Everything You Need To Know About Sustainability Reporting Standards Draft By EFRAG

ESG reporting involves disclosing a company’s performance in terms of environmental-related, social-related, and corporate governance-related matters. Such reporting provides investors and stakeholders with an overview of the impact that a business draws on the three realms and helps them understand how sustainability is delivered. Investors and companies alike are now more conscious of the adverse effects of climate change on economies. Consequently, ESG reporting considers both the risk a company faces from the environment and society in which it operates and the possible risk to the external environment caused by the company’s activities.

So far this year, several developments have taken place in the ESG space. They are…

US Securities and Exchange Commission Proposal For Climate-Related Disclosure

On March 21, 2022, the US Securities and Exchange Commission announced a proposal for mandatory climate-related disclosures by public companies. The proposal includes disclosures on companies’ direct and indirect greenhouse gas emissions, classified as Scope 1 and Scope 2 emissions, and emissions by companies’ partners and suppliers – Scope 3 emissions. Public comments on the proposal were initially due up until May 20, 2022. However, the SEC has extended the public comment period on the proposed rulemaking until June 17, 2022.

International Sustainability Standards Board (ISSB) Proposed Disclosure Requirements

On March 31, 2022, the ISSB – which was set up to form a global baseline set of sustainability standards – launched a consultation on two proposed standards that set out general sustainability-related and climate-related disclosure requirements. The IFRS Foundation said the proposals build upon Task Force on Climate-Related Financial Disclosures (TCFD) recommendations and include industry-specific disclosure requirements from the SASB Standards. The ISSB’s consultation over the two proposals ends on July 29, 2022.

European Financial Reporting Advisory Group (EFRAG) Sustainability Standards Draft

On April 29, 2022, the European Financial Reporting Advisory Group (EFRAG) launched a public consultation on the draft European Sustainability Reporting Standards (ESRS). The ESRS set out sustainability-related reporting requirements under the upcoming Corporate Sustainable Reporting Directive (CSRD). The public consultation period ends on August 8, 2022.

This write-up focuses on EFRAG’s sustainability reporting standards draft.

What is EFRAG?

Established in 2001, the European Financial Reporting Advisory Group (EFRAG) is a private association that was formed to work for the public interest. For those unfamiliar with EFRAG, it is an organization that:

  • Gives the European Commission technical advice about how international accounting standards (IAS) can be used in Europe
  • Participates in IASB’s standard-setting
  • Sets processes to make sure there is coordination within the EU region regarding the IAS.

Recently, EFRAG came under the spotlight for developing ESG disclosure guidelines or standards for all European and non-European companies doing business in the EU region.

These guidelines are intended to be used in conjunction with the new Corporate Sustainability Reporting Directive (CSRD). The European Commission proposed amendments to enhance the nature and scope of sustainability reporting in the EU region for the future. The CSRD had replaced the previously used Non-Financial Reporting Directive (NFRD) and significantly enhanced the existing NFRD norms. In contrast with the NFRD, CSRD encompassed a much wider range of non-financial information for reporting by the companies.

Therefore, we can say that EFRAG is a refined version of sustainability standards that could be used by companies for reporting. The new policies imbibed in the EFRAG are stricter and apply to a larger number of entities. The NFRD applied to only 11,000 businesses. According to the estimates, around 49,000 businesses will now be subjected to the new rule

The new requirements apply to the businesses that meet at least two of the three below mentioned criteria:

  • €40 million in net turnover
  • €20 million in assets
  • 250 or more EU employees

The EFRAG’s first set of European Sustainability Reporting Standards(ESRS) Draft or Exposure Draft (ED) was released on 29 April 2022.

The EFRAG Proposal

The EFRAG proposal includes 13 new standards that will help shape the new CSRD. They cover standards based on business strategy, governance, materiality requirements, and ESG issues. Here’s a list:

1 General Principles ESRS 1
2 Cross-cutting Standards ESRS 2
3 Climate Change ESRS E1
4 Pollution ESRS E2
5 Water and Marine Resources ESRS E3
6 Biodiversity and Ecosystems ESRS E4
7 Resource Use and Circular Economy ESRS E5
8 Company Workforce ESRS S1
9 Workers In Companies’ Value Chains ESRS S2
10 Affected Communities ESRS S3
11 Consumers and End-Users ESRS S4
12 Governance, Risk, Management, and Internal Controls ESRS G1
13 Business Conduct ESRS G2

Each draft includes precise disclosure requirements, policies, targets, action plans, resources, performance measurements, and strategies for the companies to define the disclosures.

EFRAG seeks feedback and comments on all parts of the ESRS Draft. The ESRS draft is open for 100 days from the release. This public consultation phase continues till 8 August 2022.

The 7 Key Features Of The Exposure Draft

The ESRS draft’s architecture and content have been framed and derived by the CSRD. We here demonstrate how these have influenced the standard-setting process of EFRAG:

  • Exposure Drafts may need to be modified to conform with the final CSRD requirements – Any changes to the final CSRD made during EFRAG’s public consultation phase will be included in the final draft standards.
  • Exposure Drafts incorporate existing European legislation and initiatives – The ESRS draft adapts its structure from the already existing regulations in Europe. Exposure drafts include Sustainable Finance Disclosure Regulation (SFDR) Principal Adverse Impact metrics (PAI KPIs), Benchmark Regulation, Greenhouse Gas (GHG) Allowance Directive, Eco-Management and Audit Scheme (EMAS) regulation, and European Commission recommendation on the life cycle of products and services impacting the environment.

EDs even include the recently released Corporate Sustainability Due Diligence Directive (CSDDD) providing an overview of the business through ESRS 1 and ESRS 2. Thus, inculcating transparency in the business environment.

Exposure Drafts integrate European and international standards for sustainability reporting – This relates to international standards and frameworks for sustainability reporting being taken into consideration while setting standards for the exposure drafts. The Project Task Force on European sustainability reporting standards (PTF-ESRS) took into account all lessons learned through the implementation of current European legislation, NFRD, related guidelines, and best practices in the sustainability domain.

PTF-ESRS inked agreements with Global Reporting Initiative (GRI), Shift, and the world’s business reporting network (WICI). They provided inputs and suggestions to aid the drafting process and ensured optimal integration of impact-related information, human-rights principles, and intangible-related sustainability information.

PTF-ESRS even aligned the exposure drafts with the new releases of the IFRS Foundation’s Technical Readiness Working Group (TRWG) and International Sustainability Standards Board (ISSB) and with the TCFD framework. Experts from Task-force on Nature-related Financial Disclosures (TNFD) shared insights on biodiversity-related disclosures.

Exposure Drafts’ overall architecture is intended to guarantee that sustainability information is reported clearly and concisely – The exposure draft’s architecture is intended to:

  1. Organize reporting as required by the CSRD
  2. Promote maximum comparability across sectors
  3. Easy navigation through the reported disclosures

For this, three categories of standards have been defined-

  1. Cross-Cutting Standards: They set disclosure requirements relating to sustainability impacts, risks, and opportunities that are deemed to be material for all undertakings related to “company-wide” business strategy and governance.
  2. Topical (sector-agnostic) standards: They set disclosure requirements relating to sustainability impacts, risks, and opportunities that are deemed to be material for all undertakings, regardless of the sectors they operate in.
  3. Sector-specific standards: They set disclosure requirements relating to sustainability impacts, risks, and opportunities that are deemed to be material for all undertakings operating in a given sector. (These will be released at a later stage)

Exposure Drafts address sustainability matters as per the CSRD (Article 19b) – Article 19b of the CSRD proposal enlists sustainability subject matters that need to be covered by the ESRS. The ESRS framework aims to organize the standards and reduce any chance of duplication or confusion while reporting the disclosures as listed. This covers all topics corresponding to environment-related matters, social-related matters, and governance-related matters.

Exposure Drafts are the first step toward a more accurate representation of sustainability performance – The exposure drafts follow a phased approach and at this stage, they do not include SME-proportionate and sector-specific standards. These standards are being developed and will be made available for public consultation separately.

European Commission will be reviewing the adopted ESRS every 3 years, ensuring that the ESRS stays relevant and aligned with the sustainability developments in Europe and around the world.

The public consultation will assist in fine-tuning relevance and comparability, as well as in determining the priority of ESRS implementation or phasing-in options – Inviting public consultation for framing the final disclosure requirements for EFRAG’s exposure drafts will improve quality and guarantee the reliability of sustainability information published by the issuers. This provides a fair comparing ground and hence boosts transparency in the business environment.

Important Concepts Introduced

The draft standards introduce two major concepts for businesses:

Double Materiality

EFRAG’s exposure draft urges companies to disclose sustainability matters using the double materiality principle. In this, companies are required to report how sustainability matters impact their performance as well as their impact on sustainability matters.

Value Chain Sustainability
EFRAG’s exposure draft now requires companies to disclose sustainability-related factors all along the value chain- including suppliers, transportation, financial investments, and even working conditions for workers, etc.

Links To The Online Survey

For Sections 1 and 2 of Public Consultation – Click here
For Section 3 of Public Consultation – Click here

Towards The Future

The digitization of sustainability reporting encourages the use of XBRL (eXtensible Business Reporting Language). XBRL helps in analyzing and comparing the disclosures reported by the companies. EFRAG with its exposure drafts is here to support the revolution of aligning the European companies with the globally accepted sustainability reporting standards and hence, leaves no gap for confusion.

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