On December 6, EFRAG released 64 new Explanations to support preparers and others in the implementation of the ESRS.

EFRAG is considering issuing an additional limited number of Explanations in the course of December 2024. Subsequently, EFRAG plans to release new Explanations in 2025 only after the end of the 2024 sustainability reporting cycle.

The January – November 2024 Compilation can be downloaded here >>>

Included in the November compilation is the mapping of sustainability matters in paragraph AR 16 of ESRS 1 with the Disclosure Requirements in topical standards (ID 177) >>>

Other useful clarifications in the November 2024 compilation include:

 

Global – instructions

ID 1048 – Disclosure of datapoint(s) related to a non-material Disclosure Requirement for a metric

It is not possible for a datapoint(s) to be material and for the related Disclosure Requirement not to be material when disclosing information on metrics.

However, it may be possible to conclude that an individual datapoint (or datapoints) are not material while the corresponding Disclosure Requirement is material.

Therefore, it is possible for the entity to conclude that not all datapoints need to be provided to fulfill the information requirements for a specific Disclosure Requirement.

 

ID 526 and ID 1021 – Disclosure of a non-material datapoint … related to a (a) material and (b) non-material topic

Following the provisions in ESRS 1 paragraph 114, in addition to the disclosure of material matters identified during the materiality assessment process, the undertaking may provide additional information stemming from other legislation as well as from generally accepted sustainability reporting standards and frameworks (for example, SASB Standards or GRI Standards).

Other voluntary additional disclosures require the application of professional judgement, are expected to be limited (i.e. disclosure is based on robust reasoning) and shall fulfil the criteria laid out in ESRS 1 Appendix B Qualitative characteristics of information.

This requires that: ‘Complementary information … be provided in a way that avoids obscuring material information.’

For example:

If water consumption is only deemed material in relation to impacts, risks or opportunities that arise in the upstream or downstream value chain and not in own operations, the most relevant metric to be included is the water consumption for the value chain only.

This is not a metric explicitly included in the sector-agnostic ESRS (ESRS E3 paragraph 24 (a) being focused on own operations).

However, even if no datapoint in ESRS E3 is identified as material, the undertaking shall consider whether this or another metric that depicts this matter shall be disclosed as entity-specific disclosure following ESRS 1 paragraph 11.

 

ID 1297 – Level of disaggregation

The undertaking is expected to report at a legal entity level if for specific matters or material IROs this corresponds to the criteria in ESRS 1 paragraph 54 and 56 (e.g. one legal entity per country and ‘significant variations of material impacts, risks and opportunities across countries’ as well as higher-level aggregation would obscure information).

When needed for a proper understanding of its material impacts, risks and opportunities, the undertaking shall disaggregate the reported information by significant site or by significant asset when material impacts, risks and opportunities are highly dependent on a specific location or asset in accordance with ESRS 1 paragraph 54(b).

Conversely, the undertaking is expected to report information aggregated at group level (or for a cluster of legal entities) if it assesses that a more granular level of disaggregation is not necessary.

In this case, the legal entities/subsidiaries are treated the same irrespective of their location (within the EU or in non-EU territories) when they are included as part of the aggregated data.

 

ID 1019 – Sustainability matter expected to become material in the future

A matter that is not assessed to be material over the short-, medium- or long-term horizon as of the reporting date, but – if assessed in four to five years – it might become material in the future, is to be considered not-material as the matter is not material as of the reporting date.

 

ID 923 – Phase-in entity specific disclosure

Entity-specific disclosures are required for the first three years of reporting of sustainability information.

 

ID 1144 – Phase-in 750 employees: Calculation of average

The ‘average number of employees’ shall be calculated in line with the size criteria as stipulated in the Accounting Directive (Directive 2013/34/EU) Article 3.

The Accounting Directive in Article 3 used the term ‘average number of employees during the financial year’. This is exactly the same term used in ESRS 1 Appendix C, aligning ESRS to the wording and requirement used in the Accounting Directive.

 

ID 1090 – Length of transitional provisions for early adopters

The voluntary publication of sustainability statements one year earlier than required under the CSRD does not affect the phase-in requirement periods granted by ESRS 1.

Voluntary early application of the ESRS sustainability statement by an undertaking does not count in respect of the years of preparation under ESRS, is not recognised legally, and therefore does not affect the date from when the phase-ins should be calculated.

Accordingly, in the year of mandatory application of ESRS, the undertaking may present its sustainability statement without comparative information in accordance with ESRS 1 paragraph 136 even if it has prepared a voluntary sustainability statement in the preceding year.

 

ID 1136 – Targets without policy

An undertaking might have a target without establishing a policy on how to get there.

However, this may not be efficient: while a target can be set without a policy, there is no clear management principle, rule or guidance on how to achieve it, making it unlikely to be met.

If the undertaking has a target without a related policy, the description of the relationship of the target to the policy objectives as required by ESRS 2 paragraph 80 (a) shall make that clear.

To note: Minimum Disclosure Requirements – Actions MDR-A – Actions and resources in relation to material sustainability matters also mentions the situation when actions are implemented without a specific policy (see ESRS 2 paragraph 68).

 

ESRS 2

ID 1072 – DR GOV-1 – ESG expertise of governance bodies

The sustainability-related expertise and skills could be with one person or with more than that from the administrative, management and supervisory bodies or substantiated in another kind of form. ESRS 2 paragraph AR 5 provides further guidance in that respect.

 

ID 935 – Financial effects – current vs anticipated

Question: what is the difference between current financial effects in ESRS 2 paragraph 48 (d) and anticipated short-term effects in ESRS 2 paragraph 48 (e)?

• Current financial effects are defined as ‘financial effects for the current reporting period that are recognised in the primary financial statements’.
• Anticipated financial effects are defined as ‘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’. Anticipated financial effects includes the financial effects that are not ‘current financial effects’.

The second part of ESRS 2 paragraph 48 (d) (second datapoint) requires the disclosure of ‘… the material risks and opportunities for which there is a significant risk of a material adjustment within the next annual reporting period to the carrying amounts of assets and liabilities reported in the related financial statements’.

This datapoint [2.48.d] does not qualify as current financial effects but as anticipated financial effects for which there is a significant risk of a material adjustment within the next annual reporting period.

In this sense, there is an overlap as the datapoint ‘adjustment within the next annual reporting period’ is also part of the anticipated financial effects to be reported under ESRS 2 paragraph 48 (e).

The undertaking may incorporate disclosures using cross-references to the respective parts in the financial statements to avoid repetitions.

 

Governance

ID 800 – Corruption and Bribery

There is no requirement to distinguish between convictions or fines for corruption and those for bribery in paragraph 24 of ESRS G1.

Additional information about the nature of the conviction or fine is voluntary.

‘Confirmed incidents of corruption/bribery’ is the subject of voluntary disclosures per paragraph 25 of ESRS G1, which requires disclosure of the nature.

There is no concept of ‘incidents of corruption or bribery’ in ESRS.

 

Social – S1 Own Workforce

ID 271 – Difference between work-related accident and work-related injury

S1.88: A work-related injury is one of the possible consequences of a work-related accident. Work-related incidents that result in work-related injury or ill health are work-related accidents.

Work-related accidents therefore include cases of both work-related injuries, including those resulting in fatalities, and cases of work-related ill health.

Only the cases of work-related ill health that occur as a result of accidents need to be considered.

 

ID 339 – Use of secondary data, social protection

S1.74: Estimates or secondary data may not be used to determine whether an undertaking’s employees are covered by social protection for this non-quantitative datapoint.

Whether employees are covered by social protection depends on public programs or benefits offered by the undertaking. This information arises from the legal frameworks of the various countries as well as contractual benefits provided by the undertaking to its employees.

Therefore, this information does not relate to quantitative metrics or value chain data, for which the use of estimates may be appropriate.

However, this does not rule out that some interpretation by the reporting undertaking may be needed when compiling the information, for example, when laws about health insurance in a country in which the undertaking operates are not perfectly clear about the kinds of illness that are covered.

 

ID 430 – Definition of gender

S1.50.a ESRS do not define gender, but they acknowledge the legal existence of three categories: female, male and other.

 

ID 689 – Gender Pay Gap; Gender + ID 389 – Annual total remuneration ratio and types of workers

S1.97.a: The gender pay gap calculation explicitly requires the inclusion of male and female employees only.

This is a SFDR PAI. There is no mention of ‘other employees’, as defined in ESRS S1 AR 55.

Any contextual information in this regard may be provided according to ESRS S1 paragraph 97 (c), taking into account the general provision in ESRS 1 paragraph 11 in relation to entity-specific information.

 

ID 453 – Social protection; parental leave

S1.93: Family-related leave is defined as including maternity leave, paternity leave, parental leave and carer’s leave (ESRS S1 paragraph AR 96).

The focus of the Disclosure Requirement is family-related leave covered by regulations (for example, government’s social protection), organisational policies, agreements, contracts or collective agreements (ESRS S1 paragraph AR97) that contain family-related leave entitlements. Such entitlements may differ at a country level.

Being entitled to take family-related leave would thus mean, based on national law or collective agreements, for female employees to be entitled to take maternity, parental and carer’s leave and for male employees to be entitled to paternity, parental and carer’s leave.

The scope of family leave may vary across countries, and such contextual information may be relevant to users (for example, that employees are entitled to maternity leave but not to paternity leave in a given country).

If based on national law or collective agreements female/male employees are not entitled to all the respective female/male types of family-related leave, then they would not qualify to be considered in the nominator of the metric.

 

ID 550 – Disclosure of discrimination / harassment cases found inconclusive

A company is obliged to disclose a discrimination/harassment case that, upon investigation, was found to lack conclusive evidence supporting the allegations (and hence was considered closed without any supporting evidence).

The total number of incidents of discrimination include all legal actions or complaints registered through a formal process or instances of non-compliance identified through established procedures (for example, grievance mechanisms).

ESRS S1 paragraph AR 103 provides the option to disclose the status of incidents and/or complaints as well as the actions that the undertaking has taken.

To note is that if the incident has been reported in the previous year, it shall not be reported again in the current year.

 

ID 473 – Restrictions due to national regulations

In some countries (especially outside the EEA), there may be restrictions on data collection of employees. ESRS S1 acknowledges such restrictions for two specific datapoints but not as a general principle; in particular, such provision is in

• ESRS S1 Disclosure Requirement S1-12, on persons with disabilities as well as
• ESRS S1 Disclosure Requirement S1-14 (d)) on work-related ill health and (e) on the days lost to work-related ill health and fatalities from ill health.

For these datapoints, where there is a conflict with national data protection law, it is not necessary to report on the relevant datapoints Contextual information as described in ESRS 1 paragraph AR 76 can be added for more transparency.

 

ID 730 – Type of employee, social protection

‘Type of employee’ refers to the contract type (ESRS S1 paragraph 50 (b)). This includes permanent employees, temporary employees and non-guaranteed hours employees.

 

Social – other

ID 1026 – Definition of end-users

If a company sells products B2B, is the potential impact on those individuals to be assessed under S2 or S4?

For example,

A harbor has ferry services and a truck driver who, having to use in their job a ferry to deliver goods, gets injured because of lack of security in the harbor.

Is the impact on that driver to be assessed under S2 (because the truck driver is considered to be a worker in the downstream value chain) or S4 (because the truck driver is considered an end user)?’

ESRS define ‘end users’ as ‘individuals who ultimately use’ a product or service.

This does not include workers of a business customer of the reporting undertaking.

Those workers may use services offered by the undertaking, but they do so in the context of providing a service or producing a good on behalf of their employers.

Typically, such workers should be considered value chain workers.

 

Environment

ID 968 – Ecolabel

If a company’s metric is verified by an EU Ecolabel, and assuming that the Ecolabel is not an internal body of the undertaking, the Ecolabel can be mentioned as an external body.

According to ESRS 2 paragraph 77 (b), the undertaking is required to disclose whether the measurement of the metric is validated by an external body other than the assurance provider and to specify which body.

 

CLIMATE (E1)

ID 893 – Conversion factor fossil fuels

Conversion factors for the energy content of fuels (so-called ‘heating’ or ‘calorific values’) need to be used when preparing information on energy consumption. Heating values can be direct or indirect data, originate from multiple sources, and be expressed in different ways (e.g. energy per weight or energy per volume).

Direct data on heating values will result from the analysis of the heat content of fuels used and from which a conversation factor is derived. This is typically done by very large energy consumers (and emitters) who need to know well the fuels they use, for example, power production from fossil fuels.

Indirect data on heating values can comprise, for example, data from fuel suppliers, national statistics data or engineering/technical factors representing usually accepted average figures for each fuel type, often reported as ranges (e.g. biodiesel 39–41 MJ/kg).

Common sources of indirect data for heating values are:

• 2006 IPCC Guidelines for National Greenhouse Gas Inventories (Table 1.2, page 1.18), also used as a reference for Annex VI of the EU ETS Monitoring and reporting regulation;
• the UN Energy Statistics Yearbook, which provides statistical series of Heating values for different fuels and countries (see the supplement to the 2021 Energy Statistics Database);
• GHG national inventories reports (NIR) submitted to the UNFCCC; and publications from energy statistics by the national statistics or energy authorities.
• It is important to note that calorific value changes across jurisdictions.

 

ID 1126 – Heating values and geographical location of undertaking

According to the ESRS E1 paragraph AR 32, the undertaking is required to disclose quantitative energy-related information in Mega-Watt-hours (MWh) in Lower Heating Value (LHV) (or net calorific value, NCV).

Undertakings that typically use Higher Heating Values (HHVs) (e.g. in certain locations, for certain technologies and/or based on conventions related to energy carriers) must disclose using LHV or net calorific value to comply with the ESRS, which may imply using fuel specific conversion formulas between HHV and LHV.

Note: The LHV (or NCV) of a fuel is the total heat produced by burning it minus the heat needed to evaporate the water present in the fuel or produced during its combustion (see more information on heating values in the background).

 

POLLUTION (E2)

ID 472 – Major incidents and deposits

E2.40.b: When are incidents and deposits considered to be ‘major’? Is there a qualitative or quantitative threshold to consider?

ESRS do not provide a threshold for distinguishing major incidents and deposits from regular occurrences.

The evaluation of incidents should, in all cases, be based on the undertaking’s materiality assessment and incidents identified as major are likely connected to material impacts and risks and, therefore, likely to be identified as material.

At the same time, incidents of lower scale can carry material impacts or financial risks and, therefore, be assessed by the undertaking as material, too.

 

ID 1060 – Pollution – affected communities consultations

The undertaking is compliant with ESRS E2 paragraph 11 (b) if it disclosed that it did not conduct a consultation with affected communities. ESRS E2 only requires stating whether the undertaking conducted consultations with affected communities as input for the pollution-related materiality assessment.

If such consultation process was not adopted, the undertaking is to state that fact and, optionally, it can also provide a timeframe in which it expects to have a consultation process in place. Only in the case in which the undertaking did have this consultation process in place will it also need to explain how it consulted the affected communities on pollution-related impacts, risks and opportunities.

 

ID 619 – Air emissions in ESRS E2 versus ESRS E1

When GHG emissions are material, the undertaking will report them under ESRS E1. If other air emissions (i.e. non-GHG emissions) are material, then the undertaking will need to report those under ESRS E2.

 

ID 713 and ID 928 – Microplastics – definition and REACH update

E2.28.b The definition of microplastics to use in ESRS reporting is that of the Commission Delegated Regulation (EU) 2023/2772 (Annex II and Disclosure Requirement ESRS E2-4 paragraph AR 20).

The aspects that are key to the ESRS definition of ‘microplastics’ are size (pieces of plastics, usually smaller than 5mm), the intentional or unintentional nature of their generation and impacts on the environment and human health.

Triggering for ESRS reporting are those microplastics that leave the undertaking’s facilities as emissions, products or parts of products or services, which is when the ESRS stipulate that they must be reported by the undertaking if material. Microplastics that leave the facilities as part of products should include those that are released to the environment, either due to wear and tear by product use (e.g. car tires or synthetic textiles) or due to the fact that they were manufactured to be added to products for specific purposes (e.g. exfoliating beads in facial or body scrubs).

It is to be noted that legislation on the matter of microplastics is currently evolving; hence, more defined requirements may be expected in the future.

 

WATER (E3)

ID 456 – Policies on water treatment

ESRS E3 paragraph 12 (a) (ii) should be read under the assumption that policies on water treatment can promote water reuse as a sustainable source of water. In these terms, water treatment can increase the sustainability of water management practices and, more specifically, water sourcing to the extent that it can reduce the need for water withdrawal and therefore the pressure on the water environment.

It can also improve the quality of water discharges, increasing the availability of high-quality, safe water for withdrawal and ecological functions. The practice can more broadly be seen as an application of circular economy principles to water management.

 

ID 676 – Water metrics in the value chain

The undertaking can report different metrics for the same sustainability matter for different parts of its value chain based on which metrics are deemed material for its own operations and its value chain.

In relation to the example provided by the submitter, this means that the undertaking would disclose its water consumption in relation to its upstream value chain if material (this would be an entity-specific disclosure when applying sector-agnostic standards), but it would not disclose its water consumption in its own operations if not material.

At the same time, it could disclose water withdrawal for its own operations if material (this is an optional metric) but not disclose this metric in relation to its upstream or downstream value chain if impacts in the value chain are not material.

If only impacts upstream are material, the metric in relation to own operation and downstream value chain are not disclosed.

More specifically, concerning this example the following is to be noted. ESRS E3-4 paragraph 28(a) requires reporting water consumption in the undertaking’s own operations only. If the undertaking deems that this metric is not material for its own operations, it shall not disclose it (see ESRS 1 paragraph 34 (b)).

At the same time, if the metric water consumption is identified as material in the upstream or downstream value chain, the undertaking would be required to disclose it as an entity-specific metric (see ESRS 1 paragraph 11).

ESRS E3-4 paragraph AR 32 provides the option to disclose the metric on the undertaking’s water withdrawal.

Therefore, if the undertaking considers this metric material for its own operation, it may choose to disclose it. At the same time, if this metric is deemed not material for its upstream or downstream value chain, it would not disclose it in connection to the value chain.

 

BIODIVERSITY (E4)

ID 952 – Metrics – rounding and decimals; materiality of information + ID 953 – Mandatory disclosures of material metrics on Biodiversity

ESRS E4 does not require reporting metrics for each material impact.

For ESRS E4, it is only mandatory for the undertaking to report metrics for ESRS E4 paragraph 35 (if the undertaking identified sites located in or near biodiversity-sensitive areas that it is negatively affecting) and for paragraph 38. In applying paragraphs 35 and 38, the conditions of ESRS 1 paragraph 34 apply.

The disclosure of metrics related to ESRS E4 paragraphs 39, 40 and 41 is voluntary even if the undertaking has identified material impacts in connection with the subtopics mentioned in those paragraphs (the undertaking would still be required to disclose on the other provisions listed in ESRS E4 for those material subtopics).

With regard to ESRS E4 paragraph 38, the undertaking can choose to disclose metrics that measure other or only a few of the aspects listed in that paragraph.

The undertaking shall refer to ESRS 1 paragraph 11 when identifying relevant entity-specific metrics.

Impact metrics in ESRS E4 are rarely standardized. For disclosure requirements where they are not, it is the responsibility of the undertaking to identify the metrics that are relevant to be disclosed (see ESRS 1 paragraph 31 and Appendix B of ESRS 1 for the definition of ‘relevance’).

To assist the undertakings in this process, ESRS E4-5 indicates metrics or indicators that measure relevant aspects related to ecosystems and biodiversity and that may be material for undertakings to disclose.

In relation to paragraphs 39, 40 and 41, reporting on metrics is optional. However, if the undertaking concludes that the inclusion of entity specific metric(s) is necessary (ESRS 1 paragraph 11), the provisions in these paragraphs support the identification of relevant metrics to be reported.

See also Question ID 526 and ID 1021 – Disclosure of a non-material datapoint (water consumption in own operations) related to a (a) material and (b) non-material topic.

 

ID 1115 – Disclosing the number and area of sites near or in biodiversity-sensitive areas + ID 1172 – Disclosure of the area of sites in or near biodiversity-sensitive area

The undertaking concludes that it is not negatively affecting biodiversity-sensitive areas in or near sites that it owns, leases or manages, it shall not disclose the number and area of those sites (in relation to ESRS E4 paragraph 35).

The undertaking, however, must always disclose whether it has sites located in or near biodiversity-sensitive areas and whether activities related to these sites negatively affect these areas under ESRS E4 paragraph 19 (a).

This disclosure is related to ESRS 2 IRO-1 and, therefore, this information needs to be disclosed irrespective of the outcome of the undertaking’s materiality assessment considering relevance of information (see ESRS 1 paragraphs 29 and 31).

E4.35: The undertaking is required to disclose the total area (in hectares) of a site owned, leased or managed in or near protected areas or key biodiversity areas if it has activities related to these sites that are negatively affecting a biodiversity-sensitive area.

The disclosure refers to the total area of the site, not just the portion that may fall within or be adjacent to the biodiversity-sensitive area.

Information on the total size of a site can be relevant to assess the undertaking’s actual and potential impacts, as activities carried out in the site beyond the immediately adjacent or overlapping portions of a site can still affect biodiversity-sensitive areas nearby.

What to consider as ‘near’ depends on the type of impact that the company has on the biodiversity-sensitive area. It could, for example, depend on the type and amount of pollutant emitted by the undertaking and whether it is transported by water flows (e.g. rivers), ground water or air currents, potentially impacting aquatic and terrestrial ecosystems kilometers away from the pollution source.

 

WASTE (E5)

ID 283 – Is waste incineration a disposal operation

E5.37 Incineration is to be treated as a recovery operation if it meets the conditions to be considered as an ‘R1 Use principally as fuel or other means to generate energy’ operation, according to Annex II of the Waste Framework Directive. In this case, it is considered as an ‘other energy recovery’ under ESRS E5 paragraph 37(b)(iii).

If the conditions in which incineration occurs are conducive to its classification as a ‘D10 incineration on land’ operation (Annex II of the Waste Framework Directive), then it shall be classified as a disposal operation.

 

ID 400 – Recycled waste

E5.37 Undertakings can assume that recycled waste can be calculated by subtracting non-recycled waste from total waste provided that they consider all proper components in the equation of the total waste (in order to understand what can be considered as ‘non-recycled waste’) and provided that they know all components except the one of recycled waste.

As per the Waste Framework Directive (WFD), these are the components that need to be considered in the equation of the total waste generated:

• Total waste = recycled waste + reused waste + other recovery + disposed waste.

The above categories are to be understood as per definitions in the WFD:

• Recycled waste: any recovery operation by which waste materials are reprocessed into products, materials or substances. This includes the reprocessing of organic material but excludes energy recovery and reprocessing into materials used as fuels.
• Reused waste: involves checking, cleaning or repairing recovery operations by which products or components of products that have become waste are prepared to be re-used without other pre-processing.
• Other recovery: any waste-recovery operation that serves a useful purpose by replacing other materials. Notably, it includes energy recovery (e.g. incineration with energy recovery).
• Disposed waste: waste that is not recovered (recycled or otherwise diverted from disposal) and is sent to landfill or other disposal methods.

Nevertheless, given the equation, a missing component can be derived if the other components in the equation are known.

To calculate recycled waste, if this component is not known and all others are, undertakings would have to use the following equation:

• Recycled waste = total waste – (reused waste + other recovery + disposed waste)

 

ID 408 – Categorisation of waste streams

Could you clarify the categorisation of the following waste streams (whether under ESRS E5 paragraph 37 (b) (iii), (c) (ii) or (c) (iii))?

Composting of organic waste, fermentation of organic waste and incineration of waste that results in energy production (which then is used/sold).

Composting and fermentation of organic wastes are considered a form of recycling – see Directive 2008/98/EC of the European Parliament and of the Council (Waste Framework Directive, WFD), Annex II, ‘R3 Recycling/reclamation of organic substances which are not used as solvents (including composting and other biological transformation processes)’ – and a recovery operation for the purposes of ESRS 5 paragraph 37 (b) (ii).

According to Annex l of the WFD, incineration without energy recovery is considered a disposal operation (included as ‘D10 Incineration on land’) and is classified under ESRS E5 paragraph 37 (c) (i) Annex ll of the WFD, which sets out the different types of recovery operations. Incineration with energy recovery is considered disposal if the criteria is not met (as explained in the footnote to R1 of Annex ll, of the WFD) and is to be classified under the ‘R1 Use principally as a fuel or other means to generate energy’ operation.

If classified as an ‘R1 Use principally as a fuel or other means to generate energy’ operation, incineration with energy recovery can be considered under ESRS E5 paragraph 38(b)(iii) as ‘other recovery operations’.

 

Source: https://www.efrag.org/en/news-and-calendar/news/efrag-esrs-qa-platform-64-new-explanations-available-updating-the-compilation-of-explanations-to-a

 

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Stay tuned for more CSRD and ESRS insights.

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

 

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EFRAG Q&A compilation November 2024, page 103 – Question ID 935 

EFRAG has released an answer to our question (ID 935) regarding how to distinguish current versus anticipated financial effects to be published in ESRS 2 SBM-3 paragraph 48 datapoints (e) and (d).

Thank you EFRAG for taking the time to provide this clarification.

ESRS 2 SBM-3 specifies that

• the undertaking may omit the information prescribed by paragraph 48 (e) – anticipated financial effects – for the first year of preparation of its sustainability statement,
• but not the information regarding the current financial effects, in paragraph 48 (d), linked to a significant risk of a material adjustment within the next annual reporting period.

Annex II Acronyms and Glossary of Terms defines:

• ‘current financial effects’ as ‘Financial effects for the current reporting period that are recognised in the primary financial statements’; and
• ‘anticipated financial effects’ as ‘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 other words, the current financial effect has already been recognised at or before the reporting date, whereas the anticipated effect might occur thereafter, be it in the short (within the reporting period, after the balance-sheet date), medium- or long-term.

For example, an impairment charge recognised in the current reporting period in accordance with IAS 36 Impairment of assets is a current financial effect whereas a disclosure in accordance with IAS 36 paragraph 134 (f), requiring the disclosure of a potential impairment based on a ‘reasonable possible change in key assumptions’, is an anticipated financial effect.

According to ESRS 2, the paragraph 48 (d) requires the disclosure of:

• the current financial effects of the undertaking’s material risks and opportunities on its financial position, financial performance and cash flows and the material risks and opportunities
• for which there is a significant risk of a material adjustment within the next annual reporting period to the carrying amounts of assets and liabilities reported in the related financial statements

EFRAG answers that

“This datapoint [48.d] does not qualify as current financial effects, but as anticipated financial effects for which there is a significant risk of a material adjustment within the next annual reporting period.

In this sense, there is an overlap, as the datapoint ‘adjustment within the next annual reporting period’ is also part of the anticipated financial effects to be reported under ESRS 2 paragraph 48 (e). 

The undertaking may incorporate disclosures using cross-references to the respective parts in the financial statements to avoid repetitions.”

Our understanding of this answer is that the datapoint 48 (d) should also read “anticipated” financial effects, and not “current” financial effects.

And, as such, the undertaking may omit also this information for the first year of preparation of its sustainability statement.

Source (ID 935, page 103): https://www.efrag.org/sites/default/files/media/document/2024-12/Explanations%20January%20-%20November%202024.pdf

EFRAG has released the finalized mapping of sustainability matters in paragraph AR 16 of ESRS 1 to the ESRS Disclosure Requirements in topical standards (ID 177).

The tables are available in the enclosed document.

The following can be noted:

⭕ Sustainability matters in ESRS 1 paragraph AR 16 are often interrelated. Based on the facts and circumstances of an undertaking, the materiality of a specific subtopic or sub-subtopic of a topical ESRS can trigger reporting requirements in other topical ESRS.

⭕ The subtopics of Energy and Climate Change Mitigation are closely linked. The datapoints in the Disclosure Requirement E5-1 Energy Consumption and mix cover aspects (energy use) linked to climate change mitigation. Therefore they are connected to Climate Change Mitigation.

⭕ The metrics in S1-6, S1-7 and S1-17 are mapped to the Own Workforce directly, as they provide contextual information that supports the understanding of the information reported in the other ESRS S1 disclosures and these form the basis for calculation of other metrics.  They are to be considered when defining what to report in relation to any subtopic/sub-subtopic.

⭕ The metrics in S1-8, S1-9, S1-10, S1-11, S1-12 and S1-14 are also all related to the topic of ESRS S1 Own Workforce as a whole, as they address fundamental rights.

⭕ Only the metrics in S1-13 (Training and skills development), S1-15 (Work-life balance), and S1-16 (Gender equality and equal pay for work of equal value) are mapped to a sub-sub-topic alone.

The document is available here >>>

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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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