EU CSRD: EFRAG releases study on ESRS early reports

On 25 July 2024, EFRAG released its report ‘State of play as of Q2 2024 | Implementation of European Sustainability Reporting Standards (ESRS): Initial Practices from Selected Companies'. The study analyses preliminary practices so far of implementing the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD) and highlights related challenges. 

EFRAG surveyed and interviewed 28 large EU-headquartered undertakings with a 50/50 split between financial institutions (banks, insurers, and asset managers), and non-financial institutions (companies in healthcare technology, chemicals, road transport, textiles and utilities). EFRAG did not review any actual reporting. The analysis focused on four areas: materiality assessment; value chain; gap analysis on datapoints; and organisational approach to ESG reporting. 

Here are some of the key findings from this report: 

Materiality assessment

EFRAG noted that companies are shifting from a “judgment-based” materiality assessment to an “objective, evidence-based” approach using data and expertise and taking into account qualitative information where there may be gaps. Companies relied mainly on internal and third-party data, complemented by the judgment of internal experts and external stakeholders. 

For financial materiality, companies are leveraging existing analysis / thresholds used for risk management purposes (approximately 80% of the undertakings surveyed took this approach). However, impact materiality is more likely to be affected by limited data and sector-specific methodologies / thresholds.

Stakeholder insights are obtained in a variety of ways, including interviews (used by 70%) and workshops (45%). Surveys are still used (5%) but are not the preferred method as they can result in inconclusive output or insufficient stakeholder expertise. 

Double materiality assessment in the interviewed companies generally involves: context-setting and mapping of internal experts and stakeholders; considering the long list of Issues, Risks and Opportunities (IROs) based on AR16, benchmarking, and other sector-specific frameworks; and using input from internal experts and external stakeholders to determine the shortlist of IROs. External stakeholders are generally engaged through “a targeted approach” (meaning a limited number of stakeholders). 

Value chain

Value chain is considered the least developed focus area. 

Several undertakings have adopted a simplified aggregated mapping of the value chain (i.e., upstream, downstream and own operations only) and use transitional provisions, with possible higher efforts to go beyond Tier 1 for the next reporting cycles. 90% of those surveyed responded that they are still refining their approach to mapping and analysing their value chain to ensure the appropriate level of granularity. 

Non-financial institutions appear more likely to have mapped beyond Tier 1 suppliers. 

Organisational approach

In most cases, the new reporting regime is triggering a renewed organisational approach to ESG reporting. The undertakings expressed consensus that CSRD reporting has: (i) enhanced cross-departmental collaboration; (ii) highlighted the need for standardising the ESG reporting processes, including data quality controls (akin to financial reporting), in particular in preparation for assurance; and (iii) required several additional capabilities and resources (FTE, knowledge, data and technology), including the need for an IT transformation, to be implemented under different timelines (some undertakings are starting sooner than others).

65% of companies have allocated ownership of ESG reporting to a single function (e.g. the CSO or CFO), while 35% have adopted a co-leadership approach (e.g. CFO in charge of reporting, and CSO in charge of DMA). 95% of respondents have started improving data quality controls similar to those used for financial reporting. 

However, it should be noted that this study is non-authoritative and does not set implementation guidance for the ESRS. EFRAG have stressed that the study intentionally focuses on larger undertakings and thus is not representative of the diverse mix of companies that will have to apply the ESRS. For subsequent years, EFRAG will consider an annual “state of play” study, taking stock of a larger number of undertakings and of sustainability statements effectively prepared in accordance with the ESRS.

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