Getting Prepared for the Corporate Sustainability Reporting Directive (CSRD)

Getting Prepared for the Corporate Sustainability Reporting Directive (CSRD)

Hosted by Dr. Dorothy Maxwell of Davy Horizons, Chiara Del Prete, Chair, EFRAG Sustainability Reporting, gave a wonderfully concise and insightful update on the current state of ESRS and CSRD, and how they build on GRI and IFRS.

Chiara’s presentation lasted just 15 minutes, but every word mattered. This is essential learning for practitioners of GRI today and CSRD tomorrow, so I transcribed the conversation. (We reflect the current state of both standards in the Future Planet GRID platform.)

Question from Dr. Dorothy Maxwell: There are 12 European sustainability reporting standards now out since November 2022 in draft. Would you set the scene for us in terms of an overview of what that will require in terms of reporting?

Chiara Del Prete: Sure, so we released in November 22, two cross-cutting standards, which are valid across all the different topics, one setting the principles called General Requirements and another setting the general disclosures at corporate level that frame the topical disclosure.

And then we have five standards that cover the five environmental objectives of the European policies on sustainable finance. So, climate change, pollution, water and marine resources, biodiversity, resource use, and circular economy. And we will mirror the same structure of the objectives.

Now we have four social standards, one basically for human capital, so all workforce, and then the other three, which substantially cover the value chain. So you have one for workers in the value chain, one for consumers and end-users, and one for affected communities. And finally, we have one standard on business conduct. So we have a small "G" component, but still, we have a "G" now.

Each of the standards is composed of four pillars, which mirror the structure of the TCFD and the IFRS standards. We have governance, strategy, impacts, risks, and opportunity management, and performance metrics.

The impact, risks, and opportunity management dimension are, in particular, declined in policies, targets, and action, and we have a minimum content for this type of disclosure. So, whenever in the different topical standards, you need to cover these elements, you have support in ESRS two general requirements for the sort of checklist of many minimum disclosures on policies, targets, and action.

One important caveat from my side, this is the package that EFRAG has released to the European Commission. We ended our institutional role with the publication of the drafts. We expect to see soon the standards coming in consultations by the Commission for one month, but I cannot comment on whether there will be changes on what we have delivered.

DM: "OK, and is June still likely to be the timeline this summer?"

CDP: "It will still be the summer. Summer doesn't end with June."

Question from Jonathan McKeown: So, the investment community might argue that CSRD should have been implemented before the sustainable finance disclosure regulations. Will CSRD provide all the information shareholders are required to report under FDR? What are your thoughts?"


CDP: "Well, you may know that we have been provided a number of sources and items of law regulation, international references, to incorporate in our standards. And we have also released in the package of documents released in November explanatory notes of how each of these have been considered.

Particular emphasis has been given to the SFDR PAI indicators. Not only have they been all incorporated, but in our draft, we envisaged that they would be outside the materiality assessment. So, in other terms, irrespective of the materiality of an indicator, an SFDR indicator for a company, they would be nevertheless required to report them in order to provide to the financial institutions that are obliged to prepare their SFDR reporting the elementary data in the aggregated portfolio level irrespective of their materiality. So, I would say yes, and in doing so, we have also, we are very conscious about the burden that we are imposing because we are imposing to report something that may not necessarily be responding to the traditional concept of materiality. We did it because we were requested to facilitate the implementation of the SFDR.

DM: So that brings us on to the whole area of double materiality. Could you explain to people what exactly that is? It's of course a core requirement within CSRD.

CDP: Sure, I mean that's an excellent question. So, the concept of double materiality is new. The companies are currently used to those that report under the NFRD, they normally use the GRI for impact materiality.

Now, in our system, topics may be material from an environmental, social, or governance point of view. They may be material either from impact perspective or from a financial perspective, or from both perspectives.

The company needs to consider for each matter the impact perspective, which is the inside-out dimension so how the company is connected with positive and negative current or potential impacts on people and environments, how the company impacts the people or the environment.

For negative impacts, they are material based on severity, and this is consistent with the international instruments of the sustainability due diligence, which was one of the elements that we were required by the level 1 regulation to incorporate.

So, impact materiality in ESRS is conceptually aligned with the GRI materiality assessment. I think this is very important to say. We've worked with GRI and we are confident that companies may refer to their existing knowledge, tools, etc. for the impact materiality perspective.

Now, next to it, we have the financial perspective, which is the outside-in dimension, so how does sustainability matter influence the company's position, development and performance, and here we have a time horizon that may be substantially longer than the one on financial statements and financial reporting because we need to consider short, medium, and long-term.

Now, the financial materiality leg of ESRS is expected to be conceptually aligned with the one in IFRS. So again, companies will be allowed to adopt the same approach when defining the financial perspective for their reports, then of course, impact and financial materiality are interconnected because financial risks and opportunities may derive from impacts that the company has on people and the environment. It's simple.

Many times it will be a matter of time before an impact materializes also in the financial domain. It's considered rather artificial to say that in there exists impacts that do not have a financial relevance. They will probably all have their relevance in the long-term, but at the same time, a company may be financially affected by a matter without necessarily being linked to impacts. Taking the extreme climate events, someone could be affected by them without having a material amount of emissions themselves. So, that's a bit my introduction to the double materiality.

DM: Do you have any good examples of Double Materiality, and they might be coming from the GRI world, that you have seen that would be acceptable from the perspective of CSRD in the future?

CDP: As I said, what we've done on impact materiality is really to be sure that conceptually we are aligned, and so whatever the company does under GRI perspective is also acceptable for the impact materiality under ESRS, Those best practices continue to be an important reference. OK, so that is for sure.

Good examples? Unfortunately, nobody has yet applied a financial materiality lens, except that we have a good proxy in the TCFD for climate, because the TCFD for climate is built under the financial materiality perspective.

So again, for climate, I think the examples exist, and the topic is mature. For the rest, you may know that we have been recently used by the Commission to start to develop recommendation guidance, and we are currently working on a non-authoritative document that would support the materiality process.

JMcK: Turning to data value chain, data gathering and interpreting value chain ESG data, such as scope three and other ESG areas, can be challenging to obtain and to communicate. What do you advise companies who are concerned about this?

CDP: We know that this is a source of concern. My first point here is that the approach we have provided to the Commission is impact-based, so value chain information and data are not required in each and every disclosure and data point. Companies are expected to know, to perform a sort of gap analysis at the beginning or risk analysis at the beginning, they are expected to know where they are exposed to be connected to impact through the value chain. Only when their materiality assessment along the value chain has detected a material impact ( current or potential), then the company needs to consider the value chain data. It's important to consider that there is an a materiality filter in the value chain.

Then, another element to consider is that more than 40% of our disclosures relate to policies, actions, and targets that I was mentioning in the beginning. This is narrative information that is mandatory when a certain topic is assessed to be material, except for climate that we assume being always material.

So, for policies, actions, and targets, the peculiarity of the value chain approach is that companies actually have to report whether they have policies, actions, and targets, and if they have, they have to disclose what they include. It's not requiring a necessary to go and collect data. You need to disclose and describe what policies you have, what actions you will implement, what are your targets, and if your actions, policies, and targets also cover undertakings in the value chain, then you will cover also value chain data. Otherwise, you simply state what's the current situation. Of course, one could say that the companies with the more developed value chain policies will be perceived better by the market, but still, this is not a requirement.

Then, the rest that is not policies, actions, and target; a topical level is metrics.

Now, all metrics that we have almost only SFDR metrics. We can count on the fingers of one hand, the metrics that are not already SFDR.

Now, of course, as you can imagine, the SFDR indicator, EFRATG and ESRS are simply passed through, so if there is an interpretation on whether and to what extent they entail value chain data, that's not for us. That's for the respective authorities to say.

For what I can say, well, can I tell you is that looking at the metrics only, really two or three of the metrics in our topical standards actually require the value chain, with the most important and illustrative example being scope three.

Finally, the general expectation, at least for environment, is that the company will be able to comply using sector data or market data, so without necessarily building up a massive exercise of data or data collection. Also, consider that there are three years of phasing for the value chain information, except for the SFDR indicators that are needed immediately.

So, I want really to reassure a bit and put this topic into perspective, and also our standards on the value chain. The social standards of value chain workers, in the value chain affected communities, and users, they do not include metrics, so they only have policies, targets, and action. And you comply by simply describing what you have, and if you don't have a policy, target, and an action, the only requirement is to say that you don't have one, and if you have a plan, you may declare what is your plan. The reason why these three social standards or value chain do not have metrics is that we felt that it is more relevant to define metrics at sector level and not at sector-agnostic level.