The European Financial Reporting Advisory Group (EFRAG) has updated versions of the European Sustainability Reporting Standards (ESRS).
- EFRAG published its updated sustainability reporting standards.
- As part of the implementation of the CSRD, the new standards will transform the sustainability landscape in the EU.
- First reporting under the new standards will be phased in starting in 2024.
EFRAG has submitted its first set of draft ESRS to the European Commission and published its latest update to the reporting standards. This first set, approved by the EFRAG SRB and supported by the EFRAG SR TEG, has taken into consideration
the input from the public consultation on the draft ESRS exposure drafts (EDs).
The European Commission will now consult EU bodies and Member States on the draft standards, before adopting the final standards as delegated acts in June 2023, followed by a scrutiny period by the European Parliament and Council.
The Corporate Sustainability Reporting Directive (CSRD) itself was approved by the European Council at the end of November 2022, which means that the new regulation will come into force in 2023.
The twelve cross-cutting standards include a range of cross-cutting standards, as well as those separated into the specific requirements for environmental, social and governance reporting. They are as follows:
In the coming months, EFRAG expects to focus on the development of the next set of draft ESRS, which will provide sector-specific guidance on sectors covered by the GRI – agriculture, coal mining, mining, oil+gas (upstream), oil+gas (mid-to downstream) – and five sectors considered to be ‘high impact – energy production, road transport, motor vehicle production, food/beverages and textiles. This second set will also include new standards for SME reporting.
The role of EFRAG in EU sustainability reporting
EFRAG was established in 2001 by the European Union (EU) and the private sector to provide technical advice to the European Commission on accounting matters. It was also charged with providing input into the development of IFRS sustainability standards.
In April 2021, the European Commission adopted a legislative proposal for a Corporate Sustainability Reporting Directive (CSRD) that requires companies within its scope to report using a double materiality perspective in compliance with European Sustainability Reporting Standards (ESRS) adopted by the European Commission as delegated acts.
Under the proposed CSRD, EFRAG was appointed technical adviser to the European Commission developing draft ESRS. This was confirmed by the text of 21 June resulting from the trialogue between the co-legislators and the text of 10 November 2022 approved by the European Parliament.
EFRAG extended its mission in 2022 following the new role assigned to EFRAG in the CSRD, providing Technical Advice to the European Commission in the form of fully prepared draft EU Sustainability Reporting Standards and/or draft amendments to these Standards.
The ESRS Exposure Drafts (EDs) prepared by the EFRAG Project Task Force on European Sustainability Reporting Standards (EFRAG PTF-ESRS) during the period from June 2021 to April 2022 were exposed for comments from 30 April to 8 August 2022.
Following that consultation period, the EFRAG Sustainability Reporting Board (EFRAG SRB), advised by the EFRAG Sustainability Reporting Technical Expert Group (EFRAG SR TEG), addressed the feedback of the consultation and accordingly amended the 12 draft ESRS that were submitted in November 2022.
They were unanimously approved by the SRB, which includes representatives of the Accounting Standards Committee of Germany, the Autorité des Normes Comptables of France, the Dutch Accounting Standards Board, Organismo Italiano di Contabilità (OIC), as well as European stakeholders including Accountancy Europe, European Issuers, EFAMA, European Banking Federation, and representatives of civil society and of the European Trade Union Confederation, among others.
Differences in EU and US approaches
EFRAG has been responsible for the development of sustainability reporting standards in the EU and has taken the approach of including the impact of corporate activity beyond the enterprise. In the US, the International Sustainability Standards Board (ISSB) which was launched by the International Financial Reporting Standards (IFRS) Foundation, has been focused more on an enterprise value approach.
Such an approach means that the IFRS sustainability reporting standards have focused more on the financial impact of climate, biodiversity and other risks on business operations, rather than looking at wider systemic risk. While there was a shift in October 2022 when the IFRS said that it would look at including Scope 3 emissions in its reporting standard, there is still quite a difference between the two approaches.
The phasing in of the CSRD
The new CSRD introduces a certification requirement for sustainability reporting as well as improved accessibility of information, by requiring its publication in a dedicated section of company management reports.
The EU rules on non-financial information will apply to all large companies and all companies listed on regulated markets, including responsibility for assessing the information at the level of their subsidiaries. The new requirements will also apply to all large companies with over 250 employees and at least €40 million in turnover, whether listed or not.
For non-European companies, there is also a requirement to provide a sustainability report. This applies to all companies generating €150 million in net annual turnover in the EU and which have at least one subsidiary or branch in the EU. These companies must provide a report on their ESG (environmental, social and governance) impacts, as defined in the directive.
The rules also apply to listed SMEs, taking into account their specific characteristics. An opt-out will be possible for listed SMEs during a transitional period, exempting them from the application of the directive until 2028.
The CRSD will enter into force 20 days after publication, on 28 November 2022. The rules will start to apply between 2024 and 2028, while Member States will be obliged to transpose the Directive into local law so that the Directive applies from 1 January 2024 for financial years starting on that date for Article 4 (audit fee capping provisions and audit committee approval of sustainability reporting) and within 18 months for Articles 1-3 (all others).
Requirements for subsidiaries of companies domiciled in third countries will have to be transposed by 1 January 2028, after the publication of EU guidelines.
Concerns to be addressed
While experts welcomed the submission of the standards, providing as they do a common system for reporting on ESG topics; that they are aligned with the ISSB approach to financial reporting (based on the TCFD recommendations), address Scope 3 emissions and set out lifecycle analysis as a key element of the approach, concerns about the evolution of the standards remain.
As the Alliance for Corporate Transparency pointed out, the revision of the ESRS has seen a reduction in the data points required of around 50%. In a statement, the Alliance said: “Such a massive simplification, however, led to a reduction in the granularity of data and requirements for value chain disclosures.”
It added: “As proven by the Corporate Human Rights Benchmark in 2020, the most common types of allegations related to instances of forced labour, health and safety, and child labour occur in developing countries. The worst cases of environmental destruction also take place upstream in companies’ value chain, such as deforestation, which the latest UN report on net-zero emphasises will have to end by 2025 if we are to reach net zero by 2050.”
The lack of interest in diversity and inclusion within the social pillar is notable, especially in terms of how such a failure ignores the impact of systemic discrimination. While this may reflect the lack of focus on the issue within the SDGs, they were built out of the Millennium Development Goals and therefore built on a framework that is remarkably out of step with modern understanding.
Given that the new approach to the CSRD allows for a transition period of three years, to give companies time to adjust and to prepare for such reporting, the Alliance has called for assurance that the standards won’t be watered down further.