The European Union is moving to develop its own European non-financial reporting standards. The European Commission took the step of proposing a revision of the current Directive on sustainability reporting by companies on 21 April of this year (see EUROPE B12703A10). The European Financial Reporting Advisory Group (EFRAG), which carried out the preparatory work for the Commission (see EUROPE B12554A21), has been selected as the principal architect of these future standards. EUROPE spoke to Jean-Paul Gauzès, President of EFRAG’s Board, and Patrick de Cambourg, Chair of EFRAG’s Task Force on Non-Financial Reporting, about the major challenge ahead. (Interview by Marion Fontana)
Agence Europe - Is the European Commission’s proposal fully in line with the recommendations you made at the end of February (see EUROPE B12673A18)?
Patrick de Cambourg - The Directive on the publication of sustainability information by companies is completely in line with what was drawn up within our Task Force - of course there are nuances, but there is a very strong convergence.
The basic idea is that business information should progress on two levels. A financial level, which is very elaborate today and quite mature, and an extra-financial level which is emerging, which is not standardised and whose level of quality is lower. So it is a question of, very quickly, giving an identical consistency and an identical status to this second level.
The ambition is to cover a fairly wide and comprehensive range of information, as recommended by our Task Force. This covers environmental, social and governance aspects, including intangibles.
The legislative level is based on principles. In the 54 recommendations that we made, we went into details, which are not obviously included at legislative level, because it is logical to leave this to the delegated acts.
For SMEs, the Commission proposes “separate and proportionate standards”. Did you advocate this?
Patrick de Cambourg - We recommended that we make sure that SMEs would have the possibility of accessing a normative mechanism that would allow them to join the movement. Moreover, we said that we had to think about the standardised mechanism in a way that was suitable for SMEs. In the report, we say 'Think SMEs first'.
It is a reflection question on the risks borne by SMEs, which are generally lower - except in some sectors - than those of very large companies, but it is also a question of proportionality.
On the other hand, we were quite convinced - including the SME envoy in the Task Force - that there would be a fairly strong incentive for SMEs to adopt the voluntary system.
Why? Because, in the value chain, SMEs do not work in isolation, they have customers or suppliers who are large companies and who themselves will have to provide information on their upstream and downstream activities.
According to the Commission, the standards would apply in 2024. Can EFRAG meet such tight deadlines?
Patrick de Cambourg - The draft text proposes a fairly ambitious timetable. Companies that are subject to an information report will have to apply it in 2024, with reference to 2023. It is very, very close. The Commission is therefore asked to adopt delegated acts in October 2022. October 2022 is 18 months away.
Making European non-financial reporting standards in 18 months is a challenge. But according to the English expression: “where there is a will, there is a way”.
The Commission’s draft foresees successive layers. A first set of standards at the end of 2022, a second set at the end of 2023, and then successive sets. This is a point that the Task Force stressed: we will not get a true picture on the first try. We will have a first level of information that is certainly much better than today from the first set of standards, but we will have to increase the density of the information over time.
In the first set, it is planned to prioritise climate issues on the one hand, and on the other hand, all information that is necessary for the implementation of the EU Sustainable Finance Taxonomy Regulation (see EUROPE B12509A12) and the Regulation on transparency requirements for sustainable investments (see EUROPE B12209A14).
Standards mean standard-setter. What will be the implications of this new task on EFRAG’s governance and when?
Jean-Paul Gauzès - Currently, EFRAG has a competence to advise on financial reporting. I therefore proposed in my report to create a second pillar devoted to non-financial standards, which is therefore mirroring the first pillar, with the same system: a Board which takes decisions on the standards to be proposed to the Commission, a Technical expert group which includes specialists who draft the standards, and working groups that provide assistance.
The membership of EFRAG will also be significantly increased to reflect the fact that non-financial standards have many more stakeholders than purely financial standards. Civil society, non-governmental organisations and trade unions will be represented among others.
In order to implement this second pillar, I need to redraft the founding texts of EFRAG and then submit them to the General Assembly of EFRAG members. In terms of timetable, I hope to be able to prepare the various texts by 31 December. These texts will be adopted under the suspensive condition of the final green light from the Commission.
During this interim period, it is envisaged that there will be a kind of 'shadow' EFRAG, which starts to prepare the work of developing the standards, which will be actually adopted by EFRAG once the new organisational set-up is in place, so that we will not be criticised for not following a proper formal procedure.
With the creation of this second pillar, EFRAG will need more resources. What are your estimates at this stage?
Jean-Paul Gauzès - This is a delicate subject. Resources are needed if we want to do concrete and effective work. At present, however, we are still at a stage where resources are limited and no real decision has been taken regarding the budgetary supply to the new part of EFRAG.
I estimated in my report that the immediate launch justified at least 3 million euros of additional staff costs for the coming year. If you look at the resources that exist in other international initiatives, we are talking about much more than 3 million euros for operations.
The financing should come partly from private partners, but in my opinion, a dominant part should come from the public sector, i.e. from the European Commission and the Member States, but these things are not definitively organised today.
We are currently trying to recruit part-time, fixed-term staff to form the first secretariat base for this new pillar.
Patrick de Cambourg - For the phase that is just beginning, people of good will can come knocking on EFRAG’s door, provided of course that they respect EFRAG’s rules of the game, i.e. no lobbying, simply people who want to advance the general interest in this area.
Why do you think it is a good thing that Europe is moving forward on its own on non-financial reporting standards?
Jean-Paul Gauzès - The major advantage of the European initiative compared with other existing initiatives is that it is supported by political institutions and that it establishes a compulsory and standardised system, which is therefore comparable, and I believe that this gives us a much greater opportunity to act.
Patrick de Cambourg - The conclusion of the first two parts of our report is that there is a combination of elements that make the European Union a special area.
An example: double materiality. In Europe, we are interested in the risks that companies have due to environmental or social issues. But there is another dimension, namely the risks that the company poses to the environment or to society. This double materiality is an absolutely fundamental element of the European economic model.
Most international initiatives focus on the first dimension and not on the second. For example, the International Financial Reporting Standard (IFRS) Foundation says: I will focus on the climate first and for the climate, I will focus on the financial dimensions of business risks first.
Europe goes far beyond the financial dimension of climate risk. Moreover, climate is only one of the topics that Europe aims to cover - and to cover it fairly quickly.
We said in our report - and this is also in the Commission’s draft text - that we would not reinvent the wheel and that we would take what is available internationally and that we would also contribute in a very proactive way.
Therefore we can contribute to international progress, but progress in Europe is not subordinate to international progress.