European Union - Corporate and Company Law (2024)

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On 30 May 2024, EFRAG published a Compilation of Explanations of the EuropeanSustainability Reporting Standards (ESRS) under the CorporateSustainability Reporting Directive (CSRD). These explanationsrelate to sector-agnostic ESRS. EFRAG noted that theyare intended for use by large listed and unlisted companies thatare subject to the ESRS, but not by non-listed small- andmedium-sized enterprises (SMEs), which may use the upcomingvoluntary SME standard.

These explanations will be published on the ESRS Q&APlatform which was launched by EFRAG in 2023 to addresstechnical questions on the first set of ESRS. The Compilation ofExplanations includes 12 Explanations released by EFRAG on 5February 2024 and 12 Explanations released on 1 March 2024, plusfurther explanations approved up to May 2024 on a consolidatedbasis. Explanations previously published can be identified by theirrelease date as well as under the Table of ID release dates, whichis added as an appendix. EFRAG explanations are non-authoritativeand are not exposed to public feedback, although they providevaluable guidance. They are considered final once released byEFRAG.

The explanations are grouped into chapters according to theirnature (Cross-cutting, Environment, Social, and Governance) andtheir disclosure requirements, following the ESRS structure. Keypoints raised in the General Requirements section of theexplanations include the following:

• ID 337: In relation to the example ofcalculating metrics for sustainability matters for a productionfacility and sales subsidiaries with different levels of accuracy,EFRAG explained that it is necessary to consider whether preciselymeasuring the portion of the metrics attributable to the productionfacility — and using an estimate for the portion attributableto the sales corporation — will result in a degree ofaccuracy for the entire metric that is consistent with thecharacteristics of information quality prescribed by the ESRS.
• ID 172: EFRAG confirmed in a private equitycontext that if a general partner (GP) does not consolidate theportfolio company in its financial accounts, then indirectlyrelated organisations (IROs) of the portfolio company form part ofthe value chain (rather than of its own operations). The GP mustassess and report on material IROs of the portfolio company in thedownstream value chain. Although this is not unexpected, it issignificant in confirming that private investments form part of thevalue chain of reporting entities and therefore reporting entitiesmay need to report on them. It therefore indicates the expecteddirection of travel for additional sector-specific disclosurerequirements.
• ID 41: Similar to ID 172, EFRAG confirms thatinvestments of insurance companies are part of the value chain andare subject to consideration in the materiality assessment.
• ID 148: This explanation states thatsubsidiaries which are excluded from the financial statements(e.g., due to national accounting laws) may still need to beincluded within the boundaries of the consolidated CSRD statementif material. This clarification therefore takes a more expansiveview of the scope of CSRD reporting than the scope of financialreporting.
• ID 286: EFRAG confirmed that it is notpossible to report metrics (such as, for example, energyconsumption) for a period that deviates from the financialyear.
• ID 426: EFRAG gives helpful confirmation thatthe ESRS does not require following the exact format as given undereach ESRS (other than that the report must be structured in fourparts: general info, environmental info, social info, andgovernance info), and ESRS 1 Appendix F is an "example"of how to structure the sustainability statement.
• ID 504: Although this was not unexpected,EFRAG confirms that undertakings must report material metrics, evenwhere there is a high level of uncertainty over the data of themetrics (in which case it must be estimated, and the undertakingshould disclose information about the sources of that uncertaintyand any assumptions/judgments made as part of the estimate).
• ID 293: EFRAG reiterates that the ESRS merelyset disclosure requirements and do not prescribe any behavioralobligations.
• ID 482: It is confirmed that creditinstitutions should not refer to the sectors of the financedportfolio for the purposes of ESRS 2 paragraph 40 - they shouldrefer to the sectors in which they operate directly, not thesectors in which their clients operate.
• ID 517: It is explained that the ESRS do notprescribe specific documentation for explaining the setting ofthresholds for the materiality assessment. Disclosing or explainingeach threshold separately is not required in all circ*mstances.Depending on its specific facts and circ*mstances, the descriptionand disclosure of thresholds may be more or less granular.

For more information on the CSRD and ESRS in general, see our CSRD Demystifiedmaterials.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.

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