The EU’s Corporate Sustainability Reporting Directive will have broad impact. Approximately 50,000 undertakings are expected to have a reporting obligation. The recently finalized European Sustainability Reporting Standards specify the information required to be reported under CSRD.
As we recently posted, this summer’s ESG must-read is ESRS 1, which contains the general requirements applicable to CSRD reporting. The objective of ESRS 1 is to provide an understanding of the architecture of the ESRS, the drafting conventions and fundamental concepts used and the general requirements for preparing and presenting sustainability information in accordance with CSRD.
Understanding ESRS 1 is therefore critical to preparing for CSRD reporting. It will drive not only disclosure, but also the underlying processes and controls. As a threshold matter, understanding ESRS 1 also is important for developing the project plan for CSRD readiness.
Posts in this “Summer of CSRD” series discuss selected aspects of ESRS 1, in a bite-sized read, in more or less the order presented in ESRS 1.
In the last post, we discussed reporting time horizons.
In this post, we discuss preparation and presentation of sustainability information. ESRS 1, chapter 7 provides general requirements to be applied when preparing and presenting sustainability information.
Presenting comparative information
Undertakings are required to disclose prior period comparative information for all quantitative metrics and monetary amounts disclosed in the current period. When relevant to an understanding of the current period’s sustainability statement, the undertaking also must disclose comparative information for narrative disclosures. When an ESRS requires the undertaking to present more than one comparative period for a metric or data point, the requirements of that ESRS govern.
If the undertaking reports comparative information that differs from the information previously reported, it must disclose (1) the difference between the previously reported and revised figure and (2) the reasons for the revision.
If it is impracticable to adjust comparative information for one or more prior periods to achieve comparability with the current period, the undertaking is required to disclose that. For example, data might not have been collected in the prior period in a way that allows either retrospective application of a new definition of a metric or target, or retrospective restatement to correct a prior period error, and it may be impracticable to recreate the information.
Sources of estimation and outcome uncertainty
ESRS 1 notes that the use of reasonable assumptions and estimates, including scenario or sensitivity analysis, is an essential part of preparing sustainability-related information and does not undermine the usefulness of the information. Even a high level of measurement uncertainty would not necessarily prevent an assumption or estimate from providing useful information or meeting the qualitative characteristics of information.
Where assumptions and estimates are used, the undertaking is required to disclose information to enable users to understand the most significant uncertainties affecting the quantitative metrics and monetary amounts reported in its sustainability statement. ESRS 1 also indicates that the assumptions and estimates used must be accurately described and explained.
In addition, data and assumptions used in preparing the sustainability statement must be consistent to the extent possible with the corresponding financial data and assumptions used in the undertaking’s financial statements.
Some ESRS require explanations about possible future events that have uncertain outcomes to be disclosed. In judging whether information about the possible future events is material, the undertaking must refer to the materiality criteria in ESRS 1 (see our post). This requires the undertaking to consider:
- the potential financial effects of the events (i.e., the possible outcome);
- the severity and likelihood of the impacts on people or the environment resulting from the possible events, taking into account severity; and
- the full range of possible outcomes and the likelihood of the possible outcomes within that range.
When assessing the possible outcomes, the undertaking must consider all relevant facts and circumstances, including information about low-probability and high-impact outcomes, which, when aggregated, could become material. For example, the undertaking might be exposed to several impacts or risks, each of which could cause the same type of disruption, such as disruptions to the undertaking’s supply chain. Information about an individual source of risk might not be material if disruption from that source is highly unlikely to occur. However, information about the aggregate risk of supply chain disruption from all sources might be material.
Updating disclosures about events after the end of the reporting period
If the undertaking receives information after the reporting period, but before the management report is approved for issuance that provides evidence or insights about conditions existing at period end, the undertaking must, where appropriate, update estimates and sustainability disclosures in light of the new information.
In addition, if the information provides evidence or insights about material transactions, other events and conditions that arise after the end of the reporting period, the undertaking must, where appropriate, provide narrative information indicating the existence, nature and potential consequences of these post-year end events.
Changes in preparation or presentation of sustainability information
The definition and calculation of metrics, including metrics used to set targets and monitor progress toward targets, must be consistent over time. The undertaking must provide restated comparative figures, unless it is impracticable to do so, when it has (1) redefined or replaced a metric or target or (2) identified new information in relation to the estimated figures disclosed in the preceding period if the new information provides evidence of circumstances that existed in that period.
Reporting prior period errors
The undertaking must correct material prior period errors by restating the comparative amounts for the prior period(s) disclosed, unless it is impracticable to do so. However, this requirement does not apply to reporting periods before the first year of application of ESRS by the undertaking.
Prior period errors are described in ESRS 1 as omissions from, and misstatements in, the undertaking’s sustainability statement for one or more prior periods. These errors arise from a failure to use, or misuse of, reliable information that (1) was available when the management report that includes the sustainability statement for those periods was authorized for issuance and (2) could reasonably be expected to have been obtained and considered in the preparation of sustainability disclosures included in the reports. Prior period errors include the effects of mathematical mistakes, mistakes in applying the definitions for metrics or targets, oversights or misinterpretations of facts and fraud.
When it is impracticable to determine the effect of an error on all prior periods presented, the undertaking must restate the comparative information to correct the error from the earliest date practicable. When correcting disclosures for a prior period, the undertaking may not use hindsight in (1) making assumptions about what management’s intentions would have been in a prior period or (2) estimating the amounts disclosed in a prior period. This requirement applies to correction of both backward-looking and forward-looking disclosures.
In ESRS 1, corrections of errors are distinguished from changes in estimates. Estimates may need to be revised as additional information becomes known.
Consolidated reporting and subsidiary exemption
When the undertaking reports at a consolidated level, it must perform its assessment of material impacts, risks and opportunities (IROs) for the entire consolidated group, regardless of its group legal structure. All subsidiaries must be covered in a manner that allows for the unbiased identification of material IROs. Criteria and thresholds for assessing an IRO as material are to be determined based on the materiality assessment process discussed in ESRS 1 (see our post).
If the undertaking identifies significant differences between material IROs at the group level and material IROs of one or more of its subsidiaries, the undertaking must provide an adequate description of the IROs, as appropriate, of the applicable subsidiary or subsidiaries. When assessing whether the differences between material IROs at the group level and one or more subsidiaries are significant, the undertaking may consider different circumstances, such as whether the subsidiary or subsidiaries operate in a different sector than the rest of the group or the circumstances relating to the level of disaggregation discussed in ESRS 1 (see our post).
Classified and sensitive information, and information on intellectual property, know-how or results of innovation
The undertaking is not required to disclose classified information or sensitive information, even if the information is material.
Specific to intellectual property, know-how or the results of innovation, when that information is relevant to disclosure of strategy, plans and actions in furtherance of the objective of an ESRS Disclosure Requirement, the undertaking may nevertheless omit the information if it (1) is secret (it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with that kind of information), (2) has commercial value because it is secret and (3) has been subject to reasonable steps by the undertaking to keep it secret.
If the undertaking omits classified or sensitive information, or a specific piece of information corresponding to intellectual property, know-how or the results of innovation, because it meets the criteria above, it must disclose all other required information. The undertaking must make every reasonable effort to ensure that, beyond the omission of the classified or sensitive information, or of the specific piece of information corresponding to intellectual property, know-how or the results of innovation, the overall relevance of the disclosure in question is not impaired.
Reporting on opportunities
When reporting on opportunities, the disclosure should consist of descriptive information allowing the reader to understand the opportunity for the undertaking or the entire sector.
When reporting on opportunities, the undertaking must consider the materiality of the information to be disclosed. In this context, it must consider, among other factors (1) whether the opportunity is currently being pursued and is incorporated in its general strategy, as opposed to a general opportunity for the undertaking or the sector, and (2) whether the inclusion of quantitative measures of anticipated financial effects is appropriate, taking into account the number of assumptions that it could require and consequential uncertainty.
Next up: General presentation requirements.
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