EFRAG has set out the five levers it is utilising to fulfil its mandate of streamlining the ESRS by 31 October and has suggested that it will reduce the total number of datapoints by 50%.
As detailed in a progress report, the proposed modifications focus on five areas: simplifying the double materiality assessment (DMA); improving the conciseness of sustainability statements; modifying the relationship between minimum disclosure requirements and topical specifications; improving the understandability of the standards; and addressing other burden reduction reliefs.
The five levers were identified by the EFRAG Sustainability Reporting Board (SRB) last month and the SRB reaffirmed this approach at the start June, after having assessed the 16,000 responses to the ESRS simplification questionnaire, messages from outreach evets and the results of the study on 2024 ESRS-compliant disclosures.
Lever 1
EFRAG has proposed reducing the complexity of the DMA process by clarifying that companies should start the assessment by identifying the most material topics, based on an assessment of the business model, and that the expected level of evidence to support conclusions should be ‘reasonable and proportionate’.
Wim Bartels, who leads the SRB sub-team on this lever, explained that the proposed reduction in the requirements for documentation will reduce the burden for both the preparers and the auditors that are engaging with the DMA.
EFRAG has also proposed a clarification on the interaction between the identification of material impacts, risks and opportunities, and the assessment of material topics and sub-topics. Bartels said the clarification would specify that companies should use the list of topics set out in ESRS 1 (AR16) “as a point of reference for illustration but not necessarily as [a] mandatory list to tick”.
The SRB is aiming to address how mitigation, prevention and remediations should be considered when assessing material impacts, and whether companies can include information on non-material matters in their sustainability statements. It will also clarify in the standards and guidance that companies can deem a sub-topic to be material without having to report all of the datapoints in the relevant topical standard.
Lever 2
Kristian Koktvedgaard, who is leading EFRAG’s work to improve the conciseness and readability of ESRS-aligned statements, explained: “We are seeing whether we can provide guidance around the executive summaries [in reports] and how to enhance the ‘lead-in’; and the other key element is related to the location of data […] and whether we can facilitate the use of appendices to increase the readability [of statements] and introduce some flexibility.”
In particular, the ESRS would be amended to provide the option of disclosing the most granular information and detailed metrics in dedicated sections or appendices; suggest that companies use appendices for additional information; and discourage the repetition of disclosures on the same topic.
Lever 3
To alleviate the burden of reporting under the standards, EFRAG is aiming to reduce the overlaps between the minimum cross-cutting disclosure requirements included in ESRS 2 and the disclosures on policies, targets and actions (PAT) that are specified for each topical standard.
This lever, led by Ruben Zandvliet, would significantly reduce the mandatory PAT disclosures in the environmental and social standards, with only the essential ones left in, and the rest deleted or moved to non-mandatory guidance.
The minimum disclosure requirements in ESRS 2 would be maintained as mandatory, but the number of datapoints would be revised and reduced.
Under the proposal, EFRAG would also clarify that companies only need to report PATS if they have them in place and they are related to a material topic.
Lever 4
EFRAG is also proposing a change to the approach to voluntary disclosures in the standards, which it says has been a “source of significant discussions between preparers and auditors and interpreted by some as a checklist for entity-specific preparers”.
The number of voluntary disclosures would be significantly reduced, and the structure of the standards would be changed to clearly separate between mandatory and non-mandatory disclosures.
Lever 5
Chiara Del Prete, chair of EFRAG’s Sustainability Reporting Technical Expert Group (SR TEG), said the other elements for simplifying the standards are “very promising in terms of horizontal burden reduction on top of individual reductions to datapoints”.
These elements primarily focus on reporting reliefs, covering disclosures on acquisitions and disposals, metrics where data is not available and metrics related to non-material activities.
EFRAG is reviewing the reliefs offered in the ISSB standards, including the use of ‘without undue cost and effort’; the relief from reporting opportunities where information is commercially sensitive; and the relief from reporting anticipated effects.
The focus on ‘reasonable and supportable information available without undue cost or effort’ would also extend to the collection of sustainability information from entities in companies’ value chains under EFRAG’s proposed modifications.
Amendments would emphasise the need to concentrate data collection efforts where severe impacts and risks are more likely to occur, and EFRAG is considering reliefs for metrics that are based on estimates, to reduce the emphasis on direct data collection.
Datapoint reductions
Beyond these five levers, the SRB is systematically reviewing all the mandatory datapoints in the ESRS. It is proposing a more principles-based approach to standard-setting by eliminating the least relevant datapoints, reducing the granularity of narrative disclosures, and moving some granular datapoints to non-mandatory guidance.
Relevance is assessed based on the datapoints’ alignment with the core objectives of the CSRD, other EU regulations, and disclosure requirements in international standards.
In its progress report, EFRAG’s preliminary indication is that the five levers and the systematic reduction of datapoints– taking into account deletions, those made voluntary and those moved to non-mandatory guidance – would reduce the overall number of datapoints across the 12 standards by 50%.
Del Prete said EFRAG wants to be “cautious and not overpromise” at this stage, adding the caveat that the datapoint count has not yet been finalised.
Next steps
Board members voted unanimously to approve the progress report, which will be submitted to the European Commission tomorrow (20 June).
EFRAG plans to approve an exposure draft with the proposed amendments in the last week of July. The public consultation is expected to run for 40-45 days. However, EFRAG has indicated that it can extend the duration of the consultation if the Commission extends its deadline for providing its final recommendations.
