EBF SUSTAINABLE FINANCE ROUNDUP ARTICLE 

Jean-Paul Gauzes, EFRAG Board President, on EFRAG’s progress in the development of European sustainability reporting standards

z

BRUSSELS, 20 June 2022

x

On 21 April 2021 the European Commission adopted a legislative proposal for a Corporate Sustainability Reporting Directive (CSRD) which would oblige companies under scope to report in compliance with European sustainability reporting standards adopted by the European Commission as delegated acts.

Under the proposed CSRD, the European Financial Reporting Advisory Group (EFRAG) would develop draft standards. Since the letter, dated 12 May 2021, by Commissioner McGuinness mandating EFRAG with the elaboration of the draft sustainability standards, EFRAG has continued to build on its excellent reputation in terms of its expertise and due process, including its transparency, governance, consultation, public accountability and thought leadership.

We asked Jean-Paul Gauzes, EFRAG Board President, four questions to look into how the role of EFRAG has evolved, its main achievements so far, and the main opportunities and challenges moving forward, in particular in the context of the ongoing public consultation on the draft sustainability standards.

1. EFRAG’s role has evolved from a focus on only financial reporting to one that includes sustainability reporting. How is this new mandate changing EFRAG, what main challenges did you face and how does the governance and organization of the sustainability pillar compare to that of financial reporting?

Being established 21 years ago, EFRAG is at the age when adults get more responsibilities. The parallel between the coming of age of a young adult and EFRAG’s renewed role is reflected in its new responsibilities as the European Commission’s technical advisor for providing draft European sustainability reporting standards, following the Commission’s adoption of a legislative proposal for a Corporate Sustainability Reporting Directive (CSRD) in April 2021.

EFRAG’s journey into sustainability reporting however started earlier and, in my six years as EFRAG Board President, sustainability reporting developments have been prominent. As the end of my mandate approaches, it is opportune to take stock of this journey, including the establishment of the European Lab in 2018, as foreseen by the EC Action Plan Financing Sustainable Growth  including the publication of two deliverables, one on climate-related reporting and one more recently on reporting on non-financial risks and opportunities and the linkage to the business model, as well as the mandates of Executive Vice President Dombrovskis including an ad-personam mandate to me to provide recommendations related to EFRAG’s governance reform to integrate the sustainability reporting activities into its governance and financing structure. Following the publication of reports, on 8 March last year, Commissioner McGuinness indicated her full support for the recommendations, and I am very grateful for the trust and confidence the European Commission has bestowed on EFRAG and me personally while allocating these tasks.

In my report, I recommended a two-pillar structure with a new sustainability reporting pillar mirroring the financial reporting pillar. The organisational, due process and administrative responsibilities would then fall under the newly created EFRAG Administrative Board. We started to work on the governance reform before the summer, which then came to full speed after the summer, and the EBF, with Sebastien de Brouwer as a key player, has been a trustworthy partner in the governance reform process.

As for the main challenges faced, one was certainly the governance reform process and the ambitious timeline for the establishment of the EFRAG permanent structure to ensure the delivery of technical advice, in the form of draft ESRS to the European Commission, within the established deadline. The target date for the completion of the governance reform was set for March 31, 2022, and I am proud to say that with the appointment of the EFRAG Sustainability Reporting TEG (EFRAG SR TEG) in the first half of April, we effectively met our deadline.

A second challenge is related to the membership of the sustainability reporting pillar in two respects, namely: ensuring the participation of EFRAG’s existing Member Organisations of the financial reporting pillar in the sustainability reporting pillar and the extension of EFRAG membership as to be representative of the wider range of stakeholders interested in sustainability reporting. I am pleased to say that all 17 existing EFRAG Member Organisations, including EBF, also joined the membership of the sustainability reporting pillar. In addition, 14 new organisations have joined EFRAG: three are in what is called the European Stakeholders Organisations Chapter and eleven in the newly created Civil Society Organisations Chapter. The latter encompasses NGOs, trade unions, consumer organisations and academic organisations. I believe we can say that the sustainability reporting pillar is representative of the relevant stakeholders, but I have to admit we need more countries on board and the involvement of further European organisations would be very welcome.

Finally, in this regard, I would also like to mention that EFRAG has the tradition of operating by consensus and in full transparency. The deadlines and the involvement of a wider range of stakeholders will require extra efforts to maintain this important feature.

2. The EU clearly aims to improve the availability and comparability of corporate sustainability data, foster transparency and ignite virtuous behaviour. The draft ESRS reflect this ambition. EFRAG managed, in an impressively short period of time, to develop a first set of draft standards that are currently open for consultation under a very ambitious comment period – driven of course by draft CSRD timelines. Are you concerned about possible lack of feedback given that some stakeholders may not have sufficient resources to respond, or its quality given the large scope of the consultation? What do you expect to be the key issues that would require further discussion, and which could potentially entail conflicting views amongst stakeholders delaying the standard setting process?

EFRAG published the 13 Exposure Drafts on the first set of draft standards on 29 April 2022 with a 100-day public consultation period ending on 8 August. Although 120 days were initially envisioned, the shorter deadline was agreed by the EFRAG Administrative Board, with the support of its Due Process Committee, to ensure the possibility to meet the challenging deadline set by the European Commission for EFRAG to deliver the draft standards by early November.

Notwithstanding the deadline, stakeholders’ feedback will be critical to ensure draft standards that will ensure EU companies will have sustainability reporting that meets the draft CSRD characteristics of information quality. We, therefore, encourage all stakeholders to use the survey tool, made available by the European Commission, to provide their input on the Exposure Drafts they would like to express an opinion on as it is not mandatory to provide input to all the Exposure Drafts under consultation.

To help stakeholders further understand the Exposure Drafts, EFRAG also published the related Bases for Conclusions and is organising a wide range of outreach events mostly in a hybrid format both with a country focus and with a stakeholder focus. On 22 June, a financial-institutions-focused outreach will take place, co-organised with the EBF, which will address issues and requirements of relevance for the financial sector.

The representativeness of the EFRAG governance bodies (the EFRAG Sustainability Reporting Board, the Sustainability Reporting Technical Expert Group, and its Expert Working Groups), which bring together a wide range of stakeholders, as well as the commitment from their organisations to take part in the consultation process are encouraging indicators that the feedback will positively contribute to the quality of the draft standards.

On key issues, it is still too early to comprehensively say what stakeholders would consider to be the most controversial requirements in the Exposure Drafts. The discussions within EFRAG in the coming months and the feedback received in the context of the outreach events will give a better indication of which issues may need further consideration. So far, there are several issues that are often raised which include the cooperation with international initiatives, notably with the ISSB, the materiality assessment, what belongs to sector-agnostic standards versus sector-specific standards, and the number of disclosure requirements.

In parallel with the current public consultation on the first set of draft standards, EFRAG is also already working on the second set of standards, and more precisely the sector-specific standards, while carrying out 27 sector-specific workshops to gather input from experts operating in these sectors, with the first of these workshops being focused on financial institutions.

3. The sustainability standards will continue to further evolve following the consultation period. What is to be expected after the deadline for the consultation set for August 8^th? Looking forward, what do you perceive to be the most significant challenges and opportunities?

If there is no delay in reaching a political agreement on the CSRD in the course of the trilogue, and if the timetable remains based on a first application by companies in the financial year 2024, then EFRAG will have to provide its technical advice to the European Commission in the form of draft standards in early November 2022.

The EFRAG governance bodies will meet in the autumn to ensure the deadline can be met, but this will be very demanding taking into account that the members of these bodies are volunteers with commitments from their professional jobs.

To attract additional resources, we have had two calls for tender: one to support the cost-benefit analysis and one to support the comment letter analysis, the latter tender still being open until 27 June.

Once we have provided the technical advice in the form of the first set of draft ESRS, the EFRAG bodies will then have to start to discuss the draft sector-specific standards and the SME standards which form the second set of draft ESRS.

As mentioned, the time frame is our biggest challenge since there is no buffer. Operating by consensus is also much more difficult within a very tight period.

We will make all efforts to deliver the draft standards in time so that the European Commission can begin its process. I am optimistic with all the willingness, motivation, and drive that I have seen over the last year that we will be able to bring this journey to a good end. We are all willing to contribute to the goals set in the European Commission’s Green Deal. Reporting brings transparency and comparability, hence playing a role in changing behaviour in a way that is needed to achieve a sustainable planet for future generations.

4. While EFRAG has demonstrated leadership through its proposed ESRS, reflecting the EU’s high level of ambition, the ISSB is developing international sustainability standards in parallel. What is your view on the relationship between the two future standards as well as between EFRAG and the ISSB? How do we ensure that European entities reporting under the ESRS is equivalent to that under the ISRS, avoiding the need for double reporting? What is EFRAG’s ambition in the newly created ISSB Working Group to enhance compatibility between the global baseline and jurisdictional initiatives?

I would firstly like to underline that it is not a question of competition between standard setters. All standard setters have the common goal of improving companies’ sustainability reporting. We all want to improve behaviour and foster the achievement of the ambitious sustainability goals set by the European Commission’s Green Deal and the Paris Agreement.

The need for the ESRS to take into account international initiatives is broadly recognised and in view of this, the notion of co-construction was developed, which refers to the intention to build on and contribute to international initiatives.

To this end, during the project phase, EFRAG cooperated with key global corporate reporting initiatives, including GRI, Shift Project, and WICI. This was accompanied by regular technical dialogue with a delegation of experts from the IFRS Foundation’s Technical Readiness Working Group (TRWG) and the ISSB during the development of the two ISSB Exposure Drafts on general requirements and climate-related reporting that were published in March 2022.

The content of the 13 ESRS Exposure Drafts is determined by the CSRD proposal reflecting the European Union’s high level of ambition and is therefore naturally more far-reaching compared to the recently released ISSB Exposure drafts.

To facilitate the dialogue needed to enhance the compatibility between the ISSB Exposure Drafts and the ongoing jurisdictional initiatives on sustainability disclosures, in April 2022, the ISSB established the Jurisdictional Working Group consisting of seven jurisdictional representatives. The European Commission, and EFRAG as its technical advisor, are members of this Working Group, while bilateral contacts continue to enhance interoperability. In the published notes of the first meeting of the Jurisdictional Working Group in mid-May, it was encouraging to read that the SEC, EFRAG and ISSB representatives all acknowledged that there is significant compatibility between these proposals.

I want to assure you that everyone is well aware that creating unnecessary obstacles or costs that hamper the activity, development or competitiveness of European businesses operating all over the world must be avoided. European companies need to be able to trust when applying the ESRS that there are no incompatibilities with international standards.

X

X

For more information:

Alexia Femia, Financing Sustainable Growth Adviser, a.femia@ebf.eu

X