EU CSRD reporting standards: where are we in February 2024?

The Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS) start to apply in relation to the 2024 financial year (with the first reports due in 2025) for the first cohort of large EU listed companies, public interest entities and groups as well as large non-EU issuers and groups, in each case subject to certain conditions and potential exemptions. The next steps for the CSRD primarily involve the development of further reporting standards and implementation guidance. Below is the status of the ESRS as of the end of February 2024. 

ESRS: Reporting Standards

1. On 22 December 2023, the first set of the ESRS was published in the Official Journal of the EU. These sector-agnostic reporting standards are directly applicable in all Member States and apply from 1 January 2024 (for financial years starting on or after this date). For more information on these ESRS, see our previous blog post.
    
2. The CSRD requires the Commission to adopt by 30 June 2024: (i) sector-specific ESRS, which will outline the information particular to the sectors in which an entity operates; and (ii) ESRS to be used by certain non-EU entities doing business in the EU that meet specific thresholds and come into scope of CSRD from 2028/2029. In October 2023, the Commission proposed postponing the adoption of these two sets of standards to 30 June 2026. The Commission indicated that this delay would allow entities to concentrate on implementing the first set of sector-agnostic ESRS and enable more resources to be allocated towards developing sector-specific ESRS, while limiting the reporting obligations to the minimum necessary. On 7 February 2024, the Parliament and the Council announced their agreement with this proposal (see Parliament press release). They still need to formally adopt this proposal before it can take effect. However, the co-legislators have asked the Commission to publish sector-specific ESRS in eight key areas as soon as they are ready, before the deadline. They have not specified which eight areas should be prioritised but have asked to be regularly consulted by the European Financial Reporting Advisory Group (EFRAG) (which is tasked with developing the draft ESRS) at least once a year, and to receive detailed updates on prioritisation and timelines.
    
3. EFRAG has already commenced the preparatory work for the development of sector-specific ESRS. In February 2024, EFRAG conducted a series of workshops to gather feedback on the current version of the draft ESRS – SEC1 Sector Classification, which is expected to be released for consultation in the forthcoming months. Entities will apply this standard to identify the sectors in which they operate and the related sector-specific disclosure requirements. The initial draft classification of the sectors released in February 2022 was based on the Statistical Classification of Economic Activities in the EU (NACE), along with references to the EU Taxonomy. However, in light of the fact that NACE Rev. 2.1 will start to apply from 2025, EFRAG has amended the draft standard to align with this new NACE version. Additionally, EFRAG has identified several challenges with references to the EU Taxonomy. For instance, EU Taxonomy activities address only a fraction of the scope of an ESRS sector standard, and some EU Taxonomy activities are “unassigned” to any NACE code. Consequently, EFRAG suggested using references to the EU Taxonomy that are purely indicative. 
    
4. On 24 January 2024, EFRAG initiated a public consultation on the Exposure Draft ESRS for listed SMEs. This draft will be issued as a delegated act and is expected to be effective on 1 January 2026 with an additional two-year opt out option. This standard addresses the same sustainability issues as the ESRS for large undertakings but is designed to establish reporting requirements that are proportional and applicable to the scale and complexity of the activities and to the capacities and characteristics of micro-, small-, and medium-sized enterprises (SMEs) which have securities admitted to trading on an EEA regulated market. The first two sections of the standard are cross-cutting, while the remaining sections are topical (encompassing environmental, social and business conduct disclosures). All sections, both cross-cutting and topical, are sector agnostic, meaning they apply to all undertakings regardless of the industry. EFRAG also launched a public consultation on the Exposure Draft for the voluntary reporting standard for non-listed SMEs. This draft proposes a simplified reporting framework to assist non-listed SMEs in responding to requests for sustainability information from business counterparties (such as banks, investors, or larger companies that non-listed SMEs supply to) and to support them in improving access to lenders, investors, and clients. As with the standard for listed SMEs, this voluntary standard addresses the same sustainability issues as the ESRS for large undertakings, but is based on proportionality, taking into account fundamental characteristics of SMEs. It offers non-listed SMEs a voluntary tool for sustainability reporting without legal obligation. The consultation on both sets of ESRS will remain open until 21 May 2024. EFRAG has also released educational videos on these SMEs standards. 
    
5. On 9 February 2024, EFRAG announced a public consultation on the Draft ESRS Set 1 XBRL Taxonomy. The digital taxonomies facilitate the marking up ('tagging') of sustainability reporting in a machine-readable XBRL format. The ESRS Set 1 XBRL Taxonomy represents the digital transposition of the human-readable ESRS already adopted by the Commission. Moreover, EFRAG is holding a consultation on the Draft XBRL Taxonomy for Article 8 disclosures (noting that in this mandate, it provides only the digital and technical support for converting Article 8 disclosure requirements into a machine-readable format). The consultation will last until 8 April 2024. EFRAG indicates that the ESRS Set 1 XBRL Taxonomy will form the foundation for the European Securities and Markets Authority (ESMA) to develop draft Regulatory Technical Standards (RTS) for tagging the sustainability statements according to the ESRS. The tagging rules will ultimately be adopted by the Commission in the form of a delegated act which will amend Commission Delegated Regulation (EU) 2019/815 on the European Single Electronic Format. 

Implementation Guidance 

On 22 December 2023, EFRAG published drafts of the first three implementation guidance documents. These aim to support the application of the sector-agnostic ESRS and were open to feedback until 2 February 2024. 

The guidance documents are non-authoritative and complement the ESRS but do not form part of them, and in case of any contradiction the ESRS shall prevail. 

They do not need to be adopted as delegated acts and apply once the final versions are released by EFRAG. 

1. Draft EFRAG IG 1: Materiality assessment implementation guidance describes the reporting requirements on the materiality assessment, including the illustration of possible steps in the process. The guidance includes FAQs on impact materiality, financial materiality, the materiality assessment process, stakeholder engagement, aggregation/disaggregation, and reporting. The FAQs also address interoperability with the ISSB and GRI Universal Standards, illustrating the interactions of the corresponding materiality concepts and assessment processes. In the summary, EFRAG clarifies, in particular, that once an entity has identified an impact, risk or opportunity related to a sustainability matter as material, it first needs to refer to the related disclosure requirements to identify the relevant information to be considered. Second, if the impact, risk or opportunity is not covered or insufficiently addressed by the ESRS, the entity must provide entity-specific disclosure on the matter. Relevance is the criterion for identifying the information to be disclosed and is based on: (a) the significance of the information regarding the matter it depicts; or (b) its decision-usefulness. The ESRS do not mandate a specific process or sequence of steps to follow when performing the materiality assessment, leaving this to the discretion of the entity. Whichever process is used, it should reflect the entity’s facts and circumstances. The guidance acknowledges that market practice for double materiality assessment is currently evolving, and that there are yet to be examples of sustainability statements prepared under the ESRS.
    
2. Draft EFRAG IG 2: Value chain implementation guidance outlines the reporting requirements related to the value chain within the materiality statement, for managing impacts, risks and opportunities as well as metrics and targets. It discusses the reporting boundaries of the group for sustainability reporting, including operational control, and also includes FAQs. The “value chain map” summarises the value chain implications per disclosure requirement (excluding entity-specific disclosures and SFDR indicators). In the summary, EGRAG clarifies, in particular, that the entity’s sustainability statement needs to include information about all material impacts, risks, and opportunities (IROs), including those arising or that may arise in the context of its business relationships in the upstream and downstream value chain, and that business relationships are not limited to direct contractual relationships. It also helpfully explains that when an entity cannot collect primary value chain information after reasonable efforts, it shall estimate the missing information using all reasonable and supportable data available without undue cost and effort, including proxies and sector data, and other information from indirect sources. The entity needs to describe, in its basis for preparation, the metrics using value chain estimation and the resulting level of accuracy.
   Significantly for financial institutions, IG 2 contains an FAQ confirming that financial assets (such as loans, equity and debt investments) are considered business relationships which trigger value chain information.
    
3. Draft EFRAG IG 3: Detailed ESRS datapoints implementation guidance, accompanied by an explanatory note, presents a list of all disclosure requirements in an Excel format. The Excel file includes all the standards except ESRS 1 General Requirements (as the latter does not set specific disclosures). According to EFRAG, for entities that already report their ESG data, this list can serve as the basis for performing a data gap analysis. For these and other preparers, the list provides a structure to organise the data requirements to comply with the ESRS. EFRAG emphasises that while the list does not represent the ESRS digital taxonomy (see above on the status of the draft XBRL Taxonomy) and cannot be used as the basis for the preparation of machine-readable sustainability reporting, it may support the preparation of human-readable reports that will subsequently be easier to digitise. Specifically, it can be used to structure the reporting in a more organised manner, to assist the machine-readable format as required by the CSRD.

Explanations (Q&A)

At the end of 2023, EFRAG launched its ESRS Q&A Platform to gather and address technical questions and support the implementation of the first set of ESRS. On 6 February 2024, EFRAG published the first batch of technical explanations on this platform. These are categorised according to their nature (cross-cutting, environmental, social, and governance). According to the EFRAG press release, these explanations are non-authoritative and are not exposed to public feedback. They are considered final once released by EFRAG. Out of the 258 questions received by EFRAG as of 31 January 2024, 127 are expected to result in either an explanation or implementation guidance, and 17 are undergoing preliminary analysis. This initial set of explanations is expected to soon be followed by 29 additional releases, which EFRAG plans to publish quarterly. 

For more information on the CSRD and ESRS in general, see our CSRD Demystified materials.