Keith Nuthall, journalist



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Serious concerns have been raised by Accountancy Europe and other organisations about the speed that proposed European Union (EU) sustainability reporting standards are being developed by the European Financial Reporting Advisory Group (EFRAG). The association and others are also worried about the amount of data demanded in planned mandatory EU sustainability reporting.

EFRAG is the formal technical adviser to the European Commission on sustainability reporting and has been consulting on exposure drafts of standards. Comments were due by 8 August, with EFRAG having until mid-November to make a formal proposal to the commission, which should release an EU standard by mid-2023.

‘A lot of consultees are expressing concern about these timelines’

Under pressure

Hilde Blomme, Accountancy Europe’s deputy CEO, believes that EFRAG has been pressured to act swiftly by a commission whose core policy is the European Green Deal. ‘We don’t know any standard setter that has been capable of doing this in three months,’ she says. ‘The quick ones usually take about a year.’

Blomme’s concern is ‘the risk that this might impair the quality of the standards’. If there was consensual support about EFRAG’s draft, then a quick review of the comments received could be justified, but that may well not be the case.

Mark Vaessen, A KPMG partner in the Netherlands who chairs the firm’s Better Business Reporting Network, agrees, noting that, with 13 exposure drafts to cover, EFRAG faces a huge amount of work. ‘A lot of consultees are expressing concern about these timelines,’ he says. ‘Without any reduction in this scope, it’s not going to be possible.’

While ‘climate is not waiting, we all agree the timing shouldn’t be at the expense of quality,’ he adds. ‘Compliance will be expensive, and the reports must deliver their objective: a more sustainable Europe.’

Too much information

EU ministers and MEPs are expected to formally approve the directive this year, to come into force on 1 January 2024. Companies with more than 500 employees – including listed companies, banks, insurers and corporations defined by member states – must then report in 2025 based on 2024 financial year (FY) data. Other EU-based large companies will start sustainability reporting in 2026 based on 2025 FY data; listed SMEs will report in 2027 on 2026 FY data; and non-EU-based companies operating in the EU must report from 2029 on 2028 data.

‘Compliance will be expensive, and the reports must deliver their objective: a more sustainable Europe’

As EFRAG’s standards stand, Accountancy Europe thinks too much information will be demanded – for instance, asking companies to detail what employment laws they follow in each member state accounting for more than 10% of their turnover. ‘We believe that there should be less granularity in the standards,’ Blomme says.

That is despite Accountancy Europe supporting the EU directive’s requirement that standards mandate ‘double materiality’ sustainability reports. This means that companies report on the impact of environmental and social pressures on their own profitability (single materiality) and on how their operations impact the environment and society (double).

EFRAG’s exposure drafts say how this should be done. Its standard on general strategy, governance and materiality assessment itself runs to 39 pages. There are separate drafts on:

  • general principles
  • general, strategy, governance and materiality assessment disclosure requirements
  • climate change
  • pollution
  • water and marine resources
  • biodiversity and ecosystems
  • resource use and circular economy
  • own workforce
  • workers in the value chain
  • affected communities
  • consumers and end users
  • governance, risk management and internal control
  • business conduct.
Compliance struggle

Accountancy Europe’s view that these requirements are too detailed has been backed by the Global Reporting Initiative (GRI), whose models have been used within EFRAG drafts. GRI’s concern is that the draft EU standard has ‘borrowed many of the recommended and optional reporting included in the GRI standards and made them mandatory’. It concluded in its assessment: ‘Such a level of detail and granularity means that even the most experienced reporters with sophisticated reporting and data collection systems will struggle to comply with all the requirements stipulated.’

‘We believe that there should be less granularity in the standards’

One concern is that EFRAG’s proposals do not sufficiently dovetail with those being developed by the International Sustainability Standards Board (ISSB). In May, it released its strategy to create a ‘global baseline’ of guidance on how companies and public organisations should disclose how they are impacted by environmental and social pressures and are dealing with them. This core advice will be unveiled by December.

Another concern focuses on the draft EFRAG standards’ requirements regarding ‘rebuttable presumptions’, which say that a company may not report on an environmental or social topic if it is not ‘material’ to its operations, but must justify that decision in writing, notes Blomme. Under ISSB rules, materiality assessments are, to a large extent, left to a company’s judgment. ‘This “rebuttable presumption” clause seems quite onerous,’ she says.

Vaessen agrees. ‘It’s too much; there are 400 data points companies must give,’ he says. ‘I hope EFRAG will bring these down to the most important performance indicators, to see the wood from the trees.’

Look again

While the ISSB is focusing mainly on ‘single materiality’ social and environmental impacts on companies themselves, the EU directive stresses that EFRAG should be to ‘the greatest extent possible taking into account the work of global standard setting initiatives’. That requirement may mean EFRAG’s existing draft needs revisions, argues Blomme. ‘In our humble opinion, we believe EFRAG needs to look at that again,’ she says. ‘Everybody we speak to, every comment letter that we have seen, is commenting on that, saying they [EFRAG] have not done enough to take a global baseline into consideration.’

As the draft stands, Blomme warns, EU reporters may have to release two separate reports – for the ISSB and for EFRAG – with assessments complicated by a lack of consistency over concepts, structure, disclosure requirements objectives and definitions.

‘Even the most experienced reporters will struggle to comply with all the requirements stipulated’

These might get worse if there are contrasts with climate impact disclosure standards being developed by the US Securities and Exchange Commission (SEC). This is especially the case given that the SEC’s planned disclosure requirements are moving towards double materiality. Not only would they require statements on a listed company’s governance, general risk management and climate-related risk strategy, they will also require reports on corporate greenhouse gas emissions. Some companies would have to file information on emissions from both their upstream and downstream value chains.

According to Vaesson, however, there is some commonality among each of the proposals – ISSB, SEC and EFRAG – especially on climate disclosures: ‘The difference at the end of the day may not be too big or unbridgeable.’

ACCA has contributed to, and supports, the responses made by Accountancy Europe and by European Federation of Accountants and Auditors of SMEs.

In its response, ACCA reiterates its concerns around lack of alignment with ISSB standards, the quantity of disclosures that the ESRS are likely to generate, and the extremely compressed timelines for consultation and implementation. It also called for the European Commission to consider reporting by non-EU undertakings in accordance with ISSB standards as equivalent, when these are supplemented with comparable impact reporting standards such as the GRI Standards.

Yen-Pei Chen, senior manager for Corporate Reporting, ACCA, says: ‘Maximum alignment is of paramount importance for investors and other stakeholders to have easily comparable information on sustainability-related issues.

‘The cost to companies of sustainability-related reporting and assurance is equally important. Especially for businesses that need to report under both ESRS and ISSB standards.’