The European Financial Reporting Advisory Group (EFRAG) recently published a study providing an overview of the initially observed practices of selected companies in implementing the European Sustainability Reporting Standards (ESRS), which are required for compliance with the Corporate Sustainability Reporting Directive (CSRD). EFRAG has previously published implementation guidance’s and regularly uploads technical explanations through their ESRS Q&A implementation platform, but calls for more concrete illustrations are still load. In response, EFRAG complied this report based on interviews with 28 large EU-headquartered companies across eight sectors, including both financial and non-financial institutions. It provides critical insights into how early adopters are aligning with these new standards and highlights qualitative and quantitative trends and insights, key challenges of preliminary observed approaches and illustrative aggregated preliminary observed practices. This article provides an overview of EFRAG’s findings as well as their use to companies who are or will be obligated to implement the ESRS.

This article was written by Leene Timmermann and Iman Zalinyan. Leene ([email protected]) and Iman ([email protected]) are part of RSM Netherlands Business Consulting Services, with a strong focus on ESG and Strategy matters.

The CSRD expands the scope and requirements of sustainability reporting within the EU and is a key component of the European Union’s strategy to enhance corporate transparency on environmental, social, and governance (ESG) matters. It mandates that a broader range of companies, phased in based on size criteria, disclose detailed ESG information in line with the standardized framework provided by the ESRS. The first group of large companies must comply with the CSRD from the fiscal year 2024 and preparations are in full swing. 

The implementation of ESRS presents both opportunities and challenges for companies. On one hand, it offers a structured approach to sustainability reporting, promoting transparency and comparability. On the other hand, companies may face hurdles in adapting to these new requirements, particularly due to their scale and complexity along with issues such as data collection from distant value chain partners. 

EFRAG's new study takes advantage of the phase-in system to allow later companies to benefit from the experience of the first batch in their approach to ESRS implementation. The 28 companies participating in this study were deliberately chosen based on their size and their subsequently possibly higher level of maturity and resources in applying ESRS. EFRAG acknowledges that this, along with the voluntary nature of the participation, is likely to result in findings that are not representative of the broader market, for instance, for small and medium-sized enterprises. The study focuses on sharing emerging practices and challenges. As the implementation is still in its very early stages, its findings should be seen as preliminary and not indications of mature practices. In light of this, EFRAG has announced possible annual studies including a larger number of companies as well as ESRS-compliant sustainability statements.

Key findings

The study focuses on four areas which are particularly relevant to the implementation: Double Materiality Assessment, Value Chain, Datapoints and ESG reporting organizational approach. The preliminarily observed approaches are outlined, including their prevalence and the key challenges they face. EFRAG provides several illustrative aggregated preliminary observed practices to highlight identified options and choices for companies to consider. The organization emphasizes that the inclusion of these practices cannot be interpreted as an endorsement of ESRS-compliance, but is instead only based on observations in the market.  While we only present a short overview of the findings, the study provides further details as well as terminology explanations and supporting references from the ESRS and the EFRAG Implementation Guidance’s.

Double Materiality Assessment: The study notes a shift away from a judgement-based to an evidence-based approach, resulting in a more thorough analysis of ESG topics. About 70% of companies now rely mainly on internal and third-party data, supported by the expertise of internal experts and stakeholders. Engagement of these stakeholders is conducted through several channels by more than 65% of companies. In particular, interviews and surveys but also workshops are popular methods. Companies do however highlight that surveys are not preferred due to often inconclusive output and insufficient stakeholder expertise. The study provides an aggregated overview of the double materiality assessment practices spanning from the context setting over the long and shortlist creation to the engagement with internal experts and stakeholders.

Datapoints: EFRAG found that many companies do not yet integrate the outcomes of their double materiality assessment in their gap analysis, resulting in the inclusion of more data points than required and a dispersed focus. Nearly all companies conducted a datapoint gap analysis using EFRAG’s Implementation Guidance 3, which includes an extensive inventory of required datapoints and their connections with other frameworks and phase-in options. While 75% made use of these phase-ins, only 40% leveraged information materiality. This concept enables companies to prioritize specific information, e.g. individual data points, based on their materiality to comply with the overall disclosure requirement they fall under. EFRAG notes that while this approach has the potential to target efforts on the most needed areas, it is not fully understood by the participants of the study. Meanwhile, only 10% of participants aim to disclose all datapoints, including voluntary ones.

Value Chain: The value chain mapping and analysis underlying both the materiality assessment and the reporting itself continues to be especially challenging. Among the four areas addressed in the study, the value chain is the least developed and the vast majority of companies are subsequently refining their approach. The chosen level of granularity and segmentation of value chain components varies between high-level aggregation, e.g. differentiation between upstream, downstream and own activities, and high segmentation, e.g. noting different stages of production. Particularly in the absence of sector guidance, companies struggle to find a manageable balance that results in valuable insights. A common consideration is also whether the focus will stay on direct business relationships or go beyond. For ESRS compliance, indirect relationships have to be taken into account but organisations face significant difficulties in the data collection. Several participants have opted for a simplified aggregated mapping and use transitional provisions, with possible aims to go beyond Tier 1 relationships in the next reporting cycles. EFRAG provides a 3-step segmented value chain mapping archetype based on observed practices: (1) Value chain mapping, including initial mapping and further refinement, (2) aggregation for clarity and manageability, and (3) selection of value chain components.

ESG reporting organizational approach: The study found an increasing shift towards cross-functional collaboration models for efficient ESRS implementation. While most companies adopt a single-function ownership approach, a significant number are using a joint leadership model. EFRAG notes that for most participants, the ESRS triggered a renewed organizational approach to ESG reporting, with many expecting further shifts in their ESG reporting governance structure. Companies furthermore agreed that CSRD reporting has enhanced cross-departmental collaboration, with typically five or more departments regularly engaged. Agreement exists also on the need for standardization of the ESG reporting processes and additional capabilities and resources. About 90% of companies are implementing internal control techniques similar to those used in financial reporting to ensure accuracy and integrity. 85% highlight the need for IT transformation but limited data providers’ availability and maturity as well as differences in national CSRD transpositions lead to different timetables. About 85% shared the objective to integrate ESG reporting and the result of the Double Materiality Assessment into business processes and decision making. EFRAG lastly provides an overview of key building blocks of observed ESG reporting operating models and highlights possible choices to take into account.

Forward-thinking

EFRAG’s study offers valuable insights into how companies are approaching these new requirements. As more and more groups of companies come into scope and start preparing for ESRS implementation, these findings provide a practical starting point. This learning effect is set to become even stronger as experiences multiply and practices mature. Looking to future reporting cycles, EFRAG’s study of observed practices, its emphasis on continued monitoring and support of ESRS implementation, connects companies and enables collaborative learning. The ESRS framework is a key component of the shift to a more sustainable and transparent business environment, but it is not a simple one. Building on each other's learnings and combining efforts to find efficient strategies for ESRS implementation will be key in the coming years.

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