Our take on ESRS simplification

Two years on, it’s time to take stock of the CSRD

The EU’s Corporate Sustainability Reporting Directive (CSRD) came into effect at the beginning of 2023. Two years later, we have now seen the first Sustainability Statements resulting from the CSRD and the accompanying European Sustainability Reporting Standards (ESRS). 

Clearly, the pressure is on to simplify the regulations – and reduce the reporting burden on companies. In February, the EU Commission proposed a first package of so-called ‘Omnibus’ reforms. Further reforms are planned for later in the year.

As part of this, the European Financial Reporting Advisory Group (EFRAG) are looking for feedback from ‘stakeholders’. And that includes us – we’ve just sent our response to EFRAG’s questionnaire, setting out our experience so far of working with the ESRS. For the past two years, we’ve helped several clients produce their first ESRS-compliant Sustainability Statement.

We’re not short of views on how the ESRS could be simplified and improved – both for reporting companies and for users of these statements. Below, we’ve provided a few edited highlights from our response. 

What is our overall assessment – and some of the implementation challenges and benefits?

• First, we applaud the EU’s willingness to simplify the current rules. Our experience has shown that many companies are still confused by the sheer scale and complexity of the ESRS.
• The reporting burden is simply too high, particularly for smaller or unlisted companies who don’t have the experience of the EU’s former Non-Financial Reporting Directive (NFRD).
• We’ve also seen an uneven approach by auditors – and too much focus on process and compliance rather than outcome, especially when it comes to double materiality assessments (DMAs).
• The result is that sustainability statements risk becoming too technical – and don’t provide clear insights and explanations for investors and other users. 

How could we improve on the ESRS’ current provisions on materiality?

• We think the devil here is in the details – many companies struggle with ESRS double materiality assessments.
• And that’s because it’s unclear how to interpret rules on issues like entity-specific topics, setting materiality thresholds, defining dependencies or involving external stakeholders.
• Because of the ESRS, materiality assessments are becoming more complex and prescriptive. Consequently, we’re losing the potential strategic benefits and turning these assessments into compliance-only exercises.
• We’ve argued for a simpler approach, based on updating the current AR 16 list of material topics, standardising the rules for audit, and setting up a clear, step-by-step double materiality process that companies can follow. 

How could we simplify narrative information and reduce potential overlaps between Minimum Disclosure Requirements (MDRs) and topical standards? 

Throughout the ESRS, we see definite opportunities to simplify both language and reporting requirements by:

• Bringing MDRs into the topical standards to avoid confusion among reporting companies and improve disclosure 
• Merging similar data points where the wording may be slightly different, but the information being requested is, in effect, the same
• Scrapping voluntary disclosures – these may be confusing and add to the reporting burden if companies think they’re likely to become mandatory in the near future.
• Act always with the user in mind – concentrate on the most important disclosures and remove those that are less useful or ‘actionable’ for investors and other stakeholders
• Provide better guidance on policies, actions and targets. Companies should explain how these ‘fit together’. This can be done through a well-written narrative, but the ESRS can also help by taking a more joined-up approach.
• Require Chief Risk Officers – or their equivalent – to sign off on ESG risks and opportunities. That will help companies close the gap between DMA results and their own enterprise risk management. 

Abbreviations

AR – Application Requirement
CSRD – Corporate Sustainability Reporting Directive
ESG – Environmental, Social, Governance
ESRS – European Sustainability Reporting Standards
DMA – Double Materiality Assessment
MDR – Minimum Disclosure Requirements
NFRD – Non-Financial Reporting Directive