The “Summer of CSRD” series – CSRD transitional provisions

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 this post, the last in this series, we discuss CSRD transitional provisions, which are addressed in ESRS 1, chapter 10.

Entity-specific disclosures

ESRS 1 notes that the extent to which sustainability matters are covered by ESRS is expected to evolve as further Disclosure Requirements are developed. Therefore, the need for entity-specific disclosures is likely to decrease over time, in particular as a result of the future adoption of sector-specific standards.

When defining its entity-specific disclosures, the undertaking may adopt transitional measures for their preparation in the first three annual sustainability statements, under which it may, as a priority:

• introduce in its reporting the entity-specific disclosures that it reported in prior periods, if those disclosures meet or are adapted to meet the qualitative characteristics of information referred to in ESRS 1 (for a discussion of this topic, see our post); and
• complement its disclosures prepared on the basis of topical ESRS with an appropriate set of additional disclosures to cover sustainability matters that are material for the undertaking in its sector(s), using available best practice and/or available frameworks or reporting standards, such as IFRS industry-based guidance and GRI Sector Standards.

Value chain

For the first three years of the undertaking’s sustainability reporting under the ESRS, if not all of the necessary information regarding its upstream and downstream value chain is available, the undertaking is required to explain (1) the efforts made to obtain the necessary information about its upstream and downstream value chain, (2) the reasons why not all of the necessary information could be obtained and (3) its plans to obtain the necessary information in the future.

For the first three years of its sustainability reporting under the ESRS, in order to account for difficulties the undertaking may encounter in gathering information from actors throughout the value chain and in order to limit the burden for small and medium-sized enterprises in the value chain (although this transition provision applies irrespective of whether the relevant actor in the value chain is an SME):

• when disclosing information on policies, actions and targets in accordance with ESRS 2 and other ESRS, the undertaking may limit upstream and downstream value chain information to information available in-house, such as data already available to the undertaking and publicly available information; and
• when disclosing metrics, the undertaking is not required to include upstream and downstream value chain information, except for datapoints derived from other EU legislation, as listed in ESRS 2 Appendix B.

There are four instruments specified in that Appendix:

• 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.

Starting from the fourth year of its reporting under the ESRS, the undertaking is required to include information on the material impacts, risks and opportunities connected with the undertaking through its direct and indirect business relationships in the upstream and/or downstream value chain (for a discussion of this topic, see our post). In this context, the information required by the ESRS to be obtained from small and medium-sized enterprise undertakings in the undertaking’s upstream and/or downstream value chain is limited to the content of future ESRS for listed small and medium-sized enterprises.

Comparative information

To ease the first-time application of ESRS 1, the undertaking is not required to present comparative information in the first year of preparation of its sustainability statement under the ESRS (for a discussion of this topic, see our post).

For phased-in disclosures (see below), this transitional provision applies with reference to the first year of mandatory application of the phased-in disclosure requirement.

Phased-in disclosure requirements 

Appendix C to ESRS 1 contains a list of Disclosure Requirements with varying phase-ins. These phase-ins span ten ESRS. Most of the phase-ins are limited to particular items in individual ESRS.

However, five of the ESRS have blanket phase-ins. Undertakings or groups not exceeding on their balance sheet dates 750 employees on average during the financial year (on a consolidated basis where applicable) may omit the following ESRS disclosures for the periods indicated below:

• Biodiversity and ecosystems (ESRS E4): for the first two years of preparation of their sustainability statement.
• Own workforce (ESRS S1): for the first year of preparation of their sustainability statement.
• Workers in the value chain (ESRS S2): for the first two years of preparation of their sustainability statement.
• Affected communities (ESRS S3): for the first two years of preparation of their sustainability statement.
• Consumers and end-users (ESRS S4): for the first two years of preparation of their sustainability statement.

That’s a wrap – all the posts in this series

With this post, we conclude our discussion of ESRS 1. The following additional posts have been part of this Summer of CSRD series:

• Categories of ESRS standards, reporting areas and drafting conventions
• Qualitative characteristics of reported information
• Understanding materiality
• The materiality assessment process
• Mandatory and materiality-based disclosures
• Ten key points from EFRAG’s recent materiality assessment guidance
• Disaggregated reporting
• Conducting due diligence
• The value chain
• Reporting time horizons
• Preparation and presentation of sustainability information
• General presentation requirements
• Linkages between CSRD disclosures and with other disclosures

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