New proposals for European Sustainability Reporting Standards

What is happening?

• The European Financial Reporting Advisory Group (EFRAG) has released the Exposure Drafts for European Sustainability Reporting Standards (ESRS), a key component of the Corporate Sustainability Reporting Directive (CSRD) relevant for the European Union (EU).
• The Exposure Drafts present the first iteration of the proposed standards, which are now available for public consultation until 8th August 2022.
• These Exposure Drafts cover the full range of sustainability matters: environment, social, governance and cross-cutting standards.
• The ISSB has announced the establishment of a working group to enhance compatibility between global baseline and jurisdictional initiatives which, among others, includes the European Commission and EFRAG.

WHAT IS EFRAG?

EFRAG is a private association that the European Commission has tasked to prepare fully drafted European Sustainability Reporting Standards (ESRS), as part of the proposed Corporate Sustainability Reporting Directive (CSRD).

These Exposure Drafts present the first iteration of the proposed standards, which are now available for public consultation. The consultation is open until 8^th August.

How are these proposals different to current reporting standards in the EU?

The proposals aim to strengthen the nature and extent of sustainability reporting in the EU. Building on the reporting requirements of the Non-Financial Reporting Directive (NFRD), the CRSD proposal:

• Enhances the scope of the existing rules to cover all large organizations as well as those listed on EU regulated markets.
• Sets out in far greater detail the non-financial information that entities should report.
• Mandates assurance of reported information from a third party.
• Requires companies to digitally ‘tag’ the reported information, so it is machine readable and feeds into the European Single Access Point envisaged in the capital markets union action plan.

How does this relate to the proposed ISSB standards?

The ISSB was established by the IFRS Foundation, with the aim of developing and maintaining a global set of sustainability-related reporting standards. Importantly, the ISSB is bringing together a number of already existing standards under one roof. In March 2022, the International Sustainability Standards Board (ISSB) released Exposure Drafts on climate and general sustainability-related financial disclosures. You can find out more about this here >

How they intersect:

The ISSB are promoting a ‘building block approach’, where its standards would be used as a global baseline for other jurisdictions and standard setters to build upon. An approach that would facilitate globally consistent standards is welcomed by A4S and received strong endorsement at our recent reporting roundtable.

The ESRS proposal differs from ISSB’s proposed standards (see EFRAG’s IFRS Sustainability Standards and ESRS reconciliation table), but in a recent announcement from ISSB it has established a working group to enhance compatibility. The working group aims to establish dialogue for enhanced compatibility between the ISSB’s Exposure Drafts and ongoing jurisdictional initiatives on sustainability disclosures. Members of the working group include the Chinese Ministry of Finance, the European Commission, the European Financial Reporting Advisory Group, the Japanese Financial Services Authority, the Sustainability Standards Board of Japan Preparation Committee, the United Kingdom Financial Conduct Authority and the US Securities and Exchange Commission. More can be read on this from the ISSB’s posting >

What will happen next?

Following the consultation and any subsequent amendments, EFRAG will submit the final first set of proposals to the European Commission, expected in November 2022.

Both ESRS and ISSB standards will have to undergo the endorsement process for full adoption in the relevant jurisdictions. Both have announced their intention to release final issuances by December 2022.