Calendar An icon of a desk calendar. Cancel An icon of a circle with a diagonal line across. Caret An icon of a block arrow pointing to the right. Email An icon of a paper envelope. Facebook An icon of the Facebook "f" mark. Google An icon of the Google "G" mark. Linked In An icon of the Linked In "in" mark. Logout An icon representing logout. Profile An icon that resembles human head and shoulders. Telephone An icon of a traditional telephone receiver. Tick An icon of a tick mark. Is Public An icon of a human eye and eyelashes. Is Not Public An icon of a human eye and eyelashes with a diagonal line through it. Pause Icon A two-lined pause icon for stopping interactions. Quote Mark A opening quote mark. Quote Mark A closing quote mark. Arrow An icon of an arrow. Folder An icon of a paper folder. Breaking An icon of an exclamation mark on a circular background. Camera An icon of a digital camera. Caret An icon of a caret arrow. Clock An icon of a clock face. Close An icon of the an X shape. Close Icon An icon used to represent where to interact to collapse or dismiss a component Comment An icon of a speech bubble. Comments An icon of a speech bubble, denoting user comments. Ellipsis An icon of 3 horizontal dots. Envelope An icon of a paper envelope. Facebook An icon of a facebook f logo. Camera An icon of a digital camera. Home An icon of a house. Instagram An icon of the Instagram logo. LinkedIn An icon of the LinkedIn logo. Magnifying Glass An icon of a magnifying glass. Search Icon A magnifying glass icon that is used to represent the function of searching. Menu An icon of 3 horizontal lines. Hamburger Menu Icon An icon used to represent a collapsed menu. Next An icon of an arrow pointing to the right. Notice An explanation mark centred inside a circle. Previous An icon of an arrow pointing to the left. Rating An icon of a star. Tag An icon of a tag. Twitter An icon of the Twitter logo. Video Camera An icon of a video camera shape. Speech Bubble Icon A icon displaying a speech bubble WhatsApp An icon of the WhatsApp logo. Information An icon of an information logo. Plus A mathematical 'plus' symbol. Duration An icon indicating Time. Success Tick An icon of a green tick. Success Tick Timeout An icon of a greyed out success tick. Loading Spinner An icon of a loading spinner.

EU launches sustainability regulation frameworks 

© Shutterstock / Ismail Sadiron PicturesPost Thumbnail

The European Financial Reporting Advisory Group (EFRAG) has released its first draft sustainability standards, refocusing on the importance of double materiality for both EU-based companies and those doing business in Europe.

What stands out the most is that material impact on society and the environment is considered as important a factor as financial materiality.

The proposals cover a broad set of environmental, social and governance (ESG) issues and provide a set of rules enabling companies to provide consistent and comparable assessment of business models and corporate strategies, as well as materiality assessments, action plans and, of course, performance against targets.

While much discussion of reporting in recent months has been around carbon, net-zero targets and scope 1, 2 and 3 reporting, EFRAG’s standards include categories on not just climate change but also on diversity and ecosystems, resource use, water and marine resources and of course, pollution and the circular economy.

In social terms, issues from workforce, workers in the value chain, consumers, business conduct and internal control are all addressed.

Sustainability regulation will provide market standardisation for the EU

These drafts outline the proposed rules for sustainability reporting for compliance under the EU’s forthcoming Corporate Sustainable Reporting Directive (CSRD), and should result in an agreed framework of EU Sustainability Reporting Standards (ESRS).

Not only will this provide much needed market standardisation and information comparability; it will be an expansion of the current Non-Financial Reporting Directive (NFRD) and expand the number of companies required to disclose performance from around 12,000 to roughly 50,000.

Such an expansion in the marketplace will further drive data and knowledge throughout the value chain as buyers will require information from their own supply chains.

More importantly, in order to ensure that value creation and business requirements are fully understood and integrated into the standards, EFRAG has been developing them in conjunction with the Global Reporting Initiative (GRI), the world’s most commonly used sustainability reporting framework, as well as ESG audit and accreditation system SHIIFT, the global reporting network WICI Global and the Project Task Force on European Sustainability Reporting Standards (PTF-ESRS).

Sustainability standards

The exposure drafts were published prior to review by the EFRAG Sustainability Reporting Board (SRB), a move the group says was undertaken “in order to meet the ambitious deadlines for submitting the first set of draft ESRS to the European Commission by November 2022 and to benefit from the longest public consultation period possible.” The consultation on the exposure drafts is open for 100 days, until 8 August, and can be found here.

The planned standards also take into account existing European law and initiatives, with the taskforce responsible for the drafts, for example, having “endeavoured to make sure” that they cover all principal adverse impact (PAI) metrics, investors need to meet Sustainable Finance Disclosure Regulation (SFDR) requirements.

EFRAG also said that other key ongoing EU initiatives had been considered in the drafting of the reporting standards, including the recently released proposal by the Commission for a Corporate Sustainability Due Diligence Directive (CSDDD). The European Commission adopted that proposal in February 2022.

Which companies will be affected by the new regulation?

The CSDDD is important, as it proposes mandatory corporate due diligence for sustainability and human rights issues for a company, which includes both asset managers and pension funds under the EU’s definition.

To be included, any EU company would need to have over 500 employees and a turnover of over €150m in the last financial year for which annual financial statements were prepared.

It builds on the UN’s Guiding Principles on Business and Human Rights and OECD Guidelines for Multinational Enterprises and responsible business conduct and, if approved, will enshrine the need to incorporate such concerns into corporate strategy as part of directors’ duties. The idea is for such due diligence requirements to support the requirements of the EU’s forthcoming Sustainable Finance Disclosure Regulation.

There is still a great deal of ground to cover in terms of alignment between the EU’s approach and the coalescence of action around the newly formed International Sustainability Standards Board (ISSB).

Climate issues have potential to divide or unite

There are also the US SEC’s proposed rules on climate risk disclosure to take into consideration. But as Robert Eccles, founding chairman of the Sustainability Accounting Standards Board (SASB) and one of the founders of the International Integrated Reporting Council (IIRC), said recently: “For all of the talk about single vs. double materiality and ISSB vs. EFRAG/GRI, wherever we’re starting from there is a LOT more that unites us than divides us.”

There is still a chance that the final standards issued by the bodies currently making proposals, from the ISSB, EFRAF and SEC, will differ sufficiently to ensure that the market stays confused, but there is significant momentum for concrete action and market clarity.

Tim Mohim, chief sustainability officer at ESG data group Persefoni AI and former chief executive of the GRI, says: “For the time being, the strongest thread that holds them all together is the international framework created by the Task Force on Climate Related Disclosures (TCFD).

The TCFD is a common-sense roadmap for companies to measure, manage and disclose their climate impacts. So for the climate issue at a minimum, there is some commonality.” If we can build on that commonality and provide a robust, comparable and transparent framework for ESG reporting and measurement, the ESG world could be transformed, practically overnight.

More from SG Voice

Latest Posts