Europe

EU Sustainability Reporting Standards Expected Q3 2022

Commission to review standards every three years to ensure collaborative progress on international stage.

European Sustainability Reporting Standards (ESRSs) are due to be finalised by October next year, according to a timeline published by the European Financial Reporting Advisory Group (EFRAG) as part of a new consultation.

The standards will be used to measure the social and environmental impacts of corporates in scope of the Corporate Sustainability Reporting Directive (CSRD), a proposal for which was announced in April, and will help to provide asset owners with decision-useful information for their sustainable investment strategies.

Open for feedback until 15 September, the consultation outlines EFRAG’s proposed updates to its due diligence processes and its timeline for the implementation of the ESRSs.

When CSRD is introduced, up to 50,000 European companies will be required to provide a non-financial statement on a series of ESG-related factors, in compliance with the Taxonomy Regulation. The relevant draft delegated act on disclosures under the regulation is still subject to change.

CSRD is expected to apply from January 2024, with corporates reporting on their 2023 activities. As such, it’s important that the ESRSs are in place first.

EFRAG’s proposed standards under CSRD will “operate in parallel with the legislative process” undertaken by the Commission, ensuring that corporates are disclosing the relevant ESG-related information needed by asset managers who, in turn, will be complying with the Sustainable Finance Disclosure Regulation (SFDR), the EFRAG consultation said.

The ESRSs are currently being developed by EFRAG’s Project Task Force while EFRAG’s main body restructures its governance framework.

A second set of ESRSs will be finalised the following year – expected in October, 2023 – which are designed to supply similar information that’s more sector-specific and proportionate for SMEs that don’t fall under CSRD disclosure requirements.

EFRAG has committed to engaging with stakeholders throughout the development process to ensure stakeholders have the opportunity to outline how sustainability reporting standards may affect them.

“A robust yet agile and adaptable due process is necessary to meet urgent standard-setting needs within a rapidly moving landscape,” the report noted, adding that EFRAG is still in the process of adapting its governance structure in order to ensure the body is best-placed to handle the formation and management of ESRSs.

This follows on from the preparatory report published by EFRAG’s Project Task Force in March, which made a number of recommendations as to what the first and second sets of priority standards should consist of and address.

The two sets of standards will be reviewed by the European Commission every three years, in order to ensure the European approach remains in step with other international standards, such as the work of global accounting body International Financial Reporting Standard (IFRS) Foundation.

The IFRS Foundation has proposed the implementation of an International Sustainability Standards Board (ISSB) and is currently seeking nominations for the roles of Chair and Vice-Chair until 30 June, 2021.

However, EFRAG and the IFRS Foundation are taking different approaches in the formation of international sustainability reporting standard frameworks. EFRAG has prioritised the incorporation of double materiality within the ESRS framework, rather than focusing on the impacts social and environmental factors may have on enterprise value.

The latter approach is favoured by the Foundation, although experts have warned that a global sustainability standard that focuses more on value than double materiality risks doing more harm than good.

Prior to the publication of the two sets of sustainability reporting standards, EFRAG will provide its technical advice to the Commission “in the form of fully prepared draft standards and/or draft amendments to ESRS, complete with their bases for conclusions and impact analyses (including cost-benefit analysis and impacts on sustainability matters”, according to the public consultation paper.

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