CCR Responds to the EU Commission’s Published Initiative on the First Set of ESRS

A PDF of the below Comment Letter can be downloaded here »

Mr. Sven Gentner
Head of Unit – Corporate reporting, audit, and credit rating agencies
DG Financial Services
Rue de Spa 2
1000 Brussels

Dear Mr. Gentner,

This letter is submitted by Financial Executives International’s (FEI) Committee on Corporate Reporting (CCR) in response to the EU Commission’s Published Initiative on the European Sustainability Reporting Standards (ESRS) – First Set.

FEI is a leading international organization comprised of members who hold positions as Chief Financial Officers, Chief Accounting Officers, Controllers, Treasurers, and Tax Executives at companies in every major industry. CCR is FEI’s technical committee of approximately 50 Chief Accounting Officers and Corporate Controllers from mostly U.S.-based Fortune 100 and other large public companies, the majority of which have expansive multinational operations and represent more than $13 trillion in market capitalization. CCR reviews and responds to pronouncements, proposed rules and regulations, pending legislation, and other documents issued by domestic and international regulators and organizations such as the U.S. Securities and Exchange Commission (SEC), the U.S. Public Company Accounting Oversight Board (PCAOB), the U.S. Financial Accounting Standards Board (FASB), and the International Accounting Standards Board (IASB).

This letter represents the views of CCR and not necessarily the views of FEI or its members individually.

Executive Summary

As financial statement preparers of large multinational companies, we are dedicated to meeting the information needs of our stakeholders. As such, we appreciate the intent of the Corporate Sustainability Reporting Directive (Directive) and ESRS to provide all stakeholders with consistent, comparable, and reliable information on material sustainability-related impacts, risks, and opportunities including climate-related risks. We acknowledge the growing importance of transparent reporting on these topics and recognize the EU’s commitment to the Paris Agreement.[1] Many CCR companies will be subject to these reporting requirements as early as 2024, with the majority required to comply at least at a subsidiary level by 2025 and almost all member companies expecting to be subject to the requirements by 2028.

We appreciate the efforts of the European Commission (Commission) to reduce the reporting burden and associated costs via changes in the ESRS from April 2022 through June 2023, which included offering additional flexibilities for certain sustainability disclosure guidance, detailing transition periods, and layering in additional materiality considerations. While these accommodations are most welcome, certain proposed disclosure requirements in the ESRS as amended continue to pose significant operability concerns and raise implementation questions.

The Appendix to this letter includes detailed recommendations on the Commission’s proposed rules. A summary of our views and highest priority recommendations are provided below:

Single Framework

Given the evolving international regulatory landscape, CCR companies may ultimately be required to provide disclosures pursuant to multiple sustainability-related disclosure mandates. We believe stakeholders will have the greatest benefit from standardized disclosures addressing sustainability risks and common measurements. We have concerns around the lack of alignment in concepts, terminologies, and requirements across these multinational, mandatory disclosure frameworks. We appreciate and commend the efforts of the Commission with regard to the interoperability of global standards and the changes made from bilateral discussions with the International Sustainability Standards Board (ISSB). We encourage continued efforts to maximize interoperability, as doing so will increase the utility of information for stakeholders by increasing comparability across jurisdictions while decreasing the complexity and compliance costs for preparers.

As the transposition into local law by member states is not required until June 2024, six months after the rules are first effective, it becomes more challenging for companies to adequately prepare ahead of the first effective date. We further suggest the Commission work with each member state to achieve alignment and agreement that countries will not make the requirements more onerous or otherwise add additional considerations to the Directive upon transposition. This is crucial to allow companies transparency in adoption needs and readiness.

Operationality and Illustrative Guidance

We applaud the Commission for establishing an interpretation mechanism to provide formal interpretation of the standards. We expect a vast number of implementation questions from a myriad of companies across the globe will need to be addressed by the European Financial Reporting Advisory Group (EFRAG) and the Commission. We encourage the Commission to ensure this interpretation mechanism is comprised of an authoritative group of professionals that will provide interpretative guidance related to the ESRS that will promote consistency and standardization of disclosure practices. Further, we emphasize the urgent need for interpretations and illustrative guidance in a timely manner, especially for the application of the materiality concepts, ahead of companies shaping their assessments and reporting for the first time.

We appreciate the amendment that all standards, disclosure requirements, and data points within each standard will be subject to materiality assessment, with the exception of the disclosure requirements specified in ESRS 2. We appreciate the Commission’s effort to relieve the burden for undertakings without diminishing the usefulness of the total package of information provided. Despite this relief, materiality as described in the ESRS remains complex and is an area where numerous questions continue to be raised as companies consider materiality assessments. We appreciate and support the Commission’s request that EFRAG publish additional guidance and educational materials, addressing the materiality assessment process and other issues as this assessment is fundamental to determining which disclosures an enterprise will provide under the ESRS. As written, the ESRS suggest all sustainability risks and opportunities can be quantified, but, as we believe this is not the case, additional examples of how to approach this qualitatively would be beneficial. Furthermore, it would be helpful for the Commission to provide clarity around what an appropriate threshold may be or how companies may define a materiality threshold. Given that materiality forms the basis of the disclosures, it is of utmost importance that companies apply the concept consistently.

Additionally, we believe the ten topical ESRS pose significant implementation challenges given the lack of consistent frameworks, definitions, and interpretations related to the topics covered in these standards. For example, there are no generally accepted scenarios, models, or methodologies to assess such financial effects for an undertaking or across the value chain and hence providing meaningful disclosure about the financial effects of such is currently impracticable. We believe mandating compliance without establishing a common understanding of the terms included in these topical ESRS will result in disclosures that are not decision-useful or comparable.


We remain concerned about the ability of entities within the scope of the Directive, including many CCR companies, to meet the requirements outlined in the timelines provided. We encourage the Commission to consider revisiting the proposed effective dates and the proposed phase-in approach to allow additional time for readiness, including delaying compliance with the topical ESRS until a common understanding of the frameworks, interpretations, and definitions of the terms used is further developed to ensure companies provide consistent disclosure. The Directive outlined the effective dates for compliance with the earliest date impacting companies as soon as calendar year 2024. There are obvious challenges with the effort needed to adequately assess the vast nature of the proposed ESRS which are further compounded with the possibility of additional changes being made following the four-week comment period and subsequent scrutiny period by the European Parliament and European Council. It is feasible companies will not have clarity on the final ESRS and associated requirements until shortly prior to the first effective date of January 1, 2024.

We therefore suggest the Commission extend the newly introduced phase-ins available to companies with less than 750 employees to all companies, without consideration of headcount. While we appreciate smaller companies may appear to have resource constraints, the challenges associated with deploying processes and aggregating ESG information are not unique to companies of a lesser scale. Offering the phase-ins to all companies, irrespective of scale, would help relieve the burden of reporting, result in higher quality disclosures, and enhance comparability and perspective amongst all companies.

Another challenge with the timing of adoption comes in the form of assurance requirements included in the Directive, with a significant amount of work that companies globally must undergo to build or enhance processes and design and implement sufficient controls. Further, the introduction of a significant quantity of non-financial disclosures, which are required at varying reporting levels, results in the need for numerous estimates and assumptions. This comes with an increased cost to preparers and further complicates the ability to adequately comply given the aggressive timeline outlined in the Directive.


In the Appendix of this letter, we provide additional comments to consider in your review of the ESRS and look forward to an opportunity to discuss them in greater detail with you. We share our open questions and concerns regarding the timing of adoption, extraterritoriality, complexities arising from conducting the materiality assessment, and ambiguities in determining the nature and extent of specific disclosure requirements within each ESRS.

We thank the Commission in advance for their consideration of our feedback and recommendations and hope the Commission finds our input and feedback on the First Set of ESRS to be helpful as we provide a different perspective as U.S. multinational companies. We stand ready to participate in the outreach process and provide preparer perspectives as appropriate, as we believe the ongoing dialogue makes the process more effective in executing the purpose for the new standards.


Alice L. Jolla 
Chair, Committee on Corporate Reporting
Financial Executives International 

Appendix – Specific ESRS Feedback and Implementation Challenges

ESRS 1 – General Principles

Value Chain Considerations

The value chain definition and application guidance in ESRS 1 indicates that activities of certain industries, such as a financial institution’s lending activities as noted in AR 12(b) of Appendix A, create a direct link to ESG risks for all entities they interact with (i.e., all borrowers for financial institutions). We suggest the Commission consider clarifying the intent of examples with such broad implications or otherwise provide additional examples and illustrative guidance so that such examples are not analogized to other industries and suggest that companies are responsible for the sustainability effects of activities under the sole direction and control of a counterparty. This creates significant interpretative questions and concerns related to all the ESRS that require an assessment of such risks across the value chain which we believe need to be addressed in a thoughtful and comprehensive manner. These concerns include a lack of generally accepted scenarios, models, and methodologies to assess ESG risks across this spectrum of impacts. We strongly recommend the Commission defer all value-chain considerations and impact assessment dimensions of materiality until practical and operational guidance and methodologies are developed, scrutinized in a transparent public due diligence process, and put to the test in an EU sponsored pilot study.

In addition, we suggest the Commission clarify what is expected in terms of value chain targets and metrics, as it is not clear how far up or down the value chain companies must go in relation to those targets and metrics. A company may have several layers or tiers of suppliers and other third parties well beyond those with whom we have direct transactions or influence, and it is not clear whether we should be including all suppliers and other third parties within the value chain or employ a reasonable cut-off methodology. Implementation guidance with practical examples is also needed to understand how these requirements should be applied. Specific examples of where further clarification and interpretive guidance is necessary for entities to consistently apply the ESRS disclosure requirements are provided in our feedback below.

Reporting Period

Paragraph 73 of ESRS 1 states the reporting period of an undertaking’s sustainability statement should be consistent with its financial statements. Some multinational companies may have different reporting periods for the parent and its subsidiary undertakings (e.g., a parent may have a December 31 financial year end while the subsidiary has a November 30 financial year end). We believe sustainability-related information is most useful when aligned with the parent’s reporting period as it enables users to analyze sustainability in the context of financial and other annual information published by the consolidated parent. As such, we suggest the Commission clarify companies can use the parent financial year for the sustainability statement reporting period when the parent and its subsidiary undertakings have different financial years.

Impacts, Risks, and Opportunities

Given the pervasive use of the terms “impacts, risks and opportunities,” we suggest the Commission expand contextually on the definitions of these terms offered in Annex II by providing implementation guidance with respect to identification and reporting of impacts, risks, and opportunities to promote consistent application. It is also not clear what the terms “development,” “financial position,” and “financial performance” in paragraph 49 imply in the context of material sustainability impact on the undertaking. For example, it is not clear whether the requirements to disclose impact on financial position and performance are respectively seeking disclosure of the impact on the reporting entity’s balance sheet and income statement. We suggest the Commission be more explicit in describing the disclosure requirements and consider further illustrative examples.

Business Relationships and Impact Materiality Assessment

It would be helpful to further clarify the “business relationship” nexus that is required for impact materiality reporting on the value chain. At present, the ESRS is quite vague regarding this nexus, leaving a risk of required reporting including non-proximate business relationships over which reporting companies may have very little oversight or influence. We understand the aim of the Directive is to elicit sustainability disclosures from undertakings in the EU and not to impose substantive conduct requirements on such undertakings. However, this underlying principle should be more clearly stated in the ESRS, possibly through a new paragraph in ESRS 1.


Numerous ESRS refer to various EU directives that may not be applicable or relevant to operations or activities of non-EU based entities within the scope of the Directive. As most CCR companies are non-EU domiciled, with often very complex legal entity structures, we expect many non-EU legal entities to be pulled into the scope of the ESRS reporting. For example, a parent entity operating as a holding company may be domiciled in the EU and have numerous non-EU subsidiaries which have no operations, customers, or other activities in the EU. The EU-domiciled parent entity itself may only be meeting the CSRD scoping criteria due to the activities occurring at the non-EU subsidiaries, thus indicating the collective group of the parent and the subsidiaries are in scope for CSRD compliance due to the complex legal entity structure. We are concerned the references to other EU directives could be interpreted as levers to affect the extraterritoriality of such directives beyond the EU’s legal jurisdiction. We ask the Commission to clarify that EU directives are applicable only to transactions, activities, or undertakings subject to EU Law. Without such clarification, it may not be clear whether an entity based outside of the EU doing business with another entity outside of the EU is subject to EU Law by virtue of references within ESRS disclosure requirements.

Verifiability of Information

ESRS 1 outlines the qualitative characteristics of information, including the concept of “verifiability.” Paragraph QC 14 notes, “Verifiability means that various knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.” The difference between "consensus” and “complete agreement" is unclear. Generally, when disclosures are subject to assurance as the disclosures outlined in the ESRS are proposed to be, the practitioner is assessing against specific criteria. This exercise is in effect determining whether the practitioner agrees with the conclusion reached. The application of the rules, while subject to professional judgment, is generally then “agreed upon.” It is unclear how introducing a concept of less-than-complete-agreement would impact the ability to obtain assurance over sustainability disclosures. We suggest the Commission consider revisiting the definition of verifiability as a characteristic of disclosed information with practitioners, as further clarifying examples regarding application of the cited guidance above may result in more consistency in the assurance procedures over such information.

Metric System Measures

The ESRS require measurements using the metric system, which is not used in all jurisdictions. We recommend such disclosure requirements be expanded to include a statement that measures can be based on alternative measurement systems (e.g., cubic feet versus cubic meters). This would be relevant for non-EU parent companies reporting in the U.S. on behalf of all EU subsidiaries.

ESRS 2 – General Disclosures

Scope of Consolidation Matching that of Financial Statements

ESRS 2 paragraph 5(b) contains disclosure requirements related to the basis for preparation of sustainability statements which requires companies to issue “a confirmation that the scope of consolidation is the same as for the financial statement.” This confirmation may be difficult to support as the Directive and related ESRS are currently drafted. When a company elects to utilize transitional provision 1 under Article 48i of the Directive, which permits the company to furnish sustainability information solely for the in-scope undertakings, sustainability information may be aggregated and furnished at a level for which no corresponding financial statement exists, nor is required. Additionally, the ESRS reference the concept of “operational control” in ESRS E1 1-6, which requires disclosure of GHG emissions in accordance with the extent of operational control the undertakings have over certain subsidiaries. This concept of “operational control” does not align with U.S. GAAP or the definition of “control” in IFRS. Consolidation accounting is complicated and requires careful consideration in the application of its principles. The possibility of accounting for sustainability metrics on a basis that differs from consolidation accounting used in financial reporting therefore poses challenges for making the required confirmation in paragraph 5(b). We suggest the Commission remove the concept of “operational control” from the ESRS to remove unnecessary burden and result in sustainability statements that most closely resemble the footprint of the corresponding financial statements. We also suggest the Commission revisit the requirement of a confirmation that the scope of consolidation is the same as for the financial statement and instead consider requiring a disclosure indicating whether the scope of consolidation is the same as for the financial statement, with significant deviations explained.

Lack of Consistent Related Accounting Guidance

ESRS 2 Disclosure Requirement SBM-3 indicates all “material” impacts, risks, and opportunities related to all ESRS be identified and their associated financial effects in the current periods be disclosed quantitatively. This will require the use of company-specific interpretative financial policies at each undertaking that may lead to inconsistent disclosure practice. Also, there are no generally accepted scenarios, models, or methodologies to assess such financial effects for an undertaking or across the value chain and hence providing meaningful disclosure about the financial effects of such is currently impracticable. Without meaningful financial accounting guidance from recognized accounting standard setters, we believe that any such disclosures will be wholly inconsistent from enterprise to enterprise and raise significant concerns about data quality. We suggest the Commission consider working with the IASB, the FASB, and other independent accounting standard setting bodies to establish uniform accounting guidance for the identification and measurement of sustainability-related financial effects.


Future Impairment and Contingent Loss Disclosures

Paragraph 48(d) of ESRS 2 Disclosure Requirement SBM-3 also requires an entity to disclose when there will be a material adjustment to assets or liabilities in the next financial year due to material ESG risks and opportunities. Such forward-looking information depends on many uncertain factors, among which many are beyond the company’s control. Such information will be subject to changes in estimates. Additionally, current accounting standards under IFRS and U.S. GAAP generally require immediate recognition of such matters resulting from performance of an impairment analysis or contingent liability assessment where the financial effect would be negative. We recommend the Commission eliminate this requirement and instead refer to the appropriate financial accounting standards to highlight to entities that asset impairment analyses already required need to consider the effects of material sustainability risks.

Significant ESRS Sectors

ESRS 2 paragraph 40(b) requires revenue to be broken out by significant ESRS sectors and reconciled to IFRS 8 Operating Segments. It is not clear what is meant by the term “significant ESRS sectors,” and whether in defining such term, the requirement would need to be expanded to consider other disclosure regimes (e.g., U.S. GAAP, etc.). We assume this may be in reference to the sectors that will be covered by separate and future ESRS sectoral standards but ask the Commission to clarify the intended requirement to remove any doubt or potential misinterpretation. Furthermore, this requirement appears to require ESRS disclosures by reportable segment and such disclosures would not be feasible where a company is electing transitional provision 1 under Article 48i of the Directive, as a corresponding financial consolidation most likely would not exist. Most concerning is the potential need to provide a breakdown of revenue that does not align with current financial reporting requirements, including the concept of reporting segments. Such a requirement likely does not align with how a company’s chief decision maker(s) views or manages the business. We suggest the Commission define “ESRS sectors” within the text of the standards and consider removing a breakdown of revenue.

Non-IFRS Accounting References

We note paragraph 40(b) of ESRS 2 references IFRS; however, the Directive will also apply to undertakings that are not required to apply IFRS. Therefore, we recommend the references be expanded to include “other equivalent accounting standards.” Without such references, we believe companies outside of the EU may be considered non-compliant with the ESRS due to differences in relevant accounting standards. We suggest the Commission review all references to IFRS or EU Laws to ensure it is clear what entities outside of the EU must consider in applying the ESRS so entities outside of the EU jurisdiction may exercise judgment in determining applicable laws and regulations to be considered when evaluating IFRS and legal references in the ESRS.

Protecting Confidential Business Information

Broadening sustainability disclosures under the ESRS should not come at the expense of compromising company security or confidential information. For example, certain proposed biodiversity disclosures could divulge the exact locations of critical infrastructure, which are highly confidential and, if public, could lead to security risks. As such, we recommend reporting site data in the aggregate, as opposed to listing specific site locations as stated in paragraph 16 of ESRS E4. Similarly, while ESRS 1 provides grounds for an undertaking to omit certain information based on the designation that such information is secret, we suggest the criteria should be expanded to explicitly include information deemed “commercially sensitive or valuable.”

Administrative, Management, and Supervisory Bodies

ESRS 2 paragraph 19 indicates an undertaking shall disclose whether, by whom, and how frequently the “administrative,” “management,” and “supervisory” bodies are informed about material impacts, risks, and opportunities. It is unclear how administrative, management, and supervisory bodies are intended to be distinct in describing those responsible for overseeing sustainability strategy and reporting. We recommend the Commission provide further clarity and examples of what bodies constitute these terms or consider simplifying the reference to these bodies.

ESRS E1 through E5

Anticipated Financial Effects

The updated drafts of the ESRS contain disclosure requirements on the “anticipated financial effects” of environmental sustainability topics. We acknowledge this terminology was amended from “potential financial effects” to better align with the ISSB standards and stress the requirement of forward-looking information in addition to the current financial effects of sustainability matters required under ESRS 2 SBM-3 paragraph 48(d). Despite these updates, it is extremely challenging to determine anticipated financial effects over the prescribed time horizons to be considered, especially without a standardized methodology. There are no commonly used indicators that are generally accepted or available at an international level, which will result in inconsistency of application and result in incomparable disclosures between reporting undertakings, limiting the information’s usefulness. We suggest the Commission provide guidance on determining and calculating anticipated financial impacts to facilitate consistent application and comparable reporting. Further, we suggest the Commission clarify the concepts of “material physical risks” and “material transition risks,” including the materiality framework that should be used to evaluate such risks, the potential financial effects associated with physical risk or transition risk, and the modeling estimation approaches that may be followed.

To reduce the risk of these disclosures unnecessarily exposing companies to litigation and liability when forward-looking sustainability information proves to be inaccurate through no fault of the company, we suggest considering the need for inclusion of a cautionary statement disclaiming the forward-looking nature of the disclosure to align with concepts similar to “safe harbor” as used in U.S. Securities Law.[2] Making such information public could also raise confidentiality issues. Mitigating language should therefore be introduced to allow companies to disclose only qualitative information when disclosing quantitative information is prejudicial to the company.

Resource Allocations

The environmental disclosure requirements seek information on resource allocations to individual sustainability risks (i.e., climate change, pollution, water and marine, and biodiversity). As ecosystems are integrated such that environmental risks inherently cross topical boundaries, the methodology for allocating resources by each sustainability risk is undefined and therefore likely to result in diversity in application, limiting the usefulness of the additional information. Therefore, we suggest the Commission require undertakings to disclose resources allocated to all sustainability efforts collectively, rather than to each individual risk. Further, it is unclear whether the term “resources” is intended to capture human resource costs only or more expansive costs. We suggest the Commission clarify via illustrative guidance what resources should be included in this quantification.

Substances of Concern

We suggest the Commission clarify the terms “substances of concern” and “substances of very high concern,” adding context as to how they are defined and measured. These definitions should be included within the ESRS themselves rather than through references to other EU directives, which some undertakings may not be subject to.

Conclusive Scientific Evidence

ESRS 2 DC-T paragraph 79(g) notes an entity must explain if targets are based on “conclusive scientific evidence.” We are unclear as to the indication as this suggests a high hurdle of scientific evidence may be needed before a majority of a particular scientific community acknowledges such evidence can be considered conclusive or would in certain instances be a matter of judgment and could differ entity by entity and scientific expert by scientific expert. We suggest the term “conclusive” be removed.

Ecological Thresholds

“Ecological thresholds” are referenced in the ESRS and defined in the glossary; however, it is unclear what the term encompasses. We suggest illustrative examples and additional guidance be provided where the phrase is referenced.

ESRS S1 through S4

Collective Bargaining

Subject to materiality assessment, ESRS S1 Disclosure Requirement S1-8 outlines the need to disclose information about collective bargaining agreements where an undertaking has significant employment of at least 50 employees representing at least 10% of its total number of employees. While we appreciate the updated drafts include additional relief and increased thresholds, certain requirements remain too low, including the parameters for including collective bargaining disclosure. Diverse national legislation including differences in definitions, in particular in regard to the concept of social partnership, across the EU and beyond will make fulfilling this requirement in a consistent manner difficult. We suggest the Commission consider removing the requirement to disclose information about collective bargaining agreements.

Negative and Positive Impacts on Key Stakeholders

The ESRS S1 disclosure requirements seek information about targets of the undertaking related to “reducing negative impacts” and “advancing positive impacts” on an entity’s own workforce, value chain workers, affected communities, and consumers. To reduce varied interpretation and application of these requirements, we suggest the Commission provide additional implementation guidance to clarify these concepts, including the time horizon that should be considered for these disclosures. For example, it is not clear to what extent affected communities and consumers include those of companies in the value chain, and if so, what types of targets they may have that could require disclosure.

Interests, Views, and Rights of Own Workforce and Affected Value Chain Workers

The disclosure requirements in paragraph 12 of ESRS S1 and paragraph 9 of ESRS S2 require undertakings to disclose how the interests, views, and rights of people in its own workforce and its value chain workers who can be materially impacted by the undertaking inform its strategy and business model. It is unclear how undertakings should consider these items, particularly as it relates to value chain workers who can be materially impacted by the undertaking, in providing useful and consistent disclosure. This may require a significant undertaking to quantify how value chain workers are impacted and to determine the portion of such impact attributable to the activities of the undertaking. We suggest the Commission provide implementation guidance of how materiality should be considered and how worker interests, views, and rights may impact an undertaking’s strategy and business model.

Remediation of Negative Impacts on Consumers

Paragraph 28 of ESRS S4 requires undertakings to describe processes to remediate negative impacts on consumers and end users. It is not clear to what extent this requirement applies to consumers of companies in the value chain and what methodologies should be used to determine portions of such impacts attributable to the underlying. We suggest the Commission clarify this requirement via practical implementation guidance.


Payment Practices

The requirement in ESRS G1 paragraph 31 to provide information on payment practices is not clear in whether it applies to all payments the enterprise makes to vendors, customers, and other third parties, nor the type of payment information that should be disclosed. We suggest the Commission provide implementation guidance to address and clarify these requirements further.

[1] See the Paris Agreement.

[2] See subsection 27A of Section 102 of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934.