This morning (4/12) EFRAG unveiled the Draft Simplified ESRS: A European Milestone for Sustainability Reporting.

Our key takeaways:

The levers of simplification

• Simplification of the Double Materiality Assessment (DMA) (“when it’s obvious you don’t need to do more”)
• Better readability/ conciseness of the sustainability statement and better inclusion in corporate reporting as a whole
• The critical modification of the relationship between MDR’s and topical specifications (MDR’s have been renamed GDR’s and are cross-cutting) – if you have policies, actions and targets you need to follow the robust principle-based GDR requirements
• Improved understandability, clarity and accessibility of amended ESRS
• Burden relief reductions
• Enhanced interoperability

Additional reliefs have also been introduced

• Undue cost or effort exemptions
• Flexibility for acquisitions and disposals
• Allowances for lacking data
• Exemptions for immaterial activities
• Use of estimates in value chain data
• Exclusion of joint operations
• Protection of confidential information
• Transitional phase-in provisions
• Reduced disclosure on anticipated financial effects

The many reliefs come with an antidote: transparency. “We are trusting the market. The market will judge who is doing enough and who is not doing enough.”

Fair presentation

Fair presentation is a concept brought over from the financial reporting world to the sustainability reporting world.

It focuses on taking a step backwards and asking yourself what really matters, to balance the reporting.

You can hide material information in plain sight by providing too much granularity.

The difficulty is that fair presentation is interpreted differently in different countries, there is not yet a common understanding.

We will progress and find common grounds by learning from each other and by consulting with our stakeholders. And we will have increasing access to benchmarks.

Emphasis on the conciseness of the report

• Flexibility to enhance clear communication and coherence
• Avoid obscuring information
• Policies, Actions and Targets (PAT’s) reported only if the undertaking has them
• Option to include an executive summary (needs to meet the qualitative characteristics of information)
• Option to use appendices to present more detailed information (incl Art 8)

At the end of the day, ESRS is about telling the story in a standardized way.

Anticipated financial effects

It has been one of the most difficult topics.

“Climate change has been around for 20-30 years, we left this to the market for 20-30 years. Did we advance? The answer is no. We try to address difficult topics, but they are pressing.”

“We have a multi-stakeholder approach, we have preparers, and we also have investors and social representation.””

“Those who have their pension funds invested in companies are interested in understanding the possibility of facing stranded assets. So, on the one hand we have preparers saying that it is difficult and new, and a market that needs information.”

“We have 5 years to prepare, but we need to start now. Anticipated financial effects may materialize. If they are likely to materialize in the next 5 years, you better get started and estimate them now. If you want your company to be resilient, I would think twice about using the reliefs.”

“Gross vs net”

“This is the last time we hear ‘gross vs net’.”

What we heard from preparers is “I have implemented measures and now I have to pretend as if they don’t exist”. This does not always make sense.

• Either something is happening – and we need to mitigate the consequences.
• Or it can happen in the future – and we need to prevent it.
• Or it has happened – and we need to remediate.

The approach laid out in the draft simplified ESRS allows to take into account policies and actions for potential events to the extent they are effective. Decision usefulness is key, we need to be able to assess where the company is at.

Who decides which groups of stakeholders may trigger the reporting of policies and actions?

“Companies are connected to their stakeholders on a daily basis. We don’t want to underestimate the seriousness of companies, and knowledge of what they need to do.

And if you are not sure, reach out to stakeholders, experts and investors. Investors are very interested in how risks are managed. You need to show that you are in control.”

It’s about understanding your business but also about understanding your many stakeholders.

Balancing simplification with supporting EU policy goals

“Many are still unhappy: some think we reduced too much, others think that we did not reduce enough.”

There is a tension that we have to recognize: how do we reduce the burden while still keeping the EU policy-alignment?

It’s challenging, much like fitting a square in a circle. But we believe that we have reached a balance by focusing on what is material, in a simpler and more to the point manner. The standards have been simplified, but they do still address all the fundamental goals.

In some cases, we adapted the framework to the reality: not everybody knows where their waste goes, for example, so we can now report “destination unknown”.

Climate-related scenario analysis is not mandatory as such, but if it is performed it will trigger increased resilience.

Another example: SMEs are the engine of many of the EU economies, and CSRD mandates us to protect SMEs from late payments. But the data collection seems to be burdensome.

So, the application requirement now is that “if late payment to SMEs is a material topic for the undertaking, paragraph 11 of ESRS 1 General Requirements applies; therefore, the undertaking shall provide an entity-specific metric, if material.”

The sub-topics of the social standards often go hand in hand, so it made sense to group some of them.

Sustainability reporting, if taken strategically in the company, triggers strategic decisions, and that’s ultimately what we want to achieve.

It is important to focus on data that can move the needle.

The importance of intangible value and quality data

The gap between a firm’s financial book value and its market valuation is explained by significant intangible value. Sustainability reporting will be a game-changer.

A standardized data environment is far less costly than a fragmented data landscape.

Information is always better when it is prepared at the source, in this case by the business.

Standardized corporate reporting should stand on two legs, financial reporting and sustainability reporting, joined by the governance of the business.

If we subscribe to the policy objective of relevant quality data, we need to learn and take stock of what works and what does not work. We have been given the opportunity to perform a post-implementation review earlier than planned.

We are now expecting a virtual circle. It is possible if we calibrate the requirements in a multi-stakeholder environment. Proportionality and relevance will be key.

Technology is a tool to help us overcome the challenges.

If you believe in the benefit of sustainability information, it cannot be left a side. Time is of the essence.

Competitiveness is a medium- and long-term goal that requires addressing critical transition issues – for the future of our companies and society at large.

Reporting is ultimately a question of transparency and management decisions that pave the way for the future. It goes far beyond compliance, it is a strategic decision, whether mandatory or voluntary.

Coming up

• Given the importance of the IG3 guidance document, EFRAG needs to follow a robust process withing the data team to issue a draft for feedback, probably for Q1.
• Updated XBRL taxonomy in 2026.
• Interoperability mapping.
• A very important plea: “We need clarity on the implementation for summer 2026, the improvement is significant and we need time to prepare.”

ESRS knowledge hub

EFRAG has launched a knowledge hub, in English, with the objective is to help the market actors to learn and apply the standards, with all ESRS resources gathered in one place (datapoints, guidance, Q&A, XBRL taxonomy elements…, and other key materials supporting sustainability reporting).

It also includes the VSME resources.

It’s your interactive platform to master sustainability reporting, with the objective to transform complex regulatory frameworks into actionable insights — helping you stay ahead of developments and lead with confidence.

Accessing adopted and Draft standards as well as implementation guidance has been made intuitive with the depth of expert knowledge is delivered with the clarity of structured guidance.

You can access and register it here: https://knowledgehub.efrag.org

VSME

Will the VSME be changed in the future?

VSME has been developed and tested for companies with less than 250 employees.

It mainly supports bilateral reporting relationships: the official way to communicate information for companies with less than 250 employees.

The benefits of DMA, for example, are not included.

For companies that will no longer be in the scope of CSRD after the Omnibus negotiations, the intent is to do something as simple as VSME.

Whether there will be changes will be known when the Commission starts working on that.

Read more

The draft simplified European Sustainability Reporting Standards (ESRS) are available here: https://www.efrag.org/en/news-and-calendar/news/efrag-provides-its-technical-advice-on-draft-simplified-esrs-to-the-european-commission

Read more about the simplified ESRS here: EFRAG has published the draft simplified European Sustainability Reporting Standards (ESRS) – Cleerit ESG

#CSRD, #ESRS, #VSME, #EFRAG, #Governance, #SustainabilityReporting

EFRAG has today, 3/12, submitted its technical advice to the European Commission on the draft simplified European Sustainability Reporting Standards (ESRS), with the objective of fostering greater competitiveness by easing the regulatory landscape without compromising the fundamental objective of the Green Deal to advance sustainability in the European Union.

Using the Amended ESRS, undertakings will be able to better integrate sustainability in their communication to the market, beyond compliance.

The purpose of the streamlined DMA and of the explicit emphasis on fair presentation is to encourage undertakings to focus on what really matters and to avoid unnecessary granular information often associated with a compliance exercise. In doing so the level of alignment with IFRS S1 is further enhanced.

EFRAG received more than 700 responses to its public consultation which, combined with 21 outreach events carried out in the course of September and 2 targeted field tests, provided invaluable input to EFRAG’s due process.

EFRAG notes that the legislative process referred to as Omnibus initiative is not completed. Should the conclusion of the legislative process affect in any way the substance of this technical advice, EFRAG stands ready to adapt the Amended ESRS if required to do so.

While the simplification efforts were broadly supported, some critical remarks were also noted, which mainly relate to the accumulation of reliefs without time limits, and more generally to the fact that reliefs should be the exception, not the norm and that this should be explicit in the standards to avoid creating blind spots in reporting and thus hindering appropriate risk management.

The objective of an ESRS sustainability statement

The Amended ESRS state that the objective of an ESRS sustainability statement, taken as whole, is to present fairly all the undertaking’s

• sustainability-related material impacts, risks and/or opportunities (IROs)
• and how the undertaking manages them,
• organised under topics to which they relate.

The presentation of IROs

The presentation of IROs is now divided into 2 different disclosure requirements in ESRS 2: IRO-2 and SBM-3.

The objective of disclosure requirement IRO-2 is to enable an understanding of the outcome of the materiality assessment, in terms of material IROs and material information reported in accordance with ESRS.

The objective of disclosure requirement SBM-3 is to enable an understanding of the interactions between the undertaking’s material impacts, risks and opportunities and its strategy and business model, as well as of the related financial effects.

Disclosure requirement IRO-2

IRO-2, paragraph 37(a), focuses on a description of impacts, risks and opportunities and how they are likely to affect people and the environment.

The undertaking shall disclose

• a concise description of its actual and potential, positive and negative material impacts,
• including how they affect or are likely to affect people or the environment, and its material risks and opportunities,
• specifying the related topics and
• how and where impacts, risks and opportunities are connected to its own operations and its upstream and downstream value chain,
• the description of material risks and opportunities also covers the related dependencies to the extent that is necessary for an understanding of those risks and opportunities.

The undertaking may present the descriptions of its material IROs in the same location as its disclosures on the related policies, actions, metrics and targets through which it manages them, in order to avoid duplication and support a coherent narrative.

If the undertaking exercises this option, it shall still present a concise description of its material IROs alongside its disclosures prepared in accordance with IRO-2.

Disclosure requirement SBM-3

SBM-3 focuses on reporting the interaction of the undertaking’s material impacts, risks and opportunities with its strategy and business model.

The undertaking shall disclose

• a high-level description of how material impacts originate from its strategy and business model,
• the effects of risks and opportunities on its business model and value chain,
• how it has responded, and plans to respond, to them in its strategy and decision-making
• qualitative and quantitative information about how material risks and opportunities have affected its financial position, financial performance and cash flows for the reporting period (current financial effects)
• qualitative and quantitative information on how it expects its financial position, financial performance, and cash flows to change over the short, medium and long term, given its strategy to manage material risks and opportunities (anticipated financial effects)
• qualitative information about the resilience of its strategy and business model regarding its capacity to manage its material risks, including how the analysis was conducted and the time horizons considered.

Current financial effects and anticipated financial effects of material risks and opportunities

Current financial effects and anticipated financial effects are designed to produce information that complements information provided in the financial statements.

Current financial effects are financial effects for the current reporting period that are recognised in the primary financial statements.

Anticipated financial effects are financial effects that do not meet the recognition criteria for inclusion in the financial statement line items in the reporting period and that are not captured by the current financial effects.

In presenting information about current financial effects and anticipated financial effects, the undertaking may consider the linkage with the information reported in accordance with GDR-A about financial resources allocated to the key actions.

‘Wave-one’ undertakings (=those that were scheduled by the CSRD to report on sustainability for the first time for financial year 2024) may omit quantitative information about anticipated financial effects for their financial years prior to financial year 2030.

The undertaking need not provide quantitative information about the current financial effects or anticipated financial effects if it determines that:

• the effects are not separately identifiable; or
• the level of measurement uncertainty involved in estimating those effects is so high that the resulting quantitative information would not be useful.

The undertaking need not provide quantitative information about the anticipated financial effects of material risks or opportunities if it does not have the skills, capabilities or resources to provide that quantitative information.

If the undertaking cannot provide quantitative information about the current financial effects or anticipated financial effects of a risk or opportunity it shall:

• explain why it has not provided quantitative information;
• provide qualitative information about those financial effects;
• provide quantitative information about the combined financial effects of that risk or opportunity with other risks or opportunities and other factors, unless the undertaking determines that quantitative information about the combined financial effects would not be useful.

If the undertaking cannot provide quantitative information, it is expected to provide qualitative information that is decision useful (including for decisions relating to providing resources to the undertaking).

Managing material IROs with policies, actions, metrics and targets

Information about policies, actions, metrics and targets shall enable an understanding of the level at which the undertaking manages its material IROs.

Policies and actions describe how the undertaking

• manages the prevention, mitigation and remediation of actual and potential material negative impacts, as well as material risks or
• pursues actual and potential material positive impacts and material opportunities.

Metrics and targets describe the assessed progress over time in relation to its material IROs.

The General Disclosure Requirement for policies – GDR-P includes a description of the key contents of the policy, including its general objectives and the material IROs it relates to.

General Disclosure Requirement for actions and resources – GDR-A covers key actions that play a significant role in managing the undertaking’s material IROs including actions taken to support the provision of remedy.

It includes a description of the key actions taken in the reporting year and those planned for the future, including their scope and timeframe and their expected outcomes and, where applicable, how their implementation contributes to achieving the related policy objectives.

It also includes the type and amount of current and future significant financial resources allocated to the key actions.

If the undertaking has allocated significant non-financial resources (e.g. full-time equivalent resources), the information about those resources may be presented as non-monterary quantities.

General Disclosure Requirement for targets – GDR-T includes measurable, time-bound, outcome-oriented qualitative or quantitative targets the undertaking has set related to its material IROs, including description of the relationship of the target to its policy objectives and actions.

They describe how the undertaking tracks the effectiveness of its policies and actions in relation to its material IROs, as well as the overall progress and effectiveness towards the adopted targets over time.

When reporting on policies, actions, metrics and targets, the undertaking shall report relevant information, avoiding information that is boilerplate, and therefore not relevant for users.

Excessive detail, especially about common practices, which are known to reasonably knowledgeable users, may obscure material information

If the undertaking has adopted policies, put in place actions, set targets or uses metrics only for certain aspects of a topic, this shall be reflected in the way the disclosure is prepared and presented, enabling users to understand the specific aspects that are covered.

If the undertaking has not adopted policies, actions, and targets with reference to a topic related to material impacts, risks and opportunities, it shall disclose this fact.

Presentation of sustainability information

Sustainability information shall be presented:

• in a way that allows for clear identification of information required by ESRS from other information included in the management report; and
• under a structure that facilitates access to and understanding of the sustainability statement in a format that is both human-readable and machine-readable.

ESRS do not mandate behaviour except for behaviour specifically related to the reporting of sustainability information.

 

The draft simplified European Sustainability Reporting Standards (ESRS) are available here:

https://www.efrag.org/en/news-and-calendar/news/efrag-provides-its-technical-advice-on-draft-simplified-esrs-to-the-european-commission

Next step

The European Commission will now prepare the Delegated Act revising the first set of ESRS based on EFRAG’s technical advice (expected mid-2026).