European Commission publishes FAQ on CSRD

The FAQ document was prepared by the Directorate General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA). At this stage it has the status of a “Draft Commission Notice”; the final version of the FAQ will be translated into all the EU languages for publication in the Official Journal of the European Union (EU). It is thus still possible that changes will be made.

The Commission also repeatedly emphasises that it is essential to refer to the legislation transposing the CSRD into national law to correctly understand how to implement the Directive.

In practical terms, the document includes 90 FAQs, covering:

·   sustainability information to be reported under Articles 19a and 29a of the Accounting Directive as amended by the CSRD (individual and consolidated sustainability statements, respectively);

·   sustainability information reported under Article 40a of the Accounting Directive, which relates to non-EU companies or groups with significant activity in the European Union;

·   the assurance of sustainability reporting;

·   a range of additional topics, including one question on the interaction with the Sustainable Finance Disclosure Regulation (SFDR).

The FAQ provides useful clarifications on topics such as the scope of the CSRD (a flowchart is provided to help companies to identify the applicable sustainability reporting requirements and the corresponding application date); the conditions that must be met for European subsidiaries within the scope of the CSRD to be exempted from reporting requirements (particularly when the parent company is a non-EU undertaking); and the interactions with the EU Taxonomy Regulation (relating to Article 8 disclosures).

The Commission also provides a limited number of clarifications on the interpretation of some of the requirements in ESRS Set 1 (European Sustainability Reporting Standards) adopted at end-July 2023, on matters where legal interpretation from the EC was deemed necessary.

For example, question 29 on the value chain provides clarification on the concept of “reasonable effort” in paragraph 69 of ESRS 1, which states that an entity shall estimate the information to be reported about its upstream and downstream value chain, if it has been unable to collect the necessary information after making reasonable efforts to do so.

In the FAQ, the Commission states that:

·   each undertaking should determine “reasonable effort” taking into consideration its specific factors and circumstances, as well as the external environment in which it operates. The Commission lists the criteria that it considers may be useful when carrying out this analysis in accordance with paragraph 69 of ESRS 1. It states that any one of these criteria could on its own be sufficient to determine that reasonable effort has been made by the undertaking (though the criteria may also be applied in combination). The seven criteria listed by the Commission are as follows:

    • the size and resources of the undertaking in relation to the scale and complexity of its value chain;

    • the technical readiness of the reporting undertaking to collect value chain information;

    • the availability of tools to access and share value chain information;

    • the size and resources of the actors in the value chain;

    • the technical readiness of the actors in the value chain;

    • the level of influence and buying power of the undertaking;

    • connected to the level of influence, the “proximity” of the actor in the value chain;

·   it is expected that undertakings will more frequently have recourse to estimates in the first years of application of the new reporting requirements;

·   in all cases, the undertaking must consider whether the use of estimates is likely to affect the quality of the reported information.

These “clarifications” should be particularly useful for reporting entities (cf. our feature in this issue on EFRAG’s study, which highlights that value chain analysis is one of the most challenging areas for companies when implementing ESRS).

A final point to note is that in question 38, the Commission clarifies that until the XBRL Taxonomy has been adopted by the EU (via amendments to the regulation on the European Single Electronic Format or ESEF), undertakings are not required to markup their sustainability statements or to prepare the management report in XHTML.