On November 15, the European Commission organized a one-day seminar in 4 sessions, with the objective of supporting companies in applying the European sustainability reporting standards (ESRS). Here are some key takeaways from sessions 1 and 2.

Session 1: First experiences in applying ESRS

In the opening remarks Sean Berrigan, Director-General DG FISMA, European Commission, reminded us that CSRD and ESRS are a necessary part of the EU Green Deal, and are expected to reinforce EU companies’ resilience and competitiveness, as well as reduce the risk for financial instability.

The new rules have far-reaching consequences. They will benefit companies in the medium-long term. Standardization is simplification, and will ultimately reduce burden.

Increased access to information will shape company strategy, and drive transformation and governance. But new systems, skills and processes are now needed, which also brings costs and uncertainty.

So, the single most important message is to prepare in a proportionate and pragmatic way, applying common sense, and with a learning mind-set. Don’t report more information than required. Make decisions on what is important and use the phase-in measure provisions.

“Reporting will improve over time, probably rather quickly, as quality improves.”

Natalie Dogniez, Director of EUROSIF, voiced investors’ desperate need of easy access to granular and independently verified ESG data. They need reliable information, and transparency on methodology and preparation, to make informed investment decisions – particularly from a risk point of view – and evaluate future revenue potential. The fear of greenwashing accusation is also key challenge for asset managers.

Implementation is never easy, it’s always challenging – but let’s not forget the purpose and end game of this challenge.”

Tim Mohin at Boston Consulting Group walked us through the key learnings from a study of the emerging approaches of 28 early ESRS adopters (a summary is available here: https://cleeritesg.com/index.php/2024/07/28/efrag-report-on-observed-practices-and-challenges-in-the-initial-phase-of-esrs-implementation/).

He also underscored that “sunshine is the best disinfectant”, and that information triggers change. “Prepare to comply but also to use the information in strategy – it’s a management strategy exercise not a tick-box exercise”.

Patrick de Cambourg, Chair of EFRAG SRB, introduced by saying that “reliable data is the mother of all battles, or even better, is the mother of all democratic and social consensus on how businesses can contribute to value creation both for the business and for society”.

“The cost of not reporting will be higher than that of reporting.”

He stressed the need to create a modern data environment, and that digitizing will play a key role in reducing burden. “In a modern world, information has to be digitized – if it’s provided on paper, the vacuum will be filled with private providers”.

Standardization and interoperability are also key. “Many reports are not needed, one is enough, ESRS, to also comply with ISSB and in reference with GRI”.

He also spoke about the challenges companies are currently facing, saying that it’s important not to overkill.

“Report only what is material, don’t obscure important information with a high quantity of less important information. Apply common sense, it’s not a tick-box exercise, materiality is pivotable”.

He specifically mentioned three current challenges:

• He regretted that the IG3 Excel list was too technical (at a meeting with EFRAG they spoke about the “CSRD anxiety” that it has created). 70% of the information to be provided is narrative, and the number of datapoints in the IG3 list reflects the granularity needed to avoid only having long texts. “Don’t be scared. We learn, but let’s take this seriously.”
• He also explained that the situation of non-transposition in some countries is creating a complicated situation, with many companies preparing to report on a voluntary basis.
• Asked about reduction expectations, he said that he does not have a crystal bowl, but that clearly large multinationals are not the same as smaller large companies with 250 employees. Subdividing this group, using for example LSME for the smaller companies, could provide relief, as could the timing of sector standards. But in the absence of sector specific standards, entity specific disclosures still apply in order to cover material issues.

A question was also asked about scoring and net vs. gross evaluation. The answer was that gross evaluation is standard practice in risk management. Inherent risks can be a source fueling materiality. “The gross becomes net following your action plan, and your net will become your gross in the next reporting period.”

Explanation: The gross risk is the amount of damage caused by a risk when all preventive measures fail. Businesses aim to lessen this inherent risk as much as possible. The net risk is the amount of damage caused when preventive measures are used successfully.

“In time we will have merging DMA practices, we don’t yet have standard practices.” Judgement and exercising common sens is key – no thresholds fit all. “It’s a novel phase, it will converge.”

Benedette Testino at Boston Consulting Group, explained that companies currently apply different approaches. Some aim for minimum compliance in a cautious approach. The most advanced use CSRD as a communication of what is under-way, they leverage CSRD as a platform to showcase achievements to the market. She is expecting companies to subsequently be disclosing more and more.

Filip Gregor, Director for Responsible Companies at Frank Bold, also stressed the importance of focusing on material strategic issues for transformation by using common sense, not applying abstract scoring methods.

Scoring is important, but applying transparent judgement is key to achieve purpose and connect to the board in a meaningful way. “It’s not true that everything has to be put in numbers, quality information is sometimes more useful than unreliable metrics.”

He also reminded us that there are tools on the market to help get information on heighten risk areas.

Niels Peulicke Anderson, Head of ESG Accounting at Orsted, explained that Orsted had moved sustainability reporting to finance and integrated ESG data into financial processes in order to achieve the same trust and robustness as for financial statements.

Before this change, they had 12 strategic targets, whereof half were outside the financial scope, which did not make sense to them.

He stressed that the first year was about filling the gaps, especially for qualitative datapoints since they already had the metrics more or less under control.

They started one year in advance, which gave them time to build a new structure and understand what it was about, without the need for auditing.

Now they are in a good place with the reporting, and the focus has moved to “how this will this change the company”.

It has created a new platform to work with sustainability in a structured way, aligning the process across all material topics – and the task is the same for everyone. This will also help in the work with suppliers.

Session 2: Audit and assurance of sustainability reporting

Marjolein Doblado, Chair of CEAOB International Auditing Standards Subgroup – for the Committee of European Audit Oversight Bodies, shared information about auditing, reminding us that the assurance opinion is currently based on a limited assurance engagement as regards the compliance of the sustainability statement.

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 –
• including the process carried out by the undertaking to identify the information reported pursuant to ESRS (the double materiality assessment process).

Again, it was repeated that matriality is not a calculation, judgement is needed.

Marc Boissonnet, ESG Director at TIC Council – where his role is to bring TIC (testing, inspection and certification companies) sector support to build the future sustainability landscape – shared that there has been positive feedback from large French companies so far.

The increase of work is not as big as thought, there has been no push-back, except isolated cases. The number of quantitative datapoints has not increased dramatically compared to before.

However, the qualitative information needed, on for example policies, targets and actions (MDR) has increased, “but it’s no nightmare”.

France prepared early, which has significantly helped. Globally, the new framework has been well welcomed in France.

He noted the following challenges:

• Not many member states have accepted to open the market to independent assurance providers. “We are losing the opportunity to create a more competitive service, with increased quality at lower costs”.
• There has been a significant increase in the audit duration, which came as a surprise. The number of days has been multiplied by 10 compared to NFRD, and has not been well explained.
• Information requirements from auditors are new, and quite extensive. “There are many questions, and some individuals want to protect themselves, so they request a lot of evidence.”
• Some auditors are entering the activity without sustainability experience, and it’s not possible to simply transpose financial auditing, they will have to learn to adapt.
• “The scope has increased with CSRD. Auditing is not always easy. We need to find a suitable solution, but we are on track and move forward efficiently.”

“The most difficult phase is to build the first report, and put the tools in place. Then it will become easier.” Don’t just report – move forward, adapt. This applies for all companies.

Markus Pretzle, ESG Director at TIP Group, concluded by stressing that Excel is not feasible going forward, you need a solution.

The source of the information has to be accessible by auditors, and efficiently stored for them to be able to check data and processes. “You need to make their life easier”.

The link to the recording of the event:

https://webcast.ec.europa.eu/conference-how-to-support-companies-in-applying-european-sustainability-reporting-standards-2024-11-15

#getCSRDready

On October 24, ESMA (European Securities and Markets Authority) issued its annual Public Statement setting out the European common enforcement priorities (ECEP) for the 2024 corporate reporting of issuers admitted to trading on European Economic Area (EEA) regulated markets.

ESMA, together with national enforcers in the EEA (enforcers), will pay particular attention to these areas when examining the application of the relevant reporting requirements.

Based on the examinations performed, enforcers will take enforcement actions whenever material misstatements are identified and ESMA will subsequently report on their findings.

In addition to these European priorities, enforcers may also set national priorities.

Reduce greenwashing risks and ensure high-quality sustainability reporting

As set out in ESMA’s Final report on greenwashing, with the entry into application of the new CSRD-ESRS regulatory regime, the quality of sustainability reporting is expected to significantly improve thereby helping reduce greenwashing risks.

In July 2024, ESMA issued a Public Statement on the first application of the ESRS by large issuers.

While recognising that this first application is an important milestone in the learning curve of issuers and other stakeholders, the Public Statement highlighted five key areas warranting close attention:

1. a) establishing governance arrangements and internal controls that can promote high-quality sustainability reporting;
2. b) properly designing and conducting the double materiality assessment and being transparent about it;
3. c) being transparent about the use of transitional reliefs;
4. d) preparing a clearly structured and digitisation-ready sustainability statement; and
5. e) creating connectivity between financial and sustainability information.

Two enforcement priorities

While all these areas remain relevant, two of them have been selected to identify specific enforcement priorities in the present Public Statement.

1. Materiality considerations in reporting under ESRS (b)
2. Scope and structure of the sustainability statement (d)

Special attention will also be paid to the connectivity between financial and sustainability statements.

Materiality considerations in reporting under ESRS 

⭕ Disclosures on the assessment process

Detailed disclosures on the assessment process itself, in accordance with ESRS 2, are key to enable users of the sustainability information to gain a full understanding of the extent of the different steps the issuer has undertaken to reach its materiality conclusions.

This includes providing sufficient information on the activities, business relationships, geographies and stakeholders considered.

ESMA highlights these specific datapoints within the Disclosure Requirement (DR) IRO-1

• 2.53.g – the input parameters it uses (for example, data sources, the scope of operations covered and the detail used in assumptions)
• 2.53.b – the need to disaggregate in the disclosures the processes followed for Impacts
• 2.53.c – the need to disaggregate in the disclosures the processes followed for Risks and Opportunities

⭕ Key affected stakeholders

One crucial aspect of the materiality assessment process relates to the sustainability due diligence process, including the engagement with affected stakeholders.

According to ESRS 1 (section 4), the impact materiality process is informed by the outcome of any sustainability due diligence processes implemented by the issuer.

Disclosures pursuant to DR IRO-1 should clearly reflect this connection.

Regarding the engagement with affected stakeholders, ESMA highlights that several DRs of ESRS 2 relate to whether and how an undertaking engages with its stakeholders, including in relation to its materiality assessment process (DR IRO-1 DP 2.53.b.iii).

In this regard, ESMA notes that FAQ 16 of IG1 clarifies that the objective of such engagement is to obtain the views of the key affected stakeholders.

ESMA expects that issuers provide full transparency in their disclosures in accordance with DR SBM-2 and DR IRO-1 on how they identify and prioritise the stakeholders with which they engage.

ESMA also notes that FAQ 10 of IG1 states that, where possible, the materiality assessment relies on quantitative information as objective evidence of the materiality of an impact, risk or opportunity.

⭕ Datapoints in ESRS 2 are mandatory, including IRO-1 in topical standards

ESMA emphasises the fact that, irrespective of materiality, all DRs and their datapoints in ESRS 2 are mandatory.

This includes all DRs and datapoints related to DR IRO-1 in topical standards, whether or not the related topics are eventually found to be material as a result of the materiality assessment process.

Disclosures pursuant to ESRS 2-related DRs in topical standards, other than DR IRO-1, as listed in Appendix C of ESRS 2, are required if the topic is material.

ESMA stresses the requirement in DR IRO-2 par. 56 and AR 19 of ESRS 2 to list the DRs complied with in the sustainability statement, including page numbers and paragraphs.

Scope and structure of the sustainability statement

⭕ Follow the structure of the ESRS

ESMA encourages issuers to apply the detailed structure provided in Appendix F as an illustration.

ESMA also recommends that issuers which have relied extensively on alternative presentation formats for their sustainability statements carefully consider the compliance of their approaches with the relevant ESRS requirements.

As indicated in the Public Statement ESMA issued in July 2024, on first year application of ESRS:

following the structure of the ESRS in the preparation of the sustainability statements would make digital tagging easier and reduce the burden as the digital taxonomy closely follows the structure of the ESRS disclosures.

ESMA will also consider this common structure of the ESRS disclosures and of the digital taxonomy when consulting and proposing to the European Commission the tagging requirements for sustainability statements.

Connectivity between financial and sustainability statements

ESMA highlights the requirement in ESRS 1 (paragraph 124) regarding the monetary amounts or other quantitative information included in the sustainability statement and that are also presented in the financial statements.

⭕ For such situations of direct connectivity, a reference to the corresponding information in the financial statements is required.

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Sources (pages 5 and 6 of the statement focus on ESRS) 👇

https://www.esma.europa.eu/sites/default/files/2024-10/ESMA32-193237008-8369_2024_ECEP_Statement.pdf

https://www.esma.europa.eu/press-news/esma-news/esma-announces-2024-european-common-enforcement-priorities-corporate-reporting

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Stay tuned for more CSRD and ESRS insights.

✅ Adopt a streamlined, digital and ESRS taxonomy-centric report preparation with www.cleeritesg.com

Today (30/8) EFRAG released the ESRS XBRL Taxonomy, which enables the marking up (‘tagging’) of ESRS sustainability reports in machine-readable format. It contains more than 2000 datapoints whereof more than 400 Booleans (true/false, yes/no answers).

The taxonomy represents the digital transposition of the human-readable ESRS Set 1 published in July 2023.

It will be the basis for the European Securities and Market Authority (ESMA) to develop Regulatory Technical Standards for tagging the ESRS sustainability statement.

⭕ Prerequisite: reports should have a structure where it is reasonably easy to identify the datapoint in the section addressed in the report.

The granularity in the standards themselves was chosen so that the most granular paragraphs, subparagraphs and sub-subparagraphs in each DR always provide information that is decision-useful.

This granularity was therefore suitable to be used in the XBRL taxonomy to enable reports to convey information at a decision-useful level.

It is worth noting that the DR architecture has been embedded in the ESRS from the start (April 2022). EFRAG has been thinking in digital terms since the beginning.

⭕ Priority: Decision-usefulness

Information contained within sustainability reports prepared in accordance with the ESRS is likely to be useful to suppliers, clients, investors and other stakeholders of the undertaking that need to collect and aggregate information for their own sustainability reports or for other reporting requirements.

Determining the impact of the value chain, or of investments, on a specific granular datapoint (DP) is much more efficient if that same DP is digitally identified in reports coming from that value chain or investments.

👉 Patrick de Cambourg, the EFRAG SRB Chair, stated:

‘The final XBRL taxonomy marks a major milestone to enable machine-readable sustainability statements once adopted by ESMA and the EC.

The advanced approaches being implemented, especially for the tagging of narrative disclosures, will increase the usability of ESRS statements as users (analysts, investors, etc.) confirmed to EFRAG.

We encourage companies to use the ESRS taxonomy for their first ESRS statements on a voluntary basis; it is a useful tool to structure disclosures and will increase their decision-usefulness.

Let us not miss the opportunity to start with digital ESG disclosures from day one – because this is what users want.’

⭕Implementation of the narrative tagging hierarchy 

The ESRS have been designed to systematically structure the ESRS sustainability statement into a list of detailed requirements corresponding to a given DR.

The core of a DR is in the main body of the standard and in a paragraph easily identifiable using the expressions ‘shall disclose’ and ‘shall include’ placed after the paragraph on the objective.

Usually, individual datapoints are identifiable by separate items reported in a list of letters: (a), (b), (c), etc. These can be further disaggregated in a sub-list of items identified by small roman numbers: (i), (ii), (iii), etc.

⭕The Disclosure Point (DP) structure is the following:

• the Level 1 XBRL element (known as parent) can be used to capture the full content of a Disclosure Requirement;
• the Level 2 XBRL element has dedicated elements (known as children) for each datapoint listed in the subparagraph of a DR (i.e., (a), (b), (c)); and,
• where applicable, additional XBRL elements have been implemented at the Level 3 in order to reflect the romaine numbered datapoints required by a specific DR (i.e., a(i), a(ii), a(iii)).

Additionally, Level 1 tags have an important meaning by providing a ‘content index’.

⭕Semi-narrative elements for usability and comparability of information

To improve the usability and comparability of information, EFRAG has created Semi-narrative elements, specifically Booleans and enumerations.

The Boolean corresponds to a ‘true’ or ‘false’ (yes/no) disclosure.

The enumeration is a predefined list (like a ‘drop-down menu’) created in the taxonomy that will facilitate the option to be selected from this list of items by choosing the most appropriate element (single choice) or more elements (multiple choices).

⭕The XBRL taxonomy for disclosure of IROs in ESRS 2, SBM-3

The XBRL taxonomy allows for the digital disaggregation of a single or grouped IROs (Impacts, Risks, Opportunities) and for the linking of Policies, Actions, and Targets to each of them.

A multiple-choice enumeration of sustainability matters (topics, subtopics and sub-subtopics) has been implemented, which allows for linking of the IRO to one or more sustainability matter.

⭕Providing context with relationships between topics, IROs, Policies, Actions and Targets

EFRAG has implemented relationships between topics, IROs, Policies, Actions and Targets in the taxonomy by linking IROs and topics, and by linking IROs and Policies, Actions & Targets (example: ‘Policy to choose suppliers that implement net zero target’ linked to target ‘All suppliers shall have a net zero target by 2035’).

A flexibility has been built in when a policy is not directly linked to a single IRO.

In order to provide a machine-readable link between IROs, policies, actions and targets, it is of particular relevance to use consistent identifiers or names across the report and across reporting periods.

⭕Incorporations by reference

The conditions for such incorporation, set in ESRS 1 paragraph 120, do not allow the incorporation of disclosures from any source or document outside of the Inline XBRL Document set (for example, from information provided on the webpage of the company or in a separate PDF).

Inline XBRL continuations provide flexibility in order to incorporate single disclosures by reference from different sections of the report, however those should not be used excessively and should be applied carefully in order not to lose the context of information provided.

Given the considerations above, if ESRS statements are completely digitally tagged, no specific disclosure for ESRS 2 BP-2 paragraph 16 has to be made. Therefore, no XBRL element has been implemented for this paragraph.

Source: https://www.efrag.org/en/news-and-calendar/news/efrag-publishes-the-esrs-set-1-xbrl-taxonomy

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Stay tuned for more CSRD, ESRS and CSDDD insights.

✅ Adopt a streamlined, digital and taxonomy-centric ESRS report preparation with Cleerit ESG.

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:

1. the compliance of the sustainability reporting with the ESRS …,
2. the process carried out by the undertaking to identify the information reported pursuant to those ESRS i.e., the double materiality assessment process,
3. the compliance with the requirement to mark-up sustainability reporting … (i.e., the digital tagging),
4. 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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Below you will find questions and answers, in short, for the following topics:

• ESRS 2 and MDR policies, actions & targets datapoints
• Monetary amounts for revenue and anticipated financial effects related to climate change
• GHG emissions and carbon credits
• GHG removal and storage

Q&As in short on ESRS 2 and MDR policies, actions & targets datapoints

❓ Question 821

When a sustainability matter triggers exposure to both risks and opportunities, should the assessment of materiality be made on each individually or on the combined financial risk and opportunity?

For example, energy consumption is a financial risk because the cost of energy can fluctuate significantly, but there is also an opportunity in terms of reduced energy costs if the company invests in renewable energy and energy-efficient appliances.

➡ Answer

When the nature of an opportunity or a risk relating to a sustainability matter is different, it shall be assessed separately.

The positive deviations are not necessarily identified as separate opportunities but assessed together with the risk.

In the example above, it is the action of investing in renewable energy that creates the opportunity to reduce energy expenses.

❓ Question 762

How shall Minimum Disclosure Requirements (MDR) on policies, actions and targets be reported if they related to more than one topical standard?

➡ Answer

The MDRs on policies, actions, metrics and targets shall be applied together with the corresponding DRs in topical and sector-specific ESRS (ESRS 1 par. 13).

Reference from one part of the sustainability statement to another is allowed, avoiding duplications (ESRS 1 par. 115).

❓ Question 733

Can the ESRS 2 datapoints be overlapping with those in topical standards?

➡ Answer

No, the ESRS 2 Disclosure Requirements do not overlap with those in topical ESRS, with the exception of the MDRs in ESRS 2 Chapter 4.2 as they are a checklist to be used for completeness.

When a datapoint in MDR is already covered by a topical standard, undertakings are not supposed to report twice the same information requirement.

Some Disclosure Requirements in the topical ESRS further specify the ESRS 2 disclosures in relation to the respective topical matter (see ESRS 2 par. 2).

❓ Question 429

Which are the DPs or DRs to consider from ESRS 2 for entity-specific disclosure?

➡ Answer

ESRS 2 GOV-1 to GOV-5, SBM-1 to SBM-3, IRO-1 and the Minimum Disclosure Requirements on policies and actions on metrics and targets, respectively (ESRS 2 par. 60 and 70).

❓ Question 781

Is the general meeting to be considered as an ‘administrative, management and supervisory body’? The general meeting is usually a company’s highest decision-making body.

➡ Answer

No, the general meeting should not be considered an ‘administrative, management and supervisory body’.

It is a separate governance body with specific powers attributed to shareholders or owners.

The general meeting is not addressed by ESRS.

Q&As in short on disclosing monetary amounts for revenue and anticipated financial effects related to climate change

❓Question 395

What does net revenue mean? How is it calculated?

➡ Answer

The terms ‘revenue’, ‘total revenue’ and ‘net revenue’ are to be understood as the amounts presented in the income statement of the undertaking’s financial statements in accordance with the applicable legislation and/or accounting standards.

❓Question 422

Is the disclosure of monetary amount and proportion of assets at risk over the short-/medium-/long-term meant to be broken down by the time horizon (short-/medium-/long-term) or by a single aggregate number for assets at risk in any of those time horizons?

➡ Answer

ESRS E1 paragraphs 66 and 67 do not require a breakdown of monetary amount figures by the three time horizons.

It rather requires the disclosure of a monetary amount that is the result of cumulative financial effects assessed for each of the time horizons (short-, medium- and long-term).

❓Question 555

Please provide more clarity around the requirement to report the anticipated financial effects from chronic and acute physical risks in relation to climate change.

➡ Answer

The monetary amount of the assets that are exposed to impact from chronic and/or acute climate change events provides a measure of exposure to climate risks.

The undertaking is required to disclose (Regulation EU 2022/2453):

(a) the gross carrying amount of exposures sensitive to impact from chronic climate-change events;

(b) the gross carrying amount of exposures sensitive to impact from acute climate change events; and

(c) the gross carrying amount subject to impact from both chronic and acute climate change events.

Q&As in short on disclosure of GHG emissions and carbon credits

❓Question 268

Do Gross GHG scopes 1-3 need to be disclosed each year?

➡ Answer

Yes, an undertaking shall disclose and update their Gross Scopes 1, 2, 3 and Total GHG emissions on an annual basis.

The update of Scope 3 GHG emissions in each significant category shall occur every year on the basis of current activity data.

The update of the full Scope 3 GHG inventory is required at least every three years or on the occurrence of a significant event or a significant change in circumstances (ESRS E1 par. AR 46 (f)).

❓Question 863

When calculating metrics, including value chain metrics, do we have to consider downstream positions for all four quarters (as of 31.03, 30.06, 30.09, 31.12)?

➡ Answer

ESRS do not require to calculate annual averages based on quarterly figures.

❓Question 910

Can the transitional provision in ESRS 1 paragraphs 132 to 135 (difficulty in gathering value chain information for the first 3 years) be applied to the reporting of Scope 3 emissions in ESRS E1 par. 44 (c)?

➡ Answer

No. The disclosure of Scope 3 emissions is a datapoint derived from EU legislation. Despite these transitional provisions, datapoints derived from EU legislation, such as Scope 3 emissions, shall be reported.

However, if the average number of employees during the financial year does not exceed 750, the undertaking may omit the datapoints on Scope 3 emissions and total GHG emissions for the first year.

❓Question 536

Which are the recognised quality standards for carbon credit?

➡ Answer

There is currently no list of quality standards for carbon credit recognised by the EU or recommended by EFRAG.

This list of criteria needs to be met:

(a) must be verifiable by independent third parties; and

(b) make requirements and project reports publicly available and at a minimum ensure:

1. additionality,
2. permanence,
3. avoidance of double counting and provide rules for calculation,
4. monitoring, and
5. verification of the project’s GHG emissions and removals.

As long as those criteria are met, an undertaking can consider the carbon credit as a recognised quality standard for carbon credit.

Q&As in short on GHG removal and storage

❓Question 577

What is the definition of ‘projects’ in ESRS E1 paragraph 56 (a) (GHG removals and storage resulting from projects).

➡ Answer

Projects are all activities/interventions conducted by the undertaking which may lead to GHG removals and storage.

Examples of GHG removal projects include:

reforestation/afforestation, soil carbon enhancement, ecological restoration, blue carbon removals, integration of bioenergy with carbon capture and storage (BECCS) technologies and Direct Air Capture of CO2 with storage (DACCS).

Projects will usually test new concepts, technologies or products within the operating context of the company and have both a novelty component as well as a transitory nature – the related activity is operated as a project for a certain limited period.

❓Question 636

What are the definitions of ‘biogenic removal and storage’, ‘removal and storage from land use’, ‘technological removal and storage’ and ‘hybrid removal and storage’?

➡ Answer

Biogenic removal and storage refers to GHG removal and storage as defined in ESRS, which is classified as biogenic.

This is produced by living organisms or biological processes but not by fossilized or from fossil sources. One example is forest restoration.

Removal and storage from land use refers to GHG removal and storage as defined in ESRS resulting from land-use, which is defined, too, in ESRS.

Additionally, ESRS E1 AR 57 (b) provides examples of such activities (afforestation, reforestation, forest restoration, urban tree planting, agroforestry, building soil carbon).

Technological removal and storage refers to GHG removal and storage as defined in ESRS, which results from use of technology.

Such activities may resemble examples provided in ESRS E1 AR 57 (b) (direct air capture).

Hybrid removal and storage refers to GHG removal and storage as defined in ESRS, which results from combining the use of technology with biogenic removals.

ESRS E1 AR 57 (b) provides an example of this activity (bioenergy with CO2 capture and storage).

Undertakings interested in carbon removals and carbon farming are also advised to check the provisional agreement reached on 20 February 2024 by the European Parliament and the Council of the EU for a Carbon Removals and Carbon Farming (CRCF) Regulation.

The full Q&A compilation for January-July 2024 can be downloaded here: >>

Stay tuned for more CSRD and ESRS insights on our LinkedIn page >>

EFRAG has prepared a report, with the support of the Boston Consulting Group, based on a study aimed at understanding how undertakings are preparing to apply the European Sustainability Reporting Standards (ESRS) required for compliance with the CSRD.

The report illustrates preliminary observed practices and challenges in their initial phase of ESRS implementation as of Q2 2024, divided into 4 sections:

1. Organisational approach
2. Double Materiality Assessment
3. Value Chain mapping
4. Reporting on ESRS Data Points

Below you will find valuable key takeaways. The full report can be downloaded here >>.

1. Organisational set-up for CSRD-related activities

⭕ Cross-functional collaboration models are set up to meet the ESRS requirements more effectively

All companies deploy cross-departmental collaboration.

The ownership model for the ESG reporting process is being discussed by most companies and may evolve in the future.

Currently ~65% allocate ownership to a single function (e.g., the Chief Sustainability Officer or Chief Financial Officer), while ~35% adopt a co-leadership approach (e.g., CFO in charge of reporting, CSO in charge of DMA).

Typically, five or more departments are regularly engaged in the CSRD implementation process.

Beyond the Sustainability and Finance departments, Risk Management, Human Resources, and Auditing or Internal Controls are the most frequently involved.

Departments such as Procurement, Communications, and Strategy are also commonly engaged, reflecting the interdisciplinary nature of effective ESG reporting.

30% are expecting changes in the organisational model in the near or medium term.

Upskilling is needed for any of the departments in the lead role (e.g., Sustainability on Internal Controls, Finance on ESG content).

Clear governance and forums are needed to exchange updates and implications for the other functions and make decisions.

~90%  have started improving data quality controls, similar to those used for financial reporting.

~85% acknowledge the need for IT transformation.

⭕ The companies expressed consensus that CSRD reporting has:

1️⃣ Enhanced cross-departmental collaboration (e.g., between Sustainability, Finance, Risk, IT and business units).

2️⃣ Highlighted the need for standardising the ESG reporting processes, including data quality controls (akin to financial reporting), in particular in preparation for assurance.

3️⃣ Required several additional capabilities and resources (FTE, knowledge, data and technology), including the need for an IT transformation, to be implemented under different timelines (some companies are starting sooner than others).

2. Double Materiality Assessment (DMA) practices

⭕ A strategic tool for setting ESG managerial priorities

~85% intend to integrate ESG reporting and the result of the DMA into business strategy and decision making.

A few consider DMA as a compliance exercise.

⭕ An overall shift in the DMA process is being observed

DMA is moving away from a judgement-based approach adopted in the previous years.

~70% now apply an objective evidence-based approach and rely mainly on internal and third-party data.

Where data is not available, information is complemented by the judgement of internal experts and stakeholders.

Quantitative measures of IROs (Impacts, Risks, Opportunities) are objective evidence of their materiality. Qualitative information may provide relevant context for understanding quantitative measures.

⭕“Internal expert” refers to

individuals within the organisation who possess specialised knowledge, skills or experience relevant to the environment, social or governance matters analysed or disclosed for sustainability reporting.

⭕ “Stakeholder” refers to

individuals, groups, or organisations external to the company, who can affect or be affected by the company,

including affected stakeholders and users of sustainability statements.

⭕ “Objective evidence-based” refers to

Internal data (e.g., Risk data and thresholds supplied by risk management; Opportunities based on internal projections supplied by strategy departments).

Third-party data (e.g., topic-specific databases; or in-house research on scientific papers).

Input of internal experts and stakeholders, including affected stakeholders for impact materiality.

This excludes results of generic surveys that are not targeted to specific affected stakeholder groups and narrowed to the matters that affect them.

Several highlight that surveys are not the preferred engagement channel as they often result in inconclusive output or insufficient stakeholder expertise.

⭕ “Judgement-based” refers to

Aggregation of views typically gathered through investigations/surveys/workshops with inputs from stakeholders and internal contributors (not necessarily by targeting engagements according to the level of expertise on ESG topics).

Key challenge: possible divergent views on different topics potentially leading to a subjective assessment not anchored to data.

⭕ Financial materiality thresholds

Risks: companies use both data and thresholds developed by the risk management division on ESG risk mapping (ranges expressed in millions of Euros and on different metrics as Revenues, CAPEX, and OPEX).

Opportunities: companies use business thresholds that make a business case material.

⭕ Impact materiality thresholds

Scale: is set by making use of objective external sources as much as possible (including industry proxies).

Scope: is defined according to geographical considerations on the specific topic (e.g., local vs. global footprint) and in line with where the company has established a business presence.

⭕ Interrelation between financial and impact materiality is highlighted

For instance, within the topic of health and safety, there is the human (social) impact of injury and fatalities, as well the financial risk of compensation and the wider reputational risk of an unsafe workplace.

3. Value Chain (VC) practices

⭕ VC mapping

Mapping of relationships, associated actors and financial transactions, is used to achieve visibility into the VC and connected IROs (impacts, risks, opportunities).

VC analysis remains one of the most challenging and least mature areas in ESRS implementation.

~90% are still working to refine their VC mapping, looking for the right balance of granularity.

Several have adopted a simplified aggregated VC mapping (i.e., upstream, downstream and own operations only).

They use transitional provisions, available for the first 3 years of sustainability reporting under the ESRS, with possible higher efforts to go beyond Tier 1 for the next reporting cycles.

Tier 1 (direct business relationships) suppliers are the primary suppliers that provide goods and services directly to the organization.

⭕ Focusing on direct business relationships (Tier 1)

• Does not reflect material IROs linked to indirect business relationships.
• Will not be compliant with ESRS, in particular for sectors other than financial institutions.
• Not reflecting complexities of value chains raises potential information biases.

~45% have already adopted a more granular mapping of their value chain (i.e., going beyond the high-level upstream, downstream and own operations only).

Especially non-financial institutions are already going beyond Tier 1. They tend to have more visibility of their value chain due to ongoing activities (e.g., supplier screening), especially upstream.

⭕ VC hotspots and due diligence

Severity of impacts is used to prioritise efforts, focusing on VC hotspots.

“Hotspots” are specific areas of the VC where significant IROs are likely to materialise.

Potential ”hotspots” are identified by cross-referencing countries where materials are produced, to social and environmental risk databases (i.e., Type of impact by Country by Actor in the VC). These hotspots may then be further investigated.

Special attention is given to addressing risks such as child labour in specific geographies.

The mapping of the VC for material impacts is expected to use the sustainability due diligence process when it is in place.

⭕ VC aggregation

When aggregating VC components for clarity and manageability, criteria are based on similar business types, products, services, geographical locations and organisational setups.

Such aggregation should not dilute key VC components and should ensure that the internal organisation is reflected in the VC to maintain accountability.

Detailed segmentation enhances effective visibility, management and prioritisation of high-impact areas, supporting compliance and strategic focus on significant VC elements.

Conversely, VC components with no evidence of IROs are excluded.

4. ESRS Data Point (DP) practices

⭕ EFRAG’s Implementation Guidance 3 (IG 3 Excel list)

~95% of the undertakings use IG 3 for running their gap analysis.

~20% are currently using IG 3 as a preliminary base for the upcoming digital tagging/reporting taxonomy (XBRL taxonomy).

~80% mention the complexity of retrieving data, with similar obstacles found across E, S and G.

~75% leverage the phase-in of DPs to spread the preparation efforts. However, the effect of phase-ins needs to be properly communicated.

~40% leverage Information Materiality, a concept that does not yet seem to be well understood by the participants of the study.

~10% choose to report voluntary DPs for material topics because they opt for full disclosure of DPs on material topics.

⭕ Only a minority understand how to assess Information Materiality at a DP level

The materiality of information exercise, which has the potential to direct efforts where they are most needed (i.e., in assessing material DPs), is not fully understood by the participants in this study.

Only the ‘Shall’ DPs in ESRS 2 and DR IRO 1 DPs in topical standards are always to be reported.

All other ‘Shall’ DPs are (i) applicable only when the undertaking concludes that the relevant topic is material and (ii) subject to materiality under the provisions of ESRS 1 paragraph 31 to 35.

MDR DPs are all to be reported only for material matters, per each policy/action/target that the undertaking discloses.

Information Materiality refers to ESRS 1 Appendix E: Flowchart for determining disclosures under ESRS: “Is the individual datapoint material?”

In short:

1️⃣ Perform the impact and financial materiality assessment (DMA) – informed by the topics listed in AR 16 ESRS 1.

Narrative disclosures for material topics

2️⃣ If the topic is material, disclose the DPs from the topical standard.

3️⃣ Disclose the DPs for established policies, taken actions and targets for the topic, per each policy/action/target, as explained in ESRS 2 (MDR).

4️⃣ If no policies, actions and targets have been established, disclose this to be the case. You may report a timeframe in which you aim to have these in place (ESRS1 33).

Metrics for material DRs / DPs

5️⃣ If the Disclosure Requirement (DR) is material, disclose the information required by the DR and the related DPs.

6️⃣ If the individual DP is material, disclose the information required by the DP.

⭕ Key challenges when disclosing all DPs (no use of possible levers highlighted by EFRAG)

• Higher effort required in the short and long term for reporting.
• Not all DPs might always be relevant to users.
• Risk of obscuring material information.
• Potential lower quality of data due to higher coverage needs.

More on costs

Earlier in the process, EFRAG also commissioned Centre for European Policy Studies (CEPS) and its partner Milieu to conduct an assessment of the costs and benefits of the first Set 1 of Draft ESRS presented in November 2022:

• Looking at administrative costs in absolute terms, the largest cost in absolute value (both one-off and recurring) is faced by NFRD listed undertakings.
• These are usually large undertakings requiring longer data collection processes.
• They expect to face, on average, a total of EUR 287 000 as a one-off cost of reporting and about EUR 320 000 on annual basis (of which EUR 173 000 for own costs equivalent to between 2 and 2.5 FTEs on average).
• Non-NFRD non-listed undertakings incur the lowest administrative costs, primarily due to their smaller average size. Their costs are expected to reach about EUR 36 000 on a one-off basis and EUR 40 000 on a recurring basis.

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EFRAG is responsible to deliver the technical ESRS digital taxonomy to ESMA (the European Securities and Markets Authority) and the EC (European Commission).

It will be adopted via an “RTS” (Regulatory Technical Standards), drafted by ESMA – who will also conduct a cost-benefit analysis.

It will amend the ESEF Delegated Regulation and will be directly applicable in all Member States.

During yesterday’s meeting (16/7), EFRAG presented the changes implemented to the ESRS Set 1 XBRL Taxonomy following the public consultation feedback.

A total of 49 responses were provided in the course of the public consultation, with a wide support for the draft XBRL Taxonomy: 85% of the respondents thought that it appropriately reflected the ESRS.

EFRAG SRB confirmed the implementation of many technical improvements (see the link in the comments to access the details).

It rejected most of the proposal for aggregation, as not compatible with the agreed methodology based on the fundamental principle of reflecting the granularity in ESRS, as well as users’ needs and interoperability with ISSB who has adopted a similar approach.

⭕ EFRAG remarked that when companies draft their report closely to the ESRS, the costs of the tagging process are reasonable and lower than if the disclosures are not well structured and scattered around the report.

On July 5, ESMA, also issued a document stressing:

⭕that it will be particularly important to carefully assess whether the company’s historical approach to the presentation of sustainability information is consistent with the CSRD and ESRS and, if not, to make adjustments accordingly.

⭕the importance that, from the first application of the ESRS, the reporting process is conceived in a way that caters for digitisation of the sustainability statement in a way that is aligned with the granularity of the ESRS requirements – following the structure of the ESRS makes digital tagging easier.

In addition, it was pointed out that,

➡ the burden of digital tagging that preparers face, will be justified by benefits to users of sustainability data,

➡ granular digital tagging will bring cost reductions both for companies and for financial institutions since if standardized and structured digital reporting is not done, the data will be provided by data providers at a high cost,

➡ the number of elements in the GRI taxonomy, which covers impact materiality, plus the number of the ISSB S1 and S2 elements which covers financial materiality is close to the number of ESRS elements, which covers double materiality.

EFRAG has scheduled its publication of the final taxonomy for the second half of August.

In the meantime, only editorial or technical changes will be implemented in the XBRL taxonomy, no XBRL elements will be added or removed.

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