The European Financial Advisory Reporting Group (EFRAG) has launched a consultation on its proposed European Sustainability Reporting Standards (ESRS) exposure drafts (ED).
The standards will form the cornerstone of the EU's Corporate Sustainability Reporting Directive (CSRD), which will replace the Non-Financial Reporting Directive (NFRD) and will significantly expand its scope.
The EDs are made of two cross-cutting standards covering general provisions applying to sustainability reporting under the CSRD, and the sustainability disclosure requirements that relate to how an undertaking complies with ESRS.
Other EDs for consultations are 11 standards, two covering governance issues, four covering social matters, and five covering environmental issues.
The consultation runs until 8 August 2022, and as the cliché goes only time will tell what will come from it. Yet, there are a number of topics that are bound to emerge as the discussion unfolds: the reporting burden, lexicon and 'double materiality'.
The reporting burden
Unlike the International Sustainability Standards Board (ISSB), EFRAG has decided from the outset to focus its standards-setting efforts beyond climate, and has released a set of 13 standards covering a number of ESG issues.
This was a source of discord even before EFRAG released its draft standards. On 6 April, AFEP, the French association of large companies, and Deutsches Aktieninstitüt, the association of German listed companies, wrote to EU Commissioner Mairead McGuinness warning that the complexity of EU sustainability reporting standards could undermine their effectiveness.
"The proposals as they stand are overly complex, too extensive and lack prioritisation," they wrote.
Olivier Boutellis-Taft, chief executive of Accountancy Europe, shared their concerns and told Corporate Disclosures: "I start being concerned on the standardization work where we seem to put perfection over practicality and effectiveness.
"We seem to be seeking exhaustivity and perfection, which would have been great 20 years ago, when we still had time to implement [standards] gradually.
"But the latest IPCC report tells us we now only have three years to change the world, or Earth will be hell. So if that is what we want, the only thing that matters is not academic perfection. The one thing that matters is to measure how companies are seriously cutting their carbon footprint and changing their business model to do so."
But Richard Howitt, former MEP who was the rapporteur for the NFRD before being CEO of the International Integrated Reporting Council, disagrees.
"I do like the fact that [EFRAG] are looking across the board not to climate first, they're anticipating all of the ESG issues that impact the company," he told Corporate Disclosures. "That's essential, all these issues are connected, I've always argued for that."
Peter Paul Van De Wijs, chief external affairs officer at the Global Reporting Initiative, agrees with this analysis.
"Firstly, climate should not be the only topic to be discussed," he said to Corporate Disclosures. "It's unfair to blame EFRAG for that, that's a political decision by the European Commission, which is laid out in the draft CSRD that is going under trialogue at the moment.
"In my view, to say 'climate first, the rest later' is wrong," he continued, "because a lot of these topics are connected, there are social implications of climate change that definitely needs to be addressed as well."
Accountants become wordsmiths, not just number-crunchers
"Both for preparers and users of sustainability reports it is essential that EU standards are aligned with internationally-recognised standards," the AFEP and Deutsches Aktieninstitüt wrote in their letter.
This is one area where more work is needed, Van De Wijs believes. "There is no need to reinvent the wheel, and we can use disclosures that already exist and terminologies that already exist, and align [them] as much as possible."
But for him this is all a natural process, "and we shouldn't forget that these standards are just exposure drafts", and there will be work done on alignment in future.
Others, however, are less optimistic.
"If you use terminologies in different ways, and you structure things in a different way, it doesn't help to assess alignment," one stakeholder said. "Even when there is an intention to be aligned, if you start using a different word to talk about the same thing, or use the same word to talk about something else, it creates a confusion."
The day before it published its EDs, Christophe Toepfer, a member of the EFRAG's project task force on preparatory work for the elaboration of possible EU non-financial reporting standards, presented the ESRS ED covering climate change to the EFRAG's sustainability reporting board.
He argued that the use of different terminology was often done "for good reasons".
"I understand why you would say that," one stakeholder replied, "but it would be beneficial that you start thinking on aligning the terminology going forward."
Double materiality
EFRAG standards cover companies' financial resilience and the impact of their activity on the environment and society - called 'double-materiality'.
This was mandated by the EU through the CSRD, and is an area that will be welcomed by stakeholders who have been quick to pressure the ISSB to follow a similar path.
The ISSB had originally dismissed the idea of working towards a set of standards with a double-materiality approach, but since backtracked somewhat, by referring to 'dynamic materiality' in their own standards, and signing a MoU with the GRI.
To be continued...
The consultation on the EFRAG standards closes on 8 August. By then we will all know more about all of the themes mentioned above, and have seen the full extent of praises - and criticisms - addressed to EFRAG.
