The “Summer of CSRD” series – mandatory and materiality-based disclosures

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.

Each post in this “Summer of CSRD” series discusses 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 the materiality assessment process set out in ESRS 1.

In this post, we discuss mandatory and materiality-based disclosures and other related provisions of ESRS 1.

Materiality-based disclosures

As discussed in our last post, the materiality assessment is the starting point for sustainability reporting under the ESRS. Disclosures generally are not required pursuant to ESRS Disclosure Requirements if not material under either the impact or financial materiality criteria (impact and financial materiality are discussed in an earlier post). However, as discussed in this post, some disclosures are required irrespective of materiality.

In addition, climate change is treated somewhat differently than other materiality-based disclosures. If the undertaking concludes that climate change is not material and omits all disclosures specified in ESRS E1 (Climate change), it must nevertheless provide a detailed explanation of the conclusions of its materiality assessment with regard to climate change, including a forward-looking analysis of the conditions that could lead the undertaking to conclude that climate change is material in the future.

If the undertaking concludes that a topic other than climate change is not material and therefore omits all the Disclosure Requirements in the corresponding topical ESRS, it may, but is not required to, briefly explain the conclusions of its materiality assessment for that topic. 

Mandatory disclosures

As noted above, some disclosures are required irrespective of the outcome of the undertaking’s materiality assessment. The undertaking always is required to disclose the information required by ESRS 2, General Disclosures (i.e., all of the Disclosure Requirements and datapoints specified in ESRS 2).

The undertaking also is required to disclose the information called for by specified topical ESRS that is related to ESRS 2 disclosures pertaining to the processes to identify and assess material impacts, risks and opportunities (IROs), as listed in Appendix C to ESRS 2.

Policies, actions and targets 

When disclosing information on policies, actions and targets in relation to a material sustainability matter, the undertaking is required to include the information prescribed by all the Disclosure Requirements and datapoints in the topical and sector-specific ESRS related to that matter and in the corresponding Minimum Disclosure Requirement on policies, actions, and targets required under ESRS 2.

If the undertaking cannot disclose the foregoing information because it has not adopted the applicable policies, implemented the applicable actions or set the applicable targets, it must disclose that. It also may report a timeframe in which it aims to have the policies, actions or targets in place.

Metrics

When disclosing information on metrics for a material sustainability matter pursuant to a topical ESRS, the undertaking must include the information prescribed by a Disclosure Requirement if it assesses the information to be material. The undertaking may omit information prescribed by a datapoint of a Disclosure Requirement if it determines the information is not material and is not needed to meet the objective of the Disclosure Requirement.

Datapoints derived from other EU legislation

If the undertaking omits information prescribed by a datapoint that derives from other specified EU legislation, it is required to state that the information is “not material.” There are four specified instruments:

• The Sustainable Finance Disclosure Regulation: sustainability‐related disclosures in the financial services sector;
• Pillar 3: prudential requirements for credit institutions and investment firms;
• The Benchmark Regulation: indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds; and
• The EU Climate Law: established the framework for achieving climate neutrality.

Material impacts or risks arising from actions to address other sustainability matters

If the undertaking’s materiality assessment leads to the identification of situations in which its actions to address impacts or risks, or to benefit from opportunities in relation to a sustainability matter, might have material negative impacts or cause material risks in relation to one or more other sustainability matters, it must (1) disclose the existence of the material negative impacts or risks together with the actions that generate them, with a cross-reference to the topic to which the impacts or risks relate, and (2) provide a description of how the material negative impacts or risks are addressed under the topic to which they relate.

ESRS 1 cites the following examples that would come under the foregoing principle:

• An action plan to decarbonize production that involves abandoning certain products might have material negative impacts on the undertaking’s own workforce and result in material risks due to redundancy payments.
• An action plan of an automotive supplier to focus on the supply of e-vehicles might lead to stranded assets for the production of supply parts for conventional vehicles.

Next up: EFRAG's materiality assessment guidance – ten key points.

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