GRI ESRS-Professional Exam Questions

The Corporate Sustainability Reporting Directive (CSRD) replaced the Non-Financial Reporting Directive (NFRD) to address its limitations in scope and reporting requirements. Below are the explanations for each option:

A . False -- The NFRD did not require all companies in the EU to include a non-financial statement. Instead, it applied only to large public-interest entities with 500 or more employees.

B . True -- The NFRD applied to large public-interest entities, including listed companies, banks, and insurance firms with more than 500 employees.

C . False -- The NFRD did not mandate external assurance for sustainability information. The CSRD introduced mandatory assurance at the EU level.

D . False -- The CSRD did not replace the NFRD; rather, it expanded and strengthened reporting requirements. The NFRD was replaced by the CSRD, but not the other way around.

E . True -- The CSRD was introduced to improve the scope and depth of sustainability reporting compared to the NFRD. It expanded the number of entities required to report, standardized disclosures via ESRS, and introduced third-party assurance requirements.

Key Differences Between CSRD and NFRD

Feature

NFRD (Old Directive)

CSRD (New Directive)

Scope

Large public-interest entities (500+ employees)

All large companies + listed SMEs

Assurance

Not required

Mandatory external assurance

Disclosure Requirements

Limited sustainability disclosures

Comprehensive ESRS-based reporting

Reporting Standards

No standardized framework

ESRS-based mandatory framework

Application Date

In force since 2018

Applies from 2024 onwards

Official Reference:

CSRD Directive (EU) 2022/2464 -- Assurance & Reporting Provisions.

ESRS Compilation Explanations January - November 2024.

The European Sustainability Reporting Standards (ESRS) categorize stakeholders into two main groups:

Affected Stakeholders:

These are individuals or groups whose interests are affected (positively or negatively) by the undertaking's activities and business relationships across its value chain.

Examples include workers (own workforce and those in the value chain), affected communities, consumers, and end-users.

The identification of affected stakeholders plays a crucial role in an organization's sustainability due diligence and materiality assessment processes.

Users of Sustainability Statements:

These are primary users of sustainability disclosures, including investors, lenders, and other creditors.

Additional users include business partners, trade unions, civil society organizations, non-governmental organizations (NGOs), governments, analysts, and academics.

The ESRS framework emphasizes the importance of engagement with affected stakeholders as part of an undertaking's due diligence and materiality assessment process, ensuring that material impacts, risks, and opportunities are adequately identified and reported.

Official Reference:

Commission Delegated Regulation (EU) 2023/2772, ESRS 1, Section 3.1 - Defines the two main groups of stakeholders.

ESRS 2 SBM-2 (Interests and Views of Stakeholders) - Covers how affected stakeholders' views inform an undertaking's strategy.

EFRAG Guidance on Stakeholder Engagement and Double Materiality - Reinforces the role of affected stakeholders in sustainability assessments.

The ESRS (European Sustainability Reporting Standards) framework consists of three primary categories of standards:

ESRS 1 (General Requirements):

ESRS 1 sets out the fundamental principles and requirements for sustainability reporting.

It provides an overview of the structure and drafting conventions of the ESRS framework, defining the categories of ESRS standards: cross-cutting, topical, and sector-specific.

It also establishes the double materiality principle as the basis for sustainability disclosures.

ESRS 2 (General Disclosures):

ESRS 2 outlines the core disclosure requirements applicable to all sustainability topics, ensuring comparability and completeness.

It includes general governance, strategy, impact, risk, and opportunity management disclosures applicable to all sustainability topics.

These disclosure requirements apply to all undertakings regardless of the specific sustainability topics being reported.

Topical Standards:

The ESRS framework includes ten topical standards covering the three key dimensions of sustainability:

Environmental (E): ESRS E1 (Climate Change), ESRS E2 (Pollution), ESRS E3 (Water & Marine Resources), ESRS E4 (Biodiversity & Ecosystems), and ESRS E5 (Resource Use & Circular Economy).

Social (S): ESRS S1 (Own Workforce), ESRS S2 (Workers in the Value Chain), ESRS S3 (Affected Communities), and ESRS S4 (Consumers & End-users).

Governance (G): ESRS G1 (Business Conduct).

These standards provide specific requirements on sustainability matters, complementing the general disclosure requirements in ESRS 2.

Sector-Specific Standards:

Sector-specific ESRS are currently under development.

These will address sustainability matters specific to different industries, ensuring that sectoral nuances are properly considered.

They aim to fill gaps not sufficiently covered by the topical standards by defining industry-specific impacts, risks, and opportunities.

Why is C. ESRS 1; ESRS 2; topical standards; sector-specific standards the correct answer?

ESRS 1 (General Requirements) comes first, setting the foundation.

ESRS 2 (General Disclosures) follows, providing cross-cutting disclosure requirements.

Topical standards are next, covering specific sustainability topics.

Sector-specific standards are the final category, though they are still in development.

Thus, the correct order aligns with the official structure of the ESRS framework as mandated in Commission Delegated Regulation (EU) 2023/2772.

Official Commission Delegated Regulation (EU) 2023/2772, various EFRAG guidance documents, and CSRD-related references:

Commission Delegated Regulation (EU) 2023/2772, Annex I: Structure of the ESRS framework.

EFRAG Compilation of Explanations (January - November 2024): Explanation of ESRS categories.

EFRAG Mapping of Sustainability Matters to Topical Disclosures (Q&A ID 177): Confirmation of ESRS 1, ESRS 2, and the ten topical standards.

Step A in the double materiality assessment process is the initial stage where an organization establishes a foundational understanding of its business context, activities, and stakeholder relationships. This step is critical in identifying how the entity interacts with environmental, social, and governance (ESG) matters and lays the groundwork for further impact and financial materiality assessments.

The double materiality concept in the ESRS framework requires organizations to evaluate both:

Impact materiality -- How an organization's activities impact people and the environment.

Financial materiality -- How sustainability matters influence the organization's financial position, performance, and cash flows.

Key Aspects of Step A in Double Materiality Assessment:

Identifying the business environment: Understanding industry-specific sustainability challenges, regulatory requirements, and stakeholder expectations.

Recognizing affected stakeholders: Engaging internal and external stakeholders to determine which sustainability matters are relevant.

Defining dependencies and risks: Evaluating the organization's dependencies on natural, social, and human capital, and how these can influence business outcomes.

Understanding sector and geographical relevance: Assessing which sustainability issues are most significant based on where the company operates.

Step A does not yet involve selecting specific disclosure requirements (Step B) or conducting a financial materiality assessment (Step C). Instead, it provides the contextual framework necessary for subsequent steps in the materiality process.

Official Reference:

Commission Delegated Regulation (EU) 2023/2772, ESRS 1, Section 3.1 -- Defines stakeholders' role in materiality assessment.

EFRAG Compilation Explanations January - November 2024 -- Provides guidance on applying double materiality and the importance of Step A.

EFRAG IG 1 Materiality Assessment, Chapter 2.2 -- Outlines Step A as the process of understanding business activities, stakeholders, and sustainability context.

Thus, the correct answer is C. Understand the organization's context, activities, and stakeholders.

Nature is indeed recognized as a 'silent stakeholder' in the European Sustainability Reporting Standards (ESRS). This term implies that, although nature cannot actively voice its concerns, it remains a critical component of sustainability reporting due to its fundamental role in sustaining life and economic activity. ESRS emphasizes that organizations must consider their impacts on nature, ecosystems, and biodiversity as part of their sustainability disclosures.

This recognition aligns with the concept of double materiality embedded in the ESRS framework, which considers both the financial impact on an organization and the organization's impact on environmental and social matters. The ESRS explicitly integrates biodiversity and ecosystems (ESRS E4) as a key topic, reflecting the need to account for the effects of business activities on nature, even if nature itself cannot actively advocate for protection.

The silent stakeholder concept reinforces the duty of care that organizations hold in assessing and mitigating their impacts on biodiversity, land use, pollution, and natural resources. This aligns with the United Nations Sustainable Development Goals (SDGs) and the EU Biodiversity Strategy for 2030, both of which emphasize the protection and restoration of natural ecosystems.

Official Reference:

Commission Delegated Regulation (EU) 2023/2772 of 31 July 2023 (ESRS E4 - Biodiversity and Ecosystems).

EFRAG Guidance on Stakeholder Engagement -- Highlights nature as an affected stakeholder in sustainability matters.

EU Biodiversity Strategy for 2030 -- Emphasizes that economic activities must integrate ecosystem preservation and restoration.

This confirms that the statement is true under ESRS standards.