CSRD Update: ESRS E1 – How does EFRAG propose to streamline climate reporting for non-EU entities?

On 7 November 2024, EFRAG (the European Financial Reporting Advisory Group) – the body responsible for developing the sustainability standards that underpin Corporate Sustainability Reporting Directive ("CSRD") – published its first working draft of the sustainability reporting standards for non-EU parent entities (required under Article 40a of the Accounting Directive) ("NESRS").¹ Since then, further drafts were released following EFRAG’s working meeting from 18 November (available here).

As we explained in our introductory blog on the new draft NESRS, while NESRS introduces the option for companies to exclude information about the impacts of sales of goods or provision of services to natural and legal persons outside the EU, this does not apply to NESRS E1 – the Climate Change topical standard which much be reported against for the entire global group.

As all in-scope non-EU parent companies will have to consider their global impacts under E1, how has EFRAG proposed to streamline climate reporting under this standard?

What's the Same?

(1) Disclosure requirements

NESRS E1 retains almost all of ESRS' E1 disclosure requirements, including E1-2 Policies related to climate change mitigation and adaptation, E1-5 Energy consumption and mix, and E1-7 GHG removals and GHG mitigation projects financed through carbon credits.

(2) Technical detail

While it was anticipated that NESRS would be a less onerous standard for non-EU companies, the current draft retains a notable level of granular and technical detail, requiring a robust level of disclosure by companies.

Disclosure requirements E1-4 through to E1-8 are identical to ESRS (with the exception of amending the name of the standards). Likewise, the technical calculation guidance for disclosure requirements  E1-4 - Targets related to climate change mitigation and adaptation through to E1-8 – Internal carbon pricing are completely unamended.

(3) Reporting perimeter

The general exemption provided under paragraph 18A of NESRS 1 to exclude information about the impacts of sales of goods or provision of services to natural and legal persons outside the EU does not apply to NESRS E1 (see our introductory blog for more information on this exclusion).

Therefore, it will not be possible for companies to limit climate reporting under E1 to  information on activities within the EU only and the reporting will need to cover the entirety of the report issuer’s global footprints.  

What's different?

(1) Narrowing scope to impact materiality only

As we saw in NESRS 1 and 2, the NESRS focus on impact materiality and do not require reporting on financial materiality. Non-EU parent companies will therefore not be required to carry out a financial materiality assessment or make financial or finance-related disclosures.

In the context of climate reporting, this means that a non-EU parent undertaking reporting under NESRS E1 will still be required to consider the impacts of its group on people and planet in relation to climate change, in particular in relation to GHG emissions. However, there are some other notable simplifications against the full ESRS, notably:

• Disclosure Requirements: the disclosure requirement E1-9 – which relates to 'anticipated financial effects' has been deleted, as has the ESRS 2 SBM-3 minimum requirement to report on material impacts, risks and opportunities and their interaction with strategy and business model.
• Financial materiality Application Requirements: any application requirements which relate to financial or finance-related disclosures ave been removed, such as all references to CapEx and OpEx.

(2) Connectivity Indicators

A new disclosure requirement has been introduced under E1-9A, titled 'Connectivity indicators'. This single disclosure requirement states that the undertaking shall disclose "the monetary amount and proportion (percentage) of the undertaking’s net revenue from customers operating in coal, oil and gas-related activities".²

The authors would like to thank Sophie Pamplin for her contribution.

1.    See NESRS 1 and NESRS 2.

2.    NESRS E1, ¶70A.