The “Summer of CSRD” series – linkages between CSRD disclosures and with other 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.

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 general CSRD presentation requirements.

In this post, we discuss linkages between CSRD disclosures and with other disclosures. This topic is addressed in ESRS 1, chapter 9. That chapter indicates that, as a general matter, the undertaking is required to provide information that enables users of its sustainability statement to understand the connections between different pieces of information in the statement, and the connections between the information in the sustainability statement and other information that the undertaking discloses in other parts of its corporate reporting.

Incorporation by reference

If the requirements discussed in the next paragraph are satisfied, information prescribed by an ESRS Disclosure Requirement may be incorporated in the sustainability statement by reference to the following:

• another section of the management report;
• the financial statements;
• the corporate governance statement (if not part of the management report);
• the remuneration report required by the EU Shareholder Rights Directive (that Directive addresses the exercise of shareholder rights in listed companies);
• the universal registration document under the EU Prospectus Regulation (that Regulation addresses the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market); or
• public disclosures under the EU Capital Requirements Regulation (Pillar 3 disclosures) (that Regulation addresses prudential requirements for credit institutions and investment firms).

Incorporation by reference from the foregoing documents is permitted if the disclosures incorporated by reference:

• constitute a separate element of information and are clearly identified as addressing the relevant Disclosure Requirement or specific datapoint prescribed by a Disclosure Requirement;
• are published before or at the same time as the management report;
• are in the same language as the sustainability statement;
• are subject to at least the same level of assurance as the sustainability statement; and
• meet the same technical digitalization requirements as the sustainability statement.

If these conditions are satisfied, information required by ESRS also may be incorporated by reference to the undertaking’s report prepared according to EU Eco-Management and Audit Scheme, so long as the information incorporated by reference is produced using the same basis for preparation of ESRS information, including scope of consolidation and treatment of value chain information.

When incorporating information by reference, the undertaking is required to consider the overall cohesiveness of the reported information. It also must ensure that the incorporation by reference does not impair the readability of the sustainability statement.

Appendix G to ESRS 1 includes an illustrative example of incorporation by reference.

Connected information and connectivity with financial statements

The undertaking is required to describe the relationships between different pieces of information. ESRS 1 notes that this could require connecting narrative information on governance, strategy and risk management to related metrics and targets. For example, in providing connected information, the undertaking may need to explain the effect or likely effect of its strategy on its financial statements or financial plans, or explain how its strategy relates to metrics and targets used to measure progress against performance.

The undertaking also may need to explain how its use of natural resources and changes within its supply chain could amplify, change or reduce its material impacts, risks and opportunities. It may need to link this information to information about current or anticipated financial effects on its production costs, to its strategic response to mitigate these impacts or risks, and to its related investment in new assets. The undertaking also may need to link narrative information to the related metrics and targets and to information in the financial statements. Information that describes connections must be clear and concise.

When the sustainability statement includes monetary amounts or other quantitative data points that exceed a threshold of materiality and are presented in the financial statements (i.e., direct connectivity between information disclosed in the sustainability statement and information disclosed in financial statements), the undertaking is required to include a reference to the relevant paragraph of its financial statements where the corresponding information can be found.

The sustainability statement may include monetary amounts or other quantitative data points that exceed a threshold of materiality and are either an aggregation or part of monetary amounts or quantitative data presented in the undertaking’s financial statements (i.e., indirect connectivity between information disclosed in the sustainability statement and information disclosed in financial statements). In this case, the undertaking must explain how the amounts or data points in the sustainability statement relate to the most relevant amounts presented in the financial statements. The disclosure is required to include a reference to the line item and/or the relevant paragraphs of the financial statements where the corresponding information can be found. Where appropriate, a reconciliation may be provided, which may be in tabular form.

If information is presented that is not covered by the preceding two paragraphs, the undertaking is required to explain, based on a threshold of materiality, the consistency of significant data, assumptions and qualitative information included in its sustainability statement with the corresponding data, assumptions and qualitative information included in the financial statements. This may occur when the sustainability statement includes (1) monetary amounts or other quantitative data linked to monetary amounts or other quantitative data presented in the financial statements or (2) qualitative information linked to qualitative information presented in the financial statements.

Cited examples of items for which an explanation is required are (1) when the same metric is presented as of the reporting date in financial statements and as a forecast for future periods in the sustainability statement and (2) when macroeconomic or business projections are used to develop metrics in the sustainability statement and they are also relevant in estimating the recoverable amount of assets, the amount of liabilities or provisions in financial statements.

For information covered by the preceding paragraph, consistency is required to be at the single data point level and must include a reference to the relevant line item or paragraph of notes to the financial statements. When significant data, assumptions and qualitative information are not consistent, the undertaking is required to state that and explain the reason.

Topical and sector-specific ESRS may include requirements to include reconciliations or to illustrate consistency of data and assumptions for specific Disclosure Requirements. In those cases, the requirements in the applicable ESRS apply.

Next up: Transitional provisions (the final post in this series).

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