The European Financial Reporting Advisory Group (EFRAG) published, on Friday 3 March, a series of videos explaining the first drafts of the ‘European Sustainability Reporting Standards’ (ESRS), in accordance with the ‘CSRD’ on corporate sustainability reporting (see EUROPE 13069/25). The new Chair of the Sustainability Reporting Technical Expert Group (EFRAG SR TEG), Chiara Del Prete, explained to EUROPE the next steps in the process. (Interview by Anne Damiani)
Agency Europe - The first drafts of the ESRS standards were presented to the European Commission in November (see EUROPE 13088/11). What is currently happening to them?
Chiara Del Prete - The European Commission is in the process of consultation, including with the Member States. I do not expect, in principle, that it will reopen the compromise that EFRAG has reached with the different types of stakeholders. The Commission verifies consistency with other legislation. The process is still ongoing.
I’m keeping my fingers crossed for the moment, I’m convinced it’s doing a good job.
Companies seem to be concerned about the high level of detail in the first ESRS, which could represent a heavy administrative burden. What do you say to them?
I am very aware of this criticism, as I myself used to prepare company reports. I know how cumbersome and expensive it is for a company to do reporting. It is clear that the implementation of the ESRS will represent a massive investment, not only for companies, but also for universities and auditors. We are imposing a big challenge on them.
But these costs must be weighed against the benefits: society as a whole will benefit from the increased transparency. We put the sustainability statement on the same footing as the financing statement, they are two sides of the same coin. Sustainable investment will no longer depend solely on profits. The cost-benefit balance needs to be considered in a broader perspective.
Why make these explanatory videos?
These videos aim to explain the content of the ESRS. Education and training are essential. Companies need to be educated about these new reporting standards in order to demystify them and create a cultural change and commitment.
As Albert Einstein said: “Make things as simple as possible, but not simpler”.
The business community is also concerned that the ESRS will not conform to the standards being set by the International Sustainability Standards Board (ISSB). What are your thoughts on that?
Indeed, the EU has decided to go beyond the ISSB standards with ‘dual materiality’. However, the ISSB sets a benchmark that will be applicable to all jurisdictions in the world, whether they are close to or far from the EU. It analyses the different formulations and will, for example, offer several possibilities to calculate CO2 emissions.
We are making concrete steps forward with the staff and members of the ISSB through a permanent bilateral table with them. Our aim is to put in place a common architecture so that EU companies can claim compliance with international standards.
Companies also fear that they will be penalised if they do not meet the Paris Agreement’s target of global warming below 1.5°C. Can you clarify this point?
The ESRS standards require that reporting be based on this 1.5°C scenario. Companies will need to use at least this scenario to estimate transition risks in their reports. But they are not obliged to use it for their actions, including the greenhouse gas emission reduction target. It is not a question of making behaviour compulsory, but only of imposing transparency on this behaviour.
What are the next steps for EFRAG?
We still have a lot on our plate as the CSRD requires sectoral standards, with about 40 sectors to be covered. Each of them requires consultation. We estimate that it will take us a few years to achieve this, at least until 2027.
We started with the sectors with the greatest impact on people and the environment: mining, especially coal, and gas, as well as agriculture and road transport. The first sectoral standards will be published in early April for consultation and sent to the Commission in November. Our idea is to transmit our standards systematically in November so that the delegated act is published in June and is valid from the following year.
In 2023, a delegated act will be published for listed SMEs. We are also preparing a document with voluntary standards for non-listed SMEs. We are trying to set the concept of proportionality.
In parallel, we are working on sustainable finance. We are trying to find out what the value chain of banks is: does it stop at the customers or does it go further?
We are striving to work on the digital aspect. Standards are currently human-readable, but the CSRD requires that they can also be consumed through databases.
All this work is taking place at the same time as we are structuring ourselves. We don’t have all the staff we need to cover all the work we do yet, but we are recruiting.
To see EFRAG’s videos: https://aeur.eu/f/5mr