Stockholm (NordSIP) – The contours of the EU sustainability reporting framework are rapidly becoming sharper and more precise. Last week, the European Parliament adopted the Corporate Sustainability Reporting Directive (CSRD). On 15 November, the European Financial Reporting Advisory Group (EFRAG) reached an agreement on the first set of draft European Sustainability Reporting Standards (ESRS) to be submitted to the European Commission (EC). The objective of the ESRS is to set out the general requirements that companies must comply with when preparing and presenting sustainability-related information under the Accounting Directive as amended by the CSRD.
The EC tasked EFRAG, a private association established in 2001, with drafting the new EU sustainability reporting standards in June 2020 as part of the revision of the 2014 Non-Financial Reporting Directive (NFRD). The first draft of the standards was released by EFRAG earlier this year, initiating an intensive period of consultations. Eurosif was one of the organisations to provide timely feedback, urging the standard-setters and policymakers to “preserve the ambition of the standard while finalising the text.”
The ESRS disclosure requirements cover four main reporting areas: governance (the governance processes, controls and procedures used to monitor and manage impacts, risks and opportunities); strategy (how the company’s strategy and business model interact with its material impacts, risks and opportunities, including the strategy for addressing them); impact, risk and opportunity management (the process by which they are identified, assessed and managed through policies and actions); and metrics and targets (how the company measures its performance, including progress towards the targets it has set). In addition, the ESRS delineates some topical disclosure requirements, both sector-agnostic and sector-specific ones, as well as some entity-specific disclosures.
The ESRS reaffirms that companies must report sustainability aspects based on the double materiality principle (i.e., considering both impact materiality and financial materiality) and reiterates the importance of performing a thorough materiality assessment.
According to the ESRS, the scope of the sustainability statements needs to be extended beyond the reporting company and to integrate the reporting of material impacts, risks and opportunities of its upstream and downstream value chain. One of the topics discussed during EFRAG’s meeting on 15 November was whether to include a phase-in provision allowing financial market participants (banks, insurers, asset managers) to postpone reporting on the downstream value chain. Although the decision was not to include this provision, research and public consultation on the topic will be a priority in the coming months ahead of future sets of standards.
The EC is to adopt the proposed ESRS by June 2023. The ambitious and comprehensive standards should prove helpful to companies as they struggle to incorporate the CSRD reporting requirements coming progressively into force between 2024 and 2028.