EFRAG’s June 20 Progress Report Provides An Early Look at Proposed Changes to CSRD Reporting

Reporting under the EU’s Corporate Sustainability Reporting Directive (CSRD) will be simplified as part of the Omnibus process. In connection with the Omnibus, EFRAG was mandated to provide technical advice to the European Commission on revised and simplified European Sustainability Reporting Standards by the end of October. On June 20, EFRAG submitted a progress report on its work to the Commission, which indicates the direction in which EFRAG is heading. In this post, we hit the highlights from the progress report.

The Omnibus proposals are discussed in detail in this Ropes & Gray post. EFRAG’s workplan is discussed in this post. For our most recent CSRD Transposition Tracker, see here.

A significant reduction in the number of datapoints

Corporate reporters – and many EU member states – have been critical of the burden imposed by the large number of ESRS datapoints; more than 1,000, although most are subject to materiality.

As a core part of its simplification work, EFRAG is identifying the least relevant qualitative and quantitative data points. According to the progress report, EFRAG estimates that it will be able to achieve a 50%+ reduction in the number of ESRS datapoints.

In addition to the reduction in the number of datapoints, according to the progress report, the following changes will be proposed. Some of these changes are discussed in further detail later in this post.

• The EFRAG Sustainability Reporting Board is taking a less granular approach to narrative disclosures relating to policies, actions and targets (PATs) as well as in the topical specifications of ESRS 2 (Appendix C of ESRS 2). There will be an overall reduction of “shall” narrative datapoints through deletions and moving corresponding content to non-mandatory guidance.
• More generally, datapoints that are not strictly necessary to meet the disclosure objectives of the CSRD will be eliminated. In addition, some granular datapoints – such as breakdowns or elements of contextual information – will be moved to non-mandatory guidance.
• The EFRAG SRB is considering the placement of non-binding guidance and may propose moving that guidance to appendices within the standards or to an additional EFRAG publication, possibly in the Implementation Guidance series. The EFRAG SRB will continue to discuss this point with the Commission.

A simplified double materiality assessment process

Another much-criticized aspect of the CSRD is the double materiality assessment that companies need to undertake. Criticisms include the effort the DMA requires and the focus on process. The EFRAG SRB intends to propose the following modifications to the DMA and information materiality:

• Clarifying that the DMA should normally start with the top-down approach of analyzing the reporting company’s business model to identify the most obvious material topics and that the level of supporting evidence should be reasonable and proportionate; this is being proposed to reduce the overall complexity of the DMA process and the use of unnecessary scoring;
• Emphasizing decision-usefulness, to clarify and strengthen the information materiality criteria;
• Introducing a materiality filter for all datapoints, including ESRS 2 datapoints;
• Clarifying (1) the interaction between the identification of material IROs and the assessment of material topics and sub-topics, (2) the illustrative nature of the topic list in ESRS 1, AR 16, (3) the assessment of material topics and sub-topics and (4) the expected level of granularity in reporting;
• Addressing (1) how mitigation, prevention and remediation actions are to be considered in assessing an impact for materiality (i.e., a gross versus net approach) and how to define positive impacts and (2) whether an undertaking can include in its sustainability statement information about non-material matters (e.g., when requested by rating agencies) and (3) if so, under which conditions;
• Clarifying that, when only a sub-topic is material, the undertaking is to limit the information reported to that sub-topic, without triggering reporting of all datapoints in the relevant topical standard; and
• Placing additional emphasis on the objective of fair presentation, which is based upon relevance and faithful representation, to reduce the reporting burden; however, the progress report notes that some EFRAG SRB members have expressed reservations about this working assumption and that it will therefore require further consideration.

Harmonization of Minimum Disclosure Requirements and topical disclosures

Minimum Disclosure Requirements (MDRs) are intended to in principle define, at a cross-cutting level (ESRS 2), the required disclosures for PATs relating to material topics. The topical standards in turn provide detailed mandatory datapoints that address PATs for each topic.

The EFRAG SRB is implementing the following preliminary decisions to reduce reported datapoints in topical standards and promote more concise and less duplicative reporting:

• Reducing the number of cross-cutting MDR datapoints in ESRS 2;
• Reducing the mandatory PAT specifications in the topical standards as part of a more principles-based standard-setting approach to narrative disclosures;
• Clarifying that PATs only are to be reported if the reporting company has them and they are related to materials topics;
• Having a single datapoint for listing material topics for which there are no PATs, without requiring companies to disclose why they do not have them, although companies will be able to optionally provide a timeline for implementing applicable PATs;
• Reinforcing flexibility and readability of streamlined disclosures by clarifying that (1) PAT content should not be duplicated in different parts of the sustainability statement, (2) a policy covering different topics should only be described once and (3) PATs can be limited to a sub-topic without triggering disclosures at the topical level; and
• Replicating the same approach for the topical specifications of ESRS 2 (Appendix C of ESRS 2).

Clearer differentiation between mandatory and non-mandatory content

The progress report indicates that paragraphs on mandatory guidance will be placed under their respective disclosure requirements, while non-mandatory content will be clearly separated from the former. Similarly, voluntary disclosure requirements will be clearly identifiable as non-mandatory content.

Executive summaries, dedicated sections and appendices to enhance readability

• Reporting companies will be able to include an optional executive summary at the beginning of the sustainability statement;
• The most granular information, such as detailed metrics, will be able to be included in dedicated sections or appendices;
• EU Taxonomy-related information also will be able to be included in a specific appendix; and
• To the extent additional information on non-material matters is included, this will be encouraged to be presented in dedicated sections or appendices.

Numerous other areas will be addressed

According to the progress report, some of the other areas to be addressed by EFRAG include the following:

• Acquisitions and disposals. The existing ESRS are not clear on how acquisitions and disposals should be addressed. Specific relief based on pragmatism and the availability of data is contemplated.
• IFRS reliefs. The EFRAG SRB has been reviewing the areas of relief from reporting in IFRS S1 and S2 to incorporate those that are compatible with the European context. According to the progress report, these include the broad use of the concept of “undue cost or effort” (which already is used in some places in the ESRS) and relief for disclosure of sensitive information relating to opportunities (which also is currently addressed in ESRS 1).
• Commercially sensitive information. The EFRAG SRB is prepared to address the question of commercially sensitive information more generally; however, the progress report notes that Commission representatives have indicated this may be discussed as part of the Omnibus negotiations and should therefore be addressed at a later stage.
• EU regulation datapoints. ESRS disclosures support the Sustainable Finance Disclosure Regulation and other EU regulations. The ESRS currently include all of the datapoints relating to these regulations regardless of their relevance, including those relating to all optional SFDR Principal Adverse Impact indicators. According to EFRAG, these datapoints account for over 15% of the mandatory ESRS datapoints. Under its simplification mandate from the Commission, the EFRAG SRB is reviewing these datapoints through a general purpose sustainability reporting lens.
• Unavailability of information. In addition to the broader introduction of the concept of “undue cost or effort” in the ESRS (as discussed above), the EFRAG SRB is considering specific reliefs for own operations disclosures to address the time needed to implement data collection and for value chain metrics. The specific reliefs are currently under discussion, but the progress report indicates they could allow partial reporting while providing transparency on assumptions, limitations and actions to increase data availability over time and that the EFRAG SRB may reconsider the hierarchy of primary data and use of estimates for value chain metrics.
• Exclusion of non-material activities from calculations. This relief is intended to reduce the burden associated with complete data collection for group activities that, due to their nature, are not expected to contribute materially to the metrics being measured.
• Reporting boundaries and value chain. The progress report notes that several implementation issues relating to reporting boundaries have been reported, which EFRAG believes illustrate the need to clarify the definitions of “own operations” and “value chain.”
  • There is general support for clarifying that the starting point should be the perimeter of the consolidated financial statements. However, stakeholders have asked for clarification on the treatment of specific transactions such as leasing and for pension funds and financial institutions.
  • The EFRAG SRB proposes amending ESRS E1 by adopting the consolidated financial statements as the relevant boundary for greenhouse gas emissions reporting, with an additional disclosure following an operational control approach in specific circumstances expected to affect industries where ownership structures frequently rely on this concept in practice.
  • Less prescriptive requirements for the collection of direct information for value chains will be proposed, emphasizing the need to concentrate the reporting efforts where severe impacts and risks are more likely to arise.
• Financial institutions. The EFRAG SRB may consider including in the Exposure Drafts a few dedicated paragraphs on value chain guidance applicable to the financial sector to support more comparable information.
• Reliefs for anticipated financial effects. The EFRAG SRB’s starting point is the relief available in IFRS S2, in addition to the general relief for undue cost or effort. This would allow for the reporting of qualitative information when the level of estimation uncertainty is high. The EFRAG SRB also is considering to further extend the content of this relief, in particular for long-term estimates.

Enhanced interoperability with the ISSB standards

As a general matter, the EFRAG SRB is considering opportunities to further align the ESRS and ISSB Standards. The progress report indicates that interoperability will be enhanced by changing the reporting boundary for GHG emissions to the consolidated financial perimeter, as further discussed earlier in this post. In addition, the language used for common provisions is being systematically revised to adopt the same wording as in IFRS S1 and S2 wherever possible.

EFRAG is on schedule, but recommending a longer consultation period

EFRAG started drafting revised ESRS in early May. An intermediate version including metrics was submitted last week and is currently under review. EFRAG intends to approve Exposure Drafts amending the ESRS by mid- to late-July, after which they will be open for public feedback.

However, EFRAG seems to be encouraging the Commission to push back the timing for completion of EFRAG’s technical advice to allow for a longer public comment period, to give stakeholders enough time to provide meaningful feedback. EFRAG’s consultation process, including timing, is discussed in this Ropes & Gray post.

Continuing Omnibus discussions may impact EFRAG’s work

EFRAG’s work is based on the Commission’s Omnibus proposals. As our readers know, the Omnibus proposals are still being negotiated within the European Council and Parliament and there is significant disagreement in and between those bodies on the future shape of the CSRD. Relevant changes (if any) to the Omnibus proposals would need to be taken into consideration by EFRAG before delivery of its technical advice.