The European Financial Reporting Advisory Group (EFRAG) presented, on Wednesday 23 November, the first part of the draft European Sustainability Reporting Standards or ESRS, in line with the ‘CSRD’ Directive on Corporate Sustainability Reporting (see EUROPE 13069/25). Patrick de Cambourg, Chairman of the EFRAG Sustainability Reporting Board, gives EUROPE more details on the content of the first ESRS. (Interview by Anne Damiani)
Agence Europe - What exactly is in the draft ESRS that you have submitted to the European Commission?
Patrick de Cambourg - Last month we delivered a set of twelve standards. These standards are ‘sector agnostic’, meaning they apply to all large European companies, regardless of their sector of activity.
Of these first ESRS standards, two are cross-cutting while the other ten are topical. This represents a certain volume of standards. We called the two cross-cutting ones ESRS 1 and ESRS 2. The first sets out the principles that the standards preparer should follow, while the second lists all the cross-cutting or cross-cutting information that companies should publish in their ‘sustainability statement’ as it is now called.
This information will be used to understand the relationship between the sustainability matters, governance, strategy and business model. As it has been decided to take into account double materiality, it is necessary to assess how these issues may affect companies, but also how companies may affect them. It is a question of risks or opportunities, of ‘outside-in’ and ‘inside-out’.
Among the ten topical standards, five ESRS (ESRS E1 to E5) concern the environment, respectively - the climate; - pollution; - water and marine resources; - biodiversity and the ecosystem; - resource use and the circular economy. Four ESRS (ESRS S1 to S4) deal with social and societal issues: - the impact on the own workforce; - the impact on employees in the value chain; - the impact on the communities around the company; - the impact on customers and end-users. Finally, the last ESRS (ESRS G1) relates to governance: business conduct, ethics, corruption and money laundering.
We followed the topics of the directive very closely to make sure we didn’t miss anything.
These ESRS standards are currently only in draft form. What happens now?
Unlike the NFRD directive on ‘Non-Financial Reporting’, which has since been replaced by the CSRD, the proposed ESRS are subject to a legislative process to become a delegated act. The CSRD gives the European Commission the power to make the application of standards mandatory, under certain conditions.
The Commission must first consult the European public authorities, including the European financial supervisory authorities (ESMA, EIOPA and EBA), the European Central Bank, the European Environment Agency, the EU Fundamental Rights Agency, etc. These have two months to give their opinion, until the end of January.
The Commission’s Directorate General for Financial Stability and Capital Markets, with whom we are in contact, must then coordinate with the other Directorates General to check the compliance of the standards from a legal point of view and thus ensure that the legal mandate we have been given is respected.
The ESRS will then be put out to public consultation for a month, probably in April.
The translation phase into all official EU languages also takes place. When all this is done, the scrutiny period comes, with the possibility for the EU Council and the European Parliament to reject them.
How should the implementation in companies be carried out afterwards?
These first standards are intended for large companies according to European criteria, meaning companies that meet or exceed at least two of these three thresholds: - have 250 employees ; - €40 million in annual turnover; - show a balance sheet of €20 million.
This concerns about 50,000 companies in Europe. Those that were already subject to the NFRD will have to implement the ESRS over the year 2024 with a report to be published in early 2025. For the others, they will have to apply them over the year 2025 for a report to be published in early 2026.
The company also has an obligation to identify its own topics in its materiality analysis.
The aim is to establish a quality system and to put standardised information on an equal footing with financial information. It is a second pillar, a second leg. This is why we have developed precise standards.
The issue of data collection and audit of this information is not included in our mandate. However, experience has shown that the data we request must respect five fundamental characteristics: - relevance; - reflect fair representation; - allow more comparability over time and between actors; - make the information understandable; - give them a verifiable character to make them reliable.
We have been inspired by what has been done for financial information. In practical terms, there are two main types of data: quantitative and narrative.
For financial reporting, the quantitative is evaluated with amounts in euros and the narrative explains the figures. For sustainability, there is a lot of narrative, for example, the impact of the phenomenon, the identification of the severity of the impact, the importance of the risk, the policy and action plans that are implemented, the resources that are used. And we have performance indicators. We are moving from narrative to quantitative, with not only information expressed in euros, but also other information expressed in different units of measurement: volume or weight for CO2, time with working days, etc.
We have identified more than 20 units of measurement. It will be necessary to organise, where this has not already been done, measurement systems to provide information that meets the criterion of reliability. There is a lot of work to do in terms of collecting data, setting up procedures to identify the data, collecting it at the source and sending it up.
What are the next steps for EFRAG?
EFRAG has yet to issue a set of standards. We now need to work on standards for listed SMEs. We will also provide a set of standards for unlisted SMEs, which do not have a reporting obligation but want to apply them on a voluntary basis.
We will then have to work at the sectoral level. In the preparatory work, the task force identified 41 sectors. We will produce a standard for each sector, which will complement those we have already developed.
We are starting on an annual basis: the second set of standards will be published next year. This takes time, as the European initiative is broader than other International Accounting Standards Board (IASB) initiatives, which do not include as many criteria.