European sustainability reporting under the CSRD – three new tools to help companies with implementation

The European Commission has published a draft notice setting out 90 FAQs relating to sustainability reporting, which offers helpful insights into the implementation of the Corporate Sustainability Reporting Directive (CSRD) and its accompanying European Sustainability Reporting Standards (ESRS) for companies by clarifying interpretations of specific terms and explaining certain disclosure requirements in more detail. 

In addition, the European Financial Reporting Advisory Group (EFRAG), an EU-funded technical adviser to the European Commission, has released two reports which aim to help companies navigate the complexities of the ESRS and implement them in practice. These reports are:

1. EFRAG’s initial observations on the approaches early adopters are taking to implement the ESRS and the obstacles they are encountering along the way; and 
2. an updated compilation of explanations, which includes 99 explanations related to the ESRS, as issued by EFRAG to date.

In this article, we provide an overview of the three tools and how to navigate them.

European Commission’s draft notice regarding the implementation of the CSRD and ESRS 

The European Commission’s draft notice is a useful resource for companies who may have questions regarding the CSRD and ESRS. 

The draft notice begins with an overview of the sustainability reporting requirements under the CSRD, focusing on (i) sustainability reporting requirements for the different types of in-scope undertakings (including specifically for third-country undertakings), and (ii) requirements for statutory auditors and independent assurance service providers. This section provides a helpful summary of the CSRD’s general requirements and includes a flowchart which aims to assist with CSRD scoping analyses.

The FAQs cover various aspects of reporting, compliance, and assurance requirements under the CSRD and ESRS, and also touch on certain provisions of the Sustainable Finance Disclosure Regulation. The answers are designed to be instructive, with the aim of making the EU sustainability reporting framework more user-friendly.

The draft includes an express caveat: only the Court of Justice of the EU can provide a definitive interpretation of the CSRD and the views expressed in the draft notice may not necessarily reflect the European Commission’s final position.

EFRAG’s observations on developing ESRS-related practices and implementation challenges

Given the complexity and novelty of the ESRS, the EFRAG observations issued on 25 July offer important early perspectives on how companies and financial institutions are navigating this area for the first time, and the potential pitfalls to avoid. 

The study draws on findings from 28 large and well-resourced European companies across eight industries, including financial institutions (banks, insurers, asset managers) and non-financial institutions (healthcare technology, chemicals, road transport, textiles, and utilities) who participated in the study anonymously. The report explicitly notes that it represents only a preliminary view from a limited sample and should not be seen as indicative of the broader market, which will also develop further over time. 

The observations focus on four key areas: double materiality assessments, data points, value chain mapping, and organisational approaches to ESG reporting. It covers the application of the three final Implementation Guidance documents released by EFRAG in May 2024, as well as the overall ESG reporting approach adopted by CSRD preparers:

1. Double Materiality Assessments (DMA). The DMA required by the ESRS involves assessing both the impact of sustainability on a company’s financial prospects and the company’s impact on society and the environment. Many companies that participated in the study see this exercise as a strategic activity rather than a mere compliance task, with 85% planning to integrate ESG reporting results into their business strategy and decision-making. Approaches to DMA vary from data-driven to judgement-based. Notably, around 70% of the 28 companies included in the study are adopting an objective, evidence-based approach, utilising both data and, where necessary, expert judgement from internal and external sources. Structured stakeholder engagement is emphasised, with multiple methods such as interviews and workshops thought to be useful means for doing so.
2. Data Points. Integrating DMA outcomes into the analysis of where there are data point gaps is a major challenge for many companies, often resulting in more data points than necessary being used, which dilutes focus. Most companies analysed in this report (95%) use EFRAG’s Implementation Guidance 3 for gap analysis. Additionally, among the companies that participated in the study, about 80% report difficulties with data retrieval across environmental, social, and governance aspects, and 75% are adopting phase-in options for data disclosure to manage these complexities and prioritise reporting efforts. The document highlights that while phase-in options can ease preparation, it is important to communicate the details of any phased approach clearly.
3. Value Chain Mapping. This is the least developed area amongst those in scope of the report, with several companies using simplified mappings and relying on transitional provisions. Approximately 90% of the 28 analysed companies are refining their value chain mapping for better detail, and 45% have adopted more granular approaches. Non-financial institutions in particular are extending their focus beyond direct business relationships to include broader value chain considerations.
4. Organisational Approaches to ESG Reporting. The new reporting requirements have improved cross-departmental collaboration, particularly between sustainability, finance, risk, IT, and business units. There is a clear need for standardising ESG reporting processes, including data quality controls similar to those in financial reporting, in preparation for assurance. Companies participating in this report also recognise the need for additional capabilities and resources, including IT upgrades, with around 85% acknowledging this need and the varying implementation timelines. Responsibility within organisations for ESG reporting is evolving, with 65% assigning it to a single function (e.g., CSO or CFO) and 35% adopting a co-leadership model.

Despite its limitations, the report offers a way to benchmark efforts at this early stage in many companies’ CSRD and ESRS journeys. Looking ahead, EFRAG is considering providing a more comprehensive annual state-of-play report, which would take into account audited sustainability statements and offer a broader and more detailed perspective.

EFRAG’s new compilation of explanations on the ESRS

Although not formally binding, EFRAG has recently issued a new compilation of explanations addressing various queries from stakeholders about the use of the ESRS. This compilation, which includes nearly 100 explanations, tackles technical and specific issues raised by stakeholders and offers practical insights into implementing the ESRS. Each entry features the question, relevant background on regulations or standards together with the reasoning behind the answer, and a brief summary of the answer. 

The document is user-friendly and, like the ESRS, begins with a section on general requirements, covering key answers such as the need to assess opportunities and risks related to sustainability separately if they differ in nature (e.g., energy consumption may pose a financial risk due to fluctuating costs but also presents an opportunity for cost reduction if the company invests in renewable energy). This first section also clarifies that “shall disclose” means mandatory, while “may disclose” indicates encouraged but optional disclosures, all subject to the materiality requirements set out in ESRS 1.

Additionally, there are sections for environmental, social, and governance issues, each addressing specific topics within these areas. The document also includes a keyword index, allowing users to navigate easily to questions related to particular topics. 

Overall, these publications are a valuable resource for navigating specific CSRD and ESRS compliance issues (see our Getting Ready Series for more detail on how companies can prepare for upcoming ESG regulatory developments, including CSRD), providing practical guidance and clarifications on complex reporting requirements.