In a recent announcement on March 29th, the European Financial Reporting Advisory Group (EFRAG) has been called upon by the European Commission to prioritize the implementation support of the first set of European Sustainability Reporting Standards (ESRS) over the preparatory work for the draft sector-specific standards.
The move is intended to avoid overlapping consultations and make it easier for stakeholders to contribute to the sustainability agenda. EFRAG will adjust its work plan to prioritize capacity building for the implementation of the first set of ESRS. This does not mean that EFRAG will stop work on sector-specific standards and SME standards, but the Commission has asked EFRAG to focus on the critical first steps in the implementation of the new standards.
What is so important about the ESRS standards?
As a quick refresher, the first set of ESRS covers sector-agnostic standards and was released by EFRAG in November 2022. It includes reporting requirements for 13 ESG issues, grouped into four categories:
- Cross-cutting: ESRS 1 General principles and ESRS 2 General, strategy, governance, and materiality assessment
- Environment: ESRS E1 Climate change, ESRS E2 Pollution, ESRS E3 Water and marine resources, ESRS E4 Biodiversity, and ESRS E5 Resource use and circular economy
- Social: ESRS S1 Own workforce, ESRS S2 Workers in the value chain, ESRS S3 Affected communities, and ESRS S4 Consumers and end-users
- Governance: ESRS G1 Governance, risk management, and internal control and ESRS G2 Business conduct.
The ESRS were developed to ensure that sustainability information is reported in accordance with the Directive on Corporate Sustainability Reporting (CSRD) and can be easily navigated, while maintaining maximum comparability across sectors and providing flexibility for sector-specific information. The reporting will require audited assurance of reported information and companies will have to prepare the information in a digital format that is machine-readable and tagged, so it can be fed into the EU single access point envisioned in the capital markets union action plan.
EFRAG is discussing how to put in place an ESRS implementation support function under three pillars:
I. the swift and timely provision of much-needed guidance
II. the creation of a user-friendly and comprehensive documentation hub, and
III. the facilitation of educational initiatives.
In addition, EFRAG is increasing the number of staff and allocating extra resources to these critical tasks. The other sets of draft ESRS, dedicated to SMEs and sector-specific standards, remain on EFRAG's agenda as a key task while being mindful of the need to avoid overlapping public consultations and prioritize implementation support.
EFRAG's goal is to contribute to the global progress of sustainability reporting. In this regard, the ongoing dialogue with the International Sustainability Standards Board (ISSB) and the cooperation with the Global Reporting Initiative (GRI) are particularly important. EFRAG is hopeful that interoperability will be achieved so that EU companies applying the first set of ESRS will not be confronted with multiple reporting requirements.
So what can companies do?
Firstly, companies that fall under the scope of the new reporting obligation should review the ESRS and identify the reporting requirements relevant to their operations. Companies should also begin preparing the necessary data and systems to collect and report the required information. They should also stay informed about the ongoing developments related to the ESRS, as further guidance is likely to be released in the coming months.
Finally, companies should ensure that they have a strong understanding of their sustainability information processes, they report is auditable and provides the necessary assurance to stakeholders. By taking these steps, companies can be well-prepared to meet the new reporting requirements under the CSRD and contribute to the global progress of sustainability reporting.
