The CSRD supersedes the Non-financial Reporting Directive (NFRD) and aims to put sustainability reporting at an equal footing as financial reporting. Among others the CSRD:

• expands the scope of the companies that fall under these rules;
• introduces a phased-in approach to application, starting from 1 January 2024;
• mandates providing sustainability information in a separate section of the management report;
• requires the sustainability information be prepared according to European Sustainability Reporting Standards (ESRS), and
• mandates assurance, starting with limited assurance but expanding to reasonable assurance.

More details in Accountancy Europe’s factsheet FAQs: all you need to know about the Corporate Sustainability Reporting Directive (2022).

As per the CSRD, a company must report the information necessary to understand the company’s impacts on sustainability matters and how they affect the company’s development, performance and position. The information must be provided in accordance with the ESRS, which use a double materiality lens, and include information on own business operations as well as the value chain.

The CSRD provided EFRAG with a mandate to develop these standards and deliver them as Technical Advice to the European Commission (EC). The EC would then adopt these standards as Delegated Acts.

In spring 2022, EFRAG issued and opened for a 100-days consultation 13 Exposure Drafts (EDs) on the first set of ESRS where stakeholders could provide their feedback.

The SRB and SR TEG held their own discussions, and in parallel, EFRAG organised outreach events and educational sessions on the EDs. Upon the closure of the comment period, EFRAG outsourced the analysis of the feedback received as well as the cost-benefit analysis, the latter being a mandatory element in EFRAG’s Technical Advice to the EC.

Accountancy Europe sent a letter to Commissioner McGuinness with overarching comments as well as contributed in details to consultation.

We were among the few stakeholders that managed to cover 74% of the scope of this brief by voluminous consultation. Such contribution was also the most comprehensive from all other accounting bodies that responded.

We followed up with a statement highlighting some points of our feedback and called for ESRS that are aligned with global standards, simple, clear and fit-for purpose.

Despite the significant time pressures and resource scarcity (see the letter sent to the EC from Accountancy Europe and 21 other organisations), EFRAG delivered their Technical Advice with the first set of 12 Draft ESRS to the EC in November 2022. The Draft ESRS were aligned with the final text of the CSRD as well as considered stakeholders’ feedback. In comparison to the EDs, they:

• incorporate a four-architecture structure¹ based on the TCFD pillars and the International Sustainability Standards Board’s (ISSB) structure²
• reduce significantly the number of requirements and datapoints
• are better organised and streamlined, clearer and more concise
• refocus on materiality and remove the ‘rebuttable presumption’
• consider better international standards.

The Draft ESRS adopt a mixed materiality and mandatory approach that combines the need to provide useful and relevant information with complying with various EU legislation requirements.

They include the general requirements and principles that underpin all ESRS in Draft ESRS 1. These cover the qualitative characteristics of information, double materiality, value chain, time horizons, consolidation and presentation of information.

Double materiality, a key concept in ESRS, is the unity between financial materiality and impact materiality. Companies need to make their materiality assessments based on these two perspectives to determine what information is relevant to disclose. Specifically:

• impact materiality considers the company’s material actual or potential, positive or negative impacts on people or the environment over the short-, medium- and long-term, whereas
• financial materiality looks at risks or opportunities that may cause material financial effects in the short-, medium- and long-term.

Resultantly, and another key element, is that the ESRS look at material impacts, risks and opportunities over the short-, medium- and long-term.

Such disclosures should be provided both in relation to the company’s own operations, but also its value chain.

Accountancy Europe has been analysing the Draft ESRS as delivered by EFRAG to prepare for the EC’s upcoming draft delegated act call for comments. For the first time and exclusively for CPA Ireland, we share below some of our high-level views on the Draft ESRS. We:

• welcome the improvements made compared to the Eds, including the significant reduction of requirements, removal of the rebuttable presumption, adoption of the TCFD structure
• call for more guidance on the concepts and application, including practical examples in the ESRS. Particularly we call for such guidance on the concepts of ESRS 1 (e.g. on double materiality and how to make the related judgements, value chain information, calculating the financial effects, consolidating), which underpin the other standards
• call for realigning with the final ISSB standards, as differences emerged due to the different standard setting processes timing
• call for incorporating the definitions, disclosures and guidance of the Taskforce on Nature-related Financial Disclosures (TNFD), which was published in March 2023.
• call for more consistency and clarity, including on the approach between the materiality and mandatory disclosure requirements, links between topical standards and ESRS 2 (terminology and definitions)
• express our due process concerns, including the lack of field-testing, due to the rushed way in which the standards were developed.

EC President von der Leyen announced in March 2023 that the EC would be undertaking an exercise to reduce the reporting requirements by 25%. Commissioner McGuinness provided more information, including addressing ESRS. The EC asked EFRAG to prioritise providing guidance on the first set of ESRS to developing sector standards to help stakeholders in the reporting ecosystem; a work EFRAG had been engaged in since 2022.

Accountancy Europe sent a letter to the EC following this initiative highlighting the need to follow a robust process and ensure that the related policy objectives are not weakened.

Following the announcements, EFRAG postponed work on its sector-standards but still plans to consult on its Listed SME sustainability reporting standard (LSME) ED, which should be delivered to the EC in November 2023.

This LSME is important because it sets the value chain boundaries of the bigger companies that would apply the full suite of ESRS. In addition, it provides a flavour of the simplifications as per the proportionality requirement in the CSRD for SMEs.

Accountancy Europe will engage on both the LSME and (voluntary) SME standard throughout their development process. There is no confirmation on the timeline of the other EDs, including for the sector ESRS.

The ESRS will be adopted in EU law via the delegated acts mechanism. The EC has been running its own processes and working on the Draft ESRS delivered by EFRAG. It will issue the draft Delegated Act for a final 4-week feedback period before it adopts them.

Accountancy Europe will engage in this process as we continue voicing the European profession in the development of both European and international sustainability reporting standards.