Background
Since the CSRD initially became law, there have been increasing demands in the European Union to streamline the requirements and reduce the reporting burden associated with sustainability reporting. As a result, in November 2024, the European Commission (EC) announced an intention to introduce a proposal to amend three key pillars of the European Green Deal through an Omnibus package. These key pillars are the CSRD, the Corporate Sustainability Due Diligence Directive (CSDDD) and the Taxonomy Regulation.
In connection with the Omnibus process, the European Financial Reporting Advisory Group (EFRAG) has been tasked by the EC to provide technical advice for the adoption of a delegated act to revise and simplify the existing European Sustainability Reporting Standards (ESRS). In response to a formal request from the EC Commissioner, EFRAG has released a progress report detailing the current status of the simplification efforts.
Progress update
In its report, EFRAG has indicated that they are progressing as planned and have so far met the key milestones including adopting strategic directions for simplification, performing an exercise to gather evidence to direct further work and commence drafting the revised standards. In addition to these status updates, EFRAG also identified and activated six key levers of simplification which are intended to reduce the reporting burden. These levers are currently preliminary and therefore subject to change.
Key levers
The six key activated levers are:
LEVER 1: Simplification of the Double Materiality Assessment (DMA)
EFRAG is proposing to modify a number of provisions related to the DMA and to information materiality. These modifications include:
- reducing overall complexity of the DMA process by clarifying that the DMA is a ‘top-down’ approach and that the expected level of evidence to support conclusions should be reasonable and proportionate
- clarifying and strengthening the information materiality criteria with a focus on decision-usefulness
- introducing the filter of information materiality for all data points
- clarifying the following:
- the interaction between the identification of material impacts, risks and opportunities (‘IROs’) and the assessment of material topics and sub-topics
- the illustrative nature of the list of topics in ESRS 1, AR 16
- the assessment of material topics and sub-topics
- and the expected level of granularity in reporting
- addressing how mitigation, prevention and remediation actions are considered in assessing an impact for materiality and how to define positive impacts
- addressing whether an entity can include information about non-material matters and, if so, under which conditions
- clarifying that if only a sub-topic is material, this does not trigger reporting on all data points in the relevant topical standard, and
- placing additional emphasis on the objective of fair presentation.
LEVER 2: Better readability/conciseness of the sustainability statements and better inclusion in corporate reporting as a whole
EFRAG is proposing to add flexibility to the sustainability statement. To accomplish this without contradicting existing reporting cultures, EFRAG is clarifying areas of flexibility by:
- providing the option to have an ‘executive summary’ at the beginning of the sustainability statement
- providing the option to disclose the most granular information in a dedicated section or appendix
- clarifying that entities can present EU Taxonomy-related information in a specific appendix
- suggesting that entities present additional information on non-material matters in dedicated sections or appendices, and
- discouraging repetition of information related to the same topics.
LEVER 3: Critical modification of the relationship between Minimum Disclosure Requirements (MDR) and topical specifications
EFRAG acknowledged that there is an overlap between mandatory data points in topical standards and MDRs for policies, actions and targets (PATs) in ESRS 2 ‘General disclosures’. To address this, EFRAG is implementing the following preliminary decisions:
- reducing the number of mandatory data points in cross-cutting MDRs at the ESRS 2 level
- reducing mandatory PAT datapoints in topical standards
- clarifying that PATs only need to be reported if an entity has them
- centralising the list of material topics for which there are no PATs around a single data point
- reinforcing flexibility and readability of streamlined disclosures, and
- applying the same approach to the topical specifications of ESRS 2.
LEVER 4: Improved understandability, clarity and accessibility of the Standards
EFRAG is proposing to reduce the number of voluntary disclosures by:
- emphasising that voluntary disclosures are not a checklist but rather an encouragement of good practice for more mature preparers, and
- amending the general structure of the Standards to clearly separate mandatory and non-mandatory content.
LEVER 5: Introduction of other suggested burden-reduction reliefs
EFRAG is considering a range of reliefs, including:
- relief for acquisitions and disposals based on pragmatism and availability of data
- an assessment of the reliefs incorporated in IFRS S1 and IFRS S2 to see if they are compatible in the context of the EU
- relief related to disclosing commercially sensitive opportunities
- a review of issues reported regarding Sustainable Finance Disclosure Regulation Potential Adverse Impact (SFDR PAI) indicators, followed by potential modifications
- relief for metrics when necessary inputs and information are not available
- relief to allow the exclusion of non-material activities from metrics calculations
- changes to the assessment of boundaries of reporting and the value chain, including a potential amendment of ESRS E1 to adopt the consolidated financial statements as the GHG emissions boundary, as well as a number of other possibilities
- dedicated changes to the value chain guidance specifically for entities in the financial sector, and
- relief for the anticipated financial effects disclosure, similar to that available for IFRS S2, with potential further extension on long-term estimates.
LEVER 6: Enhanced interoperability
EFRAG is considering opportunities for interoperability, particularly with the IFRS Sustainability Disclosure Standards (IFRS SDS). Adjustments to the reporting boundary for GHG emissions is expected to result in a substantial enhancement of interoperability.
Implementing the necessary reduction of mandatory datapoints
Many stakeholders have been critical of the large number of ESRS datapoints and the resulting reporting burden. This assertion was supported by EFRAG’s data gathering efforts which noted that stakeholders believe that narrative datapoints are too granular, preferring a more principles-based approach, and that many datapoints could be removed without impacting the quality of data and information.
To address these concerns, in addition to the levers discussed above, EFRAG is:
- adopting a less granular approach to narrative disclosures for PATs, and
- systematically reviewing datapoints and eliminating the least relevant datapoints – those that do not directly meet the disclosure objectives.
Next steps
EFRAG is now working to produce an Exposure Draft on the revised ESRS. The Exposure Draft is expected to be approved mid-July, followed by a short public consultation period from the end of July in the form of an online survey.
Our thoughts
We are pleased to see the progress that EFRAG is making towards their ESRS simplification goal. The proposed changes documented in this report will likely alleviate the reporting burden, particularly for smaller entities, and we anticipate that these clarifications will make it easier for practitioners to understand and implement the Standards.
However, we do have some concerns about the short consultation period that is being given to analyse the revisions. We understand this is a result of the tight timeline that EFRAG has to issue the final report to the EC at the end of October. However, we are unsure whether this will be enough time to allow for adequate due process.
You can access the full EFRAG ESRS revisions progress report here.
