EU CSRD: EFRAG publishes new set of explanations of the ESRS

On 30 May 2024, EFRAG published a Compilation of Explanations of the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD). These explanations relate to sector-agnostic ESRS. EFRAG noted that they are intended for use by large listed and unlisted companies that are subject to the ESRS, but not by non-listed small- and medium-sized enterprises (SMEs), which may use the upcoming voluntary SME standard.

These explanations will be published on the ESRS Q&A Platform which was launched by EFRAG in 2023 to address technical questions on the first set of ESRS. The Compilation of Explanations includes 12 Explanations released by EFRAG on 5 February 2024 and 12 Explanations released on 1 March 2024, plus further explanations approved up to May 2024 on a consolidated basis. Explanations previously published can be identified by their release date as well as under the Table of ID release dates, which is added as an appendix. EFRAG explanations are non-authoritative and are not exposed to public feedback, although they provide valuable guidance. They are considered final once released by EFRAG.

The explanations are grouped into chapters according to their nature (Cross-cutting, Environment, Social, and Governance) and their disclosure requirements, following the ESRS structure. Key points raised in the General Requirements section of the explanations include the following:

• ID 337: In relation to the example of calculating metrics for sustainability matters for a production facility and sales subsidiaries with different levels of accuracy, EFRAG explained that it is necessary to consider whether precisely measuring the portion of the metrics attributable to the production facility — and using an estimate for the portion attributable to the sales corporation — will result in a degree of accuracy for the entire metric that is consistent with the characteristics of information quality prescribed by the ESRS.
• ID 172: EFRAG confirmed in a private equity context that if a general partner (GP) does not consolidate the portfolio company in its financial accounts, then indirectly related organisations (IROs) of the portfolio company form part of the value chain (rather than of its own operations). The GP must assess and report on material IROs of the portfolio company in the downstream value chain. Although this is not unexpected, it is significant in confirming that private investments form part of the value chain of reporting entities and therefore reporting entities may need to report on them. It therefore indicates the expected direction of travel for additional sector-specific disclosure requirements.
• ID 41: Similar to ID 172, EFRAG confirms that investments of insurance companies are part of the value chain and are subject to consideration in the materiality assessment.
• ID 148: This explanation states that subsidiaries which are excluded from the financial statements (e.g., due to national accounting laws) may still need to be included within the boundaries of the consolidated CSRD statement if material. This clarification therefore takes a more expansive view of the scope of CSRD reporting than the scope of financial reporting.
• ID 286: EFRAG confirmed that it is not possible to report metrics (such as, for example, energy consumption) for a period that deviates from the financial year.
• ID 426: EFRAG gives helpful confirmation that the ESRS does not require following the exact format as given under each ESRS (other than that the report must be structured in four parts: general info, environmental info, social info, and governance info), and ESRS 1 Appendix F is an “example” of how to structure the sustainability statement.
• ID 504: Although this was not unexpected, EFRAG confirms that undertakings must report material metrics, even where there is a high level of uncertainty over the data of the metrics (in which case it must be estimated, and the undertaking should disclose information about the sources of that uncertainty and any assumptions/judgments made as part of the estimate).
• ID 293: EFRAG reiterates that the ESRS merely set disclosure requirements and do not prescribe any behavioral obligations.
• ID 482: It is confirmed that credit institutions should not refer to the sectors of the financed portfolio for the purposes of ESRS 2 paragraph 40 - they should refer to the sectors in which they operate directly, not the sectors in which their clients operate.
• ID 517: It is explained that the ESRS do not prescribe specific documentation for explaining the setting of thresholds for the materiality assessment. Disclosing or explaining each threshold separately is not required in all circumstances. Depending on its specific facts and circumstances, the description and disclosure of thresholds may be more or less granular.

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