit and assurance opinion
⭕What should the assurance provider express an opinion on … ? (Question 70)
This assurance opinion is based on a limited assurance engagement … with regards to:
- the compliance of the sustainability reporting with the ESRS …,
- the process carried out by the undertaking to identify the information reported pursuant to those ESRS i.e., the double materiality assessment process,
- the compliance with the requirement to mark-up sustainability reporting … (i.e., the digital tagging),
- the reporting requirements provided for in Article 8 of the [Green] Taxonomy Regulation.
The assurance providers are expected to perform procedures that enable them to conclude that no matter has come to their attention to cause them to believe that the information included in the sustainability statement is not fairly presented, in all material respects, in accordance with ESRS … .
The first part of the conclusion referring to the fair presentation, … entails an opinion on:
- whether the undertaking’s sustainability statement, including the process to identify the information reported (i.e., the double materiality assessment process), are compliant with ESRS; and
- whether the outcome of this process has resulted in the disclosure of all material sustainability-related impacts, risks and opportunities of the undertaking in accordance with ESRS.
⭕In the case of two different statutory auditors carrying out the audit of the financial statements and the assurance of the sustainability statement, which one of the two should express the opinion on whether the management report is consistent with the financial statements? (Question 72)
… The statutory auditor or audit firm in charge of auditing the financial statements remains in charge of expressing an opinion on the consistency between management report and financial statements for the same financial year.
⭕In which document does the assurance opinion need to be included? (Question 73)
In the assurance report.
If the assurance opinion is given by the same auditor that does the audit of financial statements, Member States may allow auditors to include the assurance opinion as a separate section of the audit report.
⭕Shall undertakings that report sustainability information in accordance with ESRS on a voluntary basis (such as SMEs without securities admitted to trading on an EU regulated market) be required to subject this information to assurance? (Question 77)
An undertaking carrying out sustainability reporting on a voluntary basis is … not required to subject its sustainability information to an assurance engagement.
The full EC FAQs document can be downloaded here: >>>
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