EU CSRD: EFRAG issues new ESRS explanations

On 26 July 2024, EFRAG issued new explanations of the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD). The explanations aim to help the companies in their reporting under the ESRS. New explanations were included in the Compilation of Explanations that now includes 93 explanations released by EFRAG up to July 2024.

As with previous explanations (see our previous blog post on the May issue), they are grouped into chapters according to their nature (Cross-cutting, Environment, Social, and Governance) and their disclosure requirements. The new explanations can be identified by the release date as well as through Appendix 1 (Table of ID release date). EFRAG has also added to the Compilation of Explanations a table with a list of questions which were answered elsewhere (with a reference to the location of the relevant answer). 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.

New EFRAG explanations include the following:

• ID 29 and ID 261 – ‘May’ and ‘shall’ reporting requirements: EFRAG confirmed that the terms ‘shall disclose’ and ‘may disclose’ are used to distinguish the degree of obligation to disclose information, but both terms shall be applied in light of the materiality provisions of ESRS 1. All the ‘shall’ datapoints in ESRS 2 General Disclosures are to be reported as they are outside the materiality assessment. If a topic is material for the undertaking, the ‘shall’ datapoints in the respective topical standard that relate to ESRS 2 must be reported. The undertaking, however, is not required to disclose a ‘shall disclose’ datapoint that is not material. If a topic (or a matter) is material for the undertaking, the undertaking needs to decide whether or not to include the related ‘may’ disclosure datapoints - it is encouraged to disclose it as good practice, but it is not a requirement.
• ID 245 – Climate-risk analysis: According to this explanation, preparing a scenario analysis is not a direct requirement in ESRS E1 per se, but several ESRS E1 disclosures refer to it as a foundation for the information to be disclosed. The Disclosure Requirement on processes to identify and assess climate risks requires explanation of whether the assessment of climate-related physical risks considered at least a high emission climate scenario and whether the assessment of transition risks considered at least a climate scenario in line with limiting global warming to 1.5°C with no or limited overshooting.  
• ID 268 – GHG emissions and annual update: EFRAG confirmed that an undertaking shall disclose and update its Gross Scopes 1, 2, 3 and Total GHG emissions on an annual basis. With regard to Scope 3 GHG emissions more specifically, the update of Scope 3 GHG emissions in each significant category shall occur every year on the basis of current activity data. The update of the full Scope 3 GHG inventory is required at least every three years or on the occurrence of a significant event or a significant change in circumstances.
• ID 395 – Revenue / net revenue: It is confirmed that the terms ‘revenue’, ‘total revenue’ and ‘net revenue’ are to be understood as the amounts presented in the income statement of the undertaking’s financial statements in accordance with the applicable legislation and/or accounting standards, i.e. IAS 1 paragraph 82(a)2 – if IFRS Standards are applied – or generally accepted national accounting principles (national GAAP).
• ID 432 – Net zero target and GHG removals: According to this explanation, neutralising more than 10% (e.g. 20%, as stated in the relevant question) of carbon removals would not qualify asa claim of achieving a net-zero target in accordance with the ESRS definition. Besides, ERRAG explained that capturing and storing CO2 emitted through the undertaking’s operations will be considered a removal if it results in the withdrawal of GHG from the atmosphere as a consequence of deliberate human activity (such as, for example, BECCS or carbon stored in soil through enhanced agriculture practices). It should be noted that all carbon capture and storage technologies have adverse effects that should be considered. If an undertaking is capturing and storing CO2 that it has emitted through its own operations, this does not necessarily represent a removal. If the carbon is of fossil origin, it may represent a transfer of CO2 into geological storage, and for the purposes of ESRS, an emission reduction. 
• ID 536 – Carbon credit – Quality standards: On the question of whether certain voluntary standards for carbon offsetting schemes (Gold Standard or VCR, Mandatory Clean Development Mechanisms or Voluntary Electricity Attributes Certificates) could be considered as meeting criteria prescribed by the ESRS, EFRAG avoided giving any confirmation. It has only confirmed that there is currently no list of quality standards for carbon credits recognised by the EU or recommended by EFRAG. As long as the criteria listed in the Annex II List of Acronyms and Defined Terms are met, an undertaking can consider the carbon credit as a recognised quality standard for carbon credits.
• ID 781 – General meeting: It was confirmed that the general meeting should not be considered an ‘administrative, management and supervisory body’ for the purpose of the ESRS.
• ID 821 – Risk and opportunity for financial materiality: In relation to the question regarding the matters that trigger exposure to both risks and opportunities, EFRAG explained that when the nature of an opportunity or a risk relating to a sustainability matter is different, it shall be assessed separately. The entity who submitted the request for an explanation provided an example fluctuation of the energy prices vs opportunities of investing in renewable energy. EFRAG is of the view that in this case, positive deviations when prices for supplies / sold products will be below / above expectations are not necessarily identified as separate opportunities but assessed together with the risk. However, it is the action of investing in renewable energy that creates the opportunity to reduce energy expenses.

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