Three things EFRAG’s new guidance tells us, and two it still doesn’t
4 MINUTE READ | BY TOM CARR AND NICK WYVER | 12 JUN 2024
EFRAG have published its finalised set of implementation guidance for Materiality Assessment and Value Chain, alongside finalised Detailed ESRS Datapoints and an updated set of Technical Explanations produced so far.
We’ve paid keen attention, to incorporate the latest guidance into our work with clients on double materiality, but also due to the relevance this new guidance has to our recent white paper, published last month, CSRD SOS: An urgent call to action from CSOs and practitioners. Our paper collated the views of practitioners representing over 30 companies implementing CSRD. We heard a loud and clear call from practitioners for further, more practical guidance from EFRAG, particularly around the double materiality assessment.
For those who don’t want to read through hundreds more pages of EFRAG guidance, we’ve summarised the three key things that drew our attention in the new guidance.
But when we were reviewing the finalised guidance one thing really struck us: there is surprisingly little change from the drafts published for consultation back in December.
“It feels like we’re trying to build the plane while we land it… and meanwhile, I’m not sure the right voices are getting through to EFRAG to make that landing process any smoother.”
Given that CSRD is the number one draw on time and attention for so many sustainability teams, with so much feedback given via consultation, we were surprised how little EFRAG had amended its implementation guidance documents to address these practical concerns. Most updates reflect grammatical amendments identified through internal reviews, rather than the crucial clarifications that we’ve heard practitioners responsible for implementation asking for.
At SB+CO, we continue to call on EFRAG to respond to this demand from corporate sustainability and finance leaders. Without further action, EFRAG continues to risk the ambitions of CSRD getting lost in the over-complexity of implementation.
Three key insights the new guidance tells us
Whilst we think the new guidance still lacks in crucial areas, there are a small number of new additions which do provide valuable steers to sustainability teams. Most changes were niche, but we think the following three areas will matter to most companies:
1. Stakeholder input can be valuable, but should be used in the right way.
We’ve seen and heard about a huge number of different approaches to stakeholder engagement for double materiality, from minimalist tick-box engagements with just a few stakeholders, through to open surveys to the world. To date, the guidance on what good looks like just hasn’t been there.
At SB+CO, we’ve always argued that whilst targeted stakeholder input can provide unique insights, it is very much a case of achieving quality over quantity. We find relatively few stakeholders can engage in a meaningful way with the detail of the subject matter. The new guidance from EFRAG adds weight to this approach. It states that “materiality analysis should be driven as much as possible by objective data and evidence” and suggests that perspectives of affected stakeholders should be used as “a source of supporting evidence”, particularly where objective data doesn’t exist, or where affected stakeholders hold unique or undocumented insights.
Importantly, the guidance also indicates that “not all stakeholder opinions are equally relevant for the materiality analysis”, opening the door to more active weighting to be placed on the perspectives of different stakeholder groups for different sustainability matters.[1]
“I saw that [large global technology company] and [Big Four advisor] had launched a global, open survey to ask about which topics the general public thought were material to them. How can that approach possibly lead them to sensible, credible conclusions on materiality?”
2. Managing sustainability matters that may be material for only one subsidiary within a group.
Many groups with operations spanning multiple countries or regions have been grappling with how to approach materiality and disclosure in a way that allows for disaggregation based on the different impacts, risks and opportunities facing the business across different markets.
EFRAG has expanded its guidance on this area. Its recommendation is for groups with multiple subsidiaries operating in different contexts to take a hybrid approach, whereby they assess the majority of IROs at the group level. Through the process, they should flag matters which could be highly material to individual subsidiaries, but lost in aggregation at the group level. For these matters, the company can then undertake what is in essence a mini-double materiality assessment for the topic in the context of the individual subsidiary only. These should still use the same thresholds, but can then be disclosed for the individual subsidiary only, rather than creating unnecessary data collection and disclosure burden for the entire group.
Whilst at face value this sounds like more work, we think this is a smart way to manage the aggregation issue that many companies are facing, and will save efforts in the longer term – while still driving transparency on topics that are particularly important in certain markets.
3. Disclosing metrics (and aligning them to financial periods)
It’s always important to remember that CSRD is a disclosure regulation. Unlike CSDDD which will place a duty of action on directors to manage environmental and social impacts in the value chain, CSRD only requires companies to disclose the current state of policies, action plans and metrics. The new explanation document does, however, provide two important clarifications on the disclosure of metrics, which CSRD also requires.
Firstly, EFRAG states that whilst it is possible for companies to disclose that policies and action plans have yet to be developed, they must disclose the required metrics for all material topics, even if this requires substantial use of estimations in absence of good data.
Second, EFRAG re-emphasises the importance that all metrics being disclosed must align with the financial reporting year. For many companies who currently disclose ESG data for different reporting periods to financial statements (e.g. calendar year vs financial year) this is likely to create significant headaches. Again, EFRAG proposes that companies will have to use “consistent assumptions for all metrics… to properly depict the effective usage during the [financial year]”[2].
Two things the new guidance still doesn’t answer
These points provide some helpful clarifications, and food for thought for any companies working through the implications of the CSRD process. That said, based on what we heard from speaking to over 30 sustainability practitioners, we think there remain key areas of guidance still missing from EFRAG:
1. The guidance doesn’t provide any further clarity on setting materiality thresholds.
One of the topics practitioners we’ve spoken to were most frustrated by was the lack of guidance on setting thresholds, particularly for impact materiality. The new set of guidance and explanations from EFRAG don’t add anything further on this key issue of threshold setting, caveating that the “ESRS do not set behaviour requirements.”
“There are hundreds and hundreds of pages of EFRAG guidance but nothing concrete on how to set materiality thresholds.”
This leaves companies in the lurch, and – we believe – is putting the objectives of CSRD at risk. Based on what we’re hearing, this lack of guidance on threshold setting will lead to some confounding results from first year of mandated CSRD-aligned reporting. Companies in the same sector, operating similar business models and in similar regions are likely to disclose a diverse range of perspectives on materiality, all due to significant variations in thresholds selected. This is set to create more confusion rather than consistency for report users.
2. No further clarification has been provided on expectations of the assurance process.
In our CSRD SOS paper, practitioners raised that the path to assurance isn’t clear, and that many felt the big four and legal firms were making everything too big and too complex, often for their own gain.
“Assurance guidance hasn’t come out, so quite how anyone can feel comfortable I don’t know…”
The finalised version of the implementation guidance hasn’t added any further detail on what needs to be assured, the type of documentation that CSRD preparers should maintain, or the expectation on the assurance provider. Within EFRAG’s explanations document, in response to a question on documentation requirements, EFRAG states, “the ESRS do not prescribe specific documentation. However, it is reasonable to expect that a certain level of documentation will need to be produced.”[3]
For the benefit of both CSRD preparers, and the assurance providers themselves, the lack of guidance on this topic marks a real absence. Providing an indication of the type of documentation required for the assurance process should be a priority.
SB+CO’s approach to double materiality
SB+CO’s heritage is in supporting corporate clients on their strategic sustainability challenges. We bring this experience to how we help companies responding to CSRD, primarily through a deep expertise in double materiality. We bring the flexibility, simplicity and rigour needed to conduct a process that meets compliance whilst driving meaningful insight for strategy and how you engage stakeholders.
We recently published a whitepaper, CSRD SOS: An urgent call to action from CSOs and practitioners, setting out seven fault lines and six course corrections based on engagement with over 30 sustainability leaders from large corporates at various stages of grappling with CSRD.
[1] EFRAG Technical explanations - May 2024. Question ID 185 – Objective evidence and stakeholders’ opinion. p.20.
[2] EFRAG Technical explanations - May 2024. Question ID 286 – Financial year different from calendar year. p.29.
[3] EFRAG Technical explanations - May 2024. Question ID 517 – Disclosure of thresholds. p.51.
Tom Carr
Sustainability Strategy Director
Nick Wyver
Consultancy Director
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