The double materiality-based standards are designed to underpin the EU’s Corporate Sustainability Reporting Directive.
Draft proposals for European Sustainability Reporting Standards (ESRSs) based on double materiality have been released for consultation by the European Commission’s financial and sustainability reporting advisory body.
The standards will be used by firms required to report under the new Corporate Sustainability Reporting Directive (CSRD), in turn providing critical information to investors about the sustainability risks and impacts in their portfolios.
The draft standards were developed by the European Financial Reporting Advisory Group (EFRAG) in consultation with groups including the Global Reporting Initiative (GRI), which sets standards for sustainability disclosures using a double materiality approach to serve the needs of multiple stakeholders.
The CSRD, which replaces the existing Non-Financial Reporting Directive, is currently being finalised via trilogue negotiations between the European Commission, Parliament and Council. In a proposal published in March, MEPs proposed delaying compliance with CSRD until 2024, as well as removing SMEs from the initial scope of the directive.
Focus on standards compatibility
Double materiality-based standards are designed to provide information on the risks posed by firms’ activities to society and the environment, as well as those posed by social and environmental risks to the enterprise value of firms.
The International Sustainability Standards Board (ISSB), which is currently consulting on its draft general sustainability and climate-related disclosure standards, only requires firms to report on social and environmental risks to enterprise value, also known as a financial materiality approach. The ISSB has been mandated to create a ‘baseline’ for sustainability reporting requirements on which other bodies may subsequently build.
The ISSB recently announced a working group to ensure harmonisation across standard setting initiatives, with a membership including EFRAG and reporting bodies from other major jurisdictions. It has also signed an agreement with GRI to support alignment of their sustainability-related standards.
EFRAG’s Project Task Force on European Sustainability Reporting Standards (PTF-ESRS), which has been publishing preliminary working papers reflecting its initial thinking on the standards, finalised its proposed exposure drafts at the end of last week.
Consultation on the exposure drafts for the first set of ESRSs is open until August 8, to allow EFRAG to take in feedback ahead of presenting the standards to the Commission for approval in November.
According to EFRAG, this first set of exposure drafts corresponds to the first set of standards required under CSRD and covers environment, social, governance and cross-cutting standards.
In a cover note accompanying the drafts, EFRAG said PTF-ESRS had held discussions with bodies including the ISSB and the Task Force on Nature-related Financial Disclosures to ensure compatibility with other sustainability disclosure initiatives globally.
In the consultation, EFRAG asks specifically for feedback on the substance of the exposure drafts – meaning proposed architecture, implementation of CSRD principles and overall content of each – as well as options for phasing-in the implementation of the ESRSs, and adequacy of each disclosure requirement.
“The multistakeholder, consensus-based approach of the Task Force sets an important precedent for further work in this field,” said Ugo Bassi, Director for Financial Services (DG FISMA) at the European Commission.
Praise for European leadership
Paul Simpson, CEO of environmental disclosure platform CDP, praised the European Union’s “leadership” in developing creating sustainability standards based on double materiality.
“With the environmental crisis needing immediate attention, this much-needed strengthening of EU disclosure rules will bring more accountability, a better understanding of risks and opportunities and of the progress against EU and global goals and will raise the bar on what is expected from companies,” he said.
“Corporates are not moving fast enough to ensure what they do align with our planet’s limits. That’s why these standards’ requirement that companies report a wide range of relevant science-based environmental data is so key.”
Recent CDP data found that only one in 20 listed companies have strong targets to reduce emissions, water use and deforestation impact, and around 50% of greenhouse gas emissions reported aren’t covered by science-based targets to align with keeping climate change to 1.5°C.
Judy Kuszewski, Chair of the GRI’s Global Sustainability Standards Board (GSSB), called for continued efforts to align sustainability reporting standards, confirming also that the GSSB will provide “detailed input” on the draft standards, and engage with EFRAG’s newly-formed Sustainability Reporting Board and Technical Expert Group.
“An added contribution will be a detailed mapping of the GRI Standards against the proposed ESRSs, which will help companies understand how they interconnect, and make it easier to determine additional reporting requirements,” she said.
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