EFRAG Releases Proposed European Sustainability Reporting Standards
The European Financial Reporting Advisory Group (EFRAG) announced the release of its initial draft of European Sustainability Reporting Standards, setting out the proposed rules and requirements for companies to report on sustainability-related impacts, opportunities and risks under the EU’s upcoming Corporate Sustainable Reporting Directive (CSRD).
EFRAG’s proposals were released as a series of exposure drafts (EDs) covering a broad set of environmentalEnvironmental criteria consider how a company performs as a steward of nature., socialSocial criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. and governanceGovernance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. topics ranging from climate change to workers in the value chain and business conduct governanceGovernance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.. Companies covered by the rules would be required to provide sustainability reporting on their strategies and business models, governanceGovernance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. and organization, materiality assessments of sustainability impacts, opportunities and risks, as well as policies, targets, action plans and performance.
The CSRD, currently under development, is aimed as a major update to the current Non-Financial Reporting Directive (NFRD), the current EU sustainability reporting framework. The new rules will significantly expand the number of companies required to provide sustainability disclosures to over 50,000 from around 12,000 currently, introduce more detailed reporting requirements, and require audited assurance of the information reported.
EFRAG, a private association majority financed by the EU was mandated by the European Commission in June 2020 to prepare for new EU sustainability reporting standards, as part of the revision of the Non-Financial Reporting Directive (NFRD). In May 2021, EFRAG was requested to develop reporting standards for the CSRD, and the organization’s activities have been reorganized into two pillars, including a Financial Reporting Pillar, and a Sustainability Reporting Pillar.
According to the General Principles released by EFRAG with the exposure drafts, compliance with the new reporting standards will require companies to disclose all material information on their sustainability-related impacts risks and opportunities. The new drafts cover standardised “sector-agnostic” disclosures that would apply across all sectors, disclosures that particularly apply to companies operating in specific sectors, as well as sustainability-related material impacts, risks and opportunities at the entity-specific level.
The exposure drafts are divided into “Environment,” “SocialSocial criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates.,” and “GovernanceGovernance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.” categories. Environment categories include Climate Change, Pollution, Water and marine resources, Biodiversity and Ecosystems, and Resource use and circular economy. SocialSocial criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. categories include Own Workforce, Workers in the value chain, Affected communities, and Consumers and end users. GovernanceGovernance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. categories include GovernanceGovernance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights., risk management and internal control and Business conduct.
Notable aspects of the new standards include their use of the double materiality concept and consideration of value chain sustainability factors.
EFRAG’s draft requires organizations to “report sustainability matters on the basis of the double materiality principle.” Under double materiality, companies would be required to disclose not only on how sustainability matters affect their own performance and position, but also on their own impact on sustainability matters. According to the exposure drafts:
“Double materiality is the union … of impact materiality and financial materiality. A sustainability matter meets therefore the criteria of double materiality if it is material from either the impact perspective or the financial perspective or both perspectives.”
The standards also require significant disclosures regarding sustainability-related factors in the value chain. For example, the Climate change exposure draft requires disclosure of “gross indirect Scope 3 GHG emissions in metric tons of CO2 equivalent,” which encompasses a broad set of emissions outside of companies’ direct control, including upstream purchasing, sold products, goods transportation, travel and even financial investments. Similarly, the Workers in the value chain drafts require companies to report on their approach to identifying and managing actual and potential impacts on value chain workers, covering topics including working conditions, access to equal opportunities, and human rights issues such as child labor and forced labor.
With the release of the draft sustainability reporting standards, EFRAG announced that it has launched a 100 day public consultation, in order to receive feedback on the overall substance of the exposure drafts, prioritisation and phasing-in of the standards, and the adequacy of the proposed requirements.
Click here to access EFRAG’s exposure drafts for the ESRS.
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