The European Commission is now assessing a first set of detailed proposed EU mandatory sustainability reporting standards, delivered – on time – by the European Financial Reporting Advisory Group (EFRAG) Sustainability Reporting Board (SRB).
Due diligence assessments and potential amendments will now be undertaken by the EU executive, before formal adoption of the standards, planned for June 2023. It will be using powers under the new EU corporate sustainability reporting directive, which was formally approved by both the European Parliament and EU Council of Ministers in November 2022.
EFRAG stressed that it had achieved a ‘reduction by nearly half of the disclosure requirements’
Mandatory reporting using these standards will start for larger companies in 2025, reporting on 2024 business, with smaller companies being told to report at later dates depending on their size between then and 2029.
EFRAG’s initial drafts, released in April, sparked criticism that they were overly onerous in their reporting demands. And the advisory group has listened, slimming down requirements.
In its cover note accompanying the proposals, EFRAG stressed that it had achieved a ‘reduction by nearly half of the disclosure requirements compared to the [initial exposure drafts] EDs’.
It added that now many requirements will be phased, ‘meaning they will have to be reported only one, two or three years after the particular ESRS [European Sustainability Reporting Standard] goes into effect for that particular contingent of companies’.
Also, a requirement to obtain data from value chain partners will not be required for three years after an ESRS comes into force – a key element of EFRAG’s pro-double materiality stance.
Reduced scope
A statement from PwC noted, for example, that the new draft has dropped a past insistence on ‘rebuttable presumptions’, where a company may refuse to report on an environmental or social topic if not ‘material’ to its operations, but must justify that decision in writing. ‘A materiality assessment still has to be made, but with a reduced scope,’ said PwC.
Given this, EFRAG said ‘no company will be required to report on all of the datapoints… and most undertakings will only be reporting on a subset of the ESRS, because only a subset of sustainability matters will be material for them’. The new proposals also exclude a planned business conduct reporting standard, which will be considered for future draft standards.
Welcoming the new formal proposals, EU accounting federation Accountancy Europe, which had been critical of earlier drafts’ demands, said the latest version ‘represents a significant step forward’. But regarding the standards approved by the Commission in 2023, it says they need ‘to become a pragmatic tool to support the urgent need to move to a sustainable economy’, rather than a reporting exercise.
Accountancy Europe is also keen that ESRS dovetail with International Sustainability Standards Board (ISSB) and Global Reporting Initiative (GRI) standards. They need to ‘serve the European public good’, it added.
‘Concerns expressed during the public consultation on the exposure drafts gave rise to substantial changes’
As regards meshing with global ISSB standards, which should themselves be formally approved by late next year, PwC said the revised EFRAG standards had moved in that direction: ‘The former structural approach of the three reporting pillars (strategy, implementation and performance measurement) has been replaced by a four-pillar approach similar to the architecture of the TCFD [Task Force on Climate-Related Financial Disclosures] and ISSB (governance, strategy, impact, risk and opportunity management, metrics and targets) to enhance international interoperability.’
SME concerns
In a blog, Salvador Marin, president, of the European Federation of Accountants and Auditors for SMEs (EFAA), who represents small and medium-sized enterprises and practices (SMEs/SMPs) on the EFRAG SRB, voted for the first set of ESRS, saying he ‘recognised the significant simplification of the ESRS Exposure Drafts consulted on in the early summer’, many following EFAA advice.
However, Marin said he still had ‘significant concerns over the adverse cost-benefit impact on SMEs, especially unlisted SMEs in the value chain of larger companies’. As a result, he abstained on backing a cover letter sent to the Commission on EFRAG cost-benefit analysis of its initiative.
The new proposed sustainability reporting standards were welcomed by PwC, which said in its view ‘concerns expressed during the public consultation on the exposure drafts gave rise to substantial changes’.
A Deloitte note added: ‘Complying with this reporting requirement will take some time to get right, and the sooner businesses start to adapt and test their capability the better.’
A leader of ongoing EFRAG work will be Patrick de Cambourg, appointed SRB chair by the EFRAG General Assembly on the same day that EFRAG released its formal drafts.
De Cambourg has been a driving force behind developing an EU EFRAG sustainability reporting system, while the ISSB undertakes its own work. Honorary president of accounting firm Mazars, he was until November, president of the Autorité des Normes Comptables (ANC), the French accounting standard-setting public authority.
De Cambourg commented on his new appointment: ‘EFRAG is keen to contribute to a robust corporate reporting solution to achieve a sustainable European economy.’
Further reading
Read the AB article Double materiality dilemma
