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From 1 January 2024, the first companies that fall under the Corporate Sustainability Reporting Directive (CSRD) are subject to stricter transparency requirements in their annual reports. With this comes a need for uniform disclosure requirements and clarity on what to report. Undertakings will have to report on their sustainability performance according to the European Sustainability Reporting Standards (ESRS) framework.

The CSRD moreover requires an external auditor to provide limited assurance on sustainability information. On 9 June, the European Commission published the draft delegated act containing these ESRS which is open for feedback until 7 July. The final standards are expected to be adopted in July 2023. For an overview of the scope and content of the CSRD, see our December 2022 newsletter.

New draft ESRS – and changes to EFRAG’s technical advice
The European Commission based their draft ESRS on the previous draft ESRS framework prepared by the EU's Financial Reporting Advisory Group (EFRAG) as published on 23 November 2022. The set-up of the draft ESRS has not changed. It still includes generic as well as specific reporting standards. Compared to the earlier drafts, the reporting requirements under the proposal are less extensive. In a recent blog, we describe the proposed revisions that account for a 25% reduction in the reporting requirements. This reduction is meant to ensure proportionality and flexibility, especially at the start and for smaller companies.

Double materiality assessment
Different to the EFRAG proposal, the European Commission wants to subject all disclosure requirements to a double materiality assessment, except for the requirements specified in ESRS 2 on general disclosures. Previously, a lot more standards were automatically designated as material and consequently would have been mandatory. This has raised concerns as to whether the European Commission facilitates a significant setback in ambition allowing companies to leave out entire parts of sustainability disclosures. Furthermore, the reduction of reporting requirements is somewhat frustrating for financial undertakings subject to the SFDR that are largely dependent on data from CSRD reporting companies, as it will be more challenging for financial undertakings to obtain data if this proposal is adopted.

Less work for companies?
In our view, the assessment to be made does not become less extensive through the proposed reduction. As there is no prescribed boundary to determine when a sustainability topic is considered material or not, the complexity will likely increase. To avoid further legal exposure, companies will need to diligently determine and document their assessment, and must be transparent about the methodology applied. The materiality assessment remains mandatory, the result may be that not all companies have to disclose every sustainability-related key performance indicator which may not be relevant to their business.

What it means for you

  • If the proposal is adopted, companies must be able to explain how and why sustainability topics have been classified as (not) material. It is important to prepare for reporting according to the draft ESRS and diligently document the methodology and process to conduct double materiality assessments.
  • Take note of examples of the good practices found by the AFM in their recent report in which they state that companies lag behind and encourage companies to take action right away. This report contains helpful best practices that are also relevant for companies that do not fall under direct AFM supervision.
  • A good practice is to be transparent on any reporting methodology applied as well as the choices made in determining that methodology and to avoid a tick-the-box approach.

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