The European Financial Reporting Advisory Group (EFRAG), which earlier this year had its mandate widened to draft and approve sustainability reporting standards for Europe, sought feedback during a three-month window on 13 Exposure Drafts (EDs) on sustainability.
Given their strategic importance, GTIL made a decision to respond to these EDs on 8 August 2022 and a copy of our responses can be found here.
When these EDs are approved they will become European Sustainability Reporting Standards (ESRS) and the intention is they will all come into effect from 1 January 2024. Eleven of their EDs will become the first set of standards required under the Corporate Sustainability Reporting Directive (CSRD), covering environmental, social and governance matters. A further two cross-cutting ED’s addressed the underlying principles behind the overall presentation, recognition, measurement and disclosure of sustainability matters in general.
Our main comments, which we understand are broadly consistent with responses made by other large international accounting firms, are summarised as follows:
- We encouraged EFRAG to continue to work very closely with the International Sustainability Standards Board (ISSB) and other parties to build a global baseline for sustainability reporting. We strongly recommended to EFRAG that it adopt the four pillar approach found in the Task Force for Climate-Related Financial Disclosures (TCFD) requirements, rather than continuing to use the three pillar approach it has used in the EDs.
- We said companies should ultimately have confidence that when complying with ESRS they were also complying with the ISSB standards, because the data they collected and processed should be the same. We pointed out that as currently drafted, if a global company was operating in the EU and elsewhere around the world that two sets of sustainability Information would have to be prepared because ESRS requirements and ISSB requirements were currently quite different and in many cases, irreconcilable.
- We said that to support all of the EDs, additional guidance was needed to explain the concepts of double materiality, impact materiality, financial materiality, and information materiality found in ESRS 1 ‘General Principles’. Our comments said this additional guidance would support practical implementation, fit for purpose and comparable reporting, and interoperability with ISSB's standards. We pointed out that if more precise requirements and guidance surrounded double materiality this would remove the need to include a rebuttable presumption requirement directed at assessing the adequacy of materiality disclosures
- We indicated the level of detail and quantity of information required by the 13 EDs was likely to lead to information overload, so in doing so it would reduce transparency and potentially the level of confidence that readers would have in the sustainability information being presented. We recommended reducing the number of disclosures, and clearly indicating what was mandatory and what was elective. We reminded EFRAG that it was important to allow companies sufficient time to collect data and to build processes, systems, and internal controls that deliver high quality data, and so we recommended phasing in many of its required disclosures
- Finally, we expressed concern about us not having sufficient time to consider all the material that had been released by EFRAG for comment. Following on from this we said we also had concerns about EFRAG not having sufficient time:
- to analyse and properly address stakeholder feedback on the proposals
- to perform an overall impact assessment of what it was proposing
- for the EFRAG Sustainability Reporting Technical Experts Group and Board to do their technical work, and
- to ultimately deliver a final set of high quality standards based on a TCFD format.
Given all this we strongly recommend that EFRAG that it ask the EU for more time to allow appropriate due process and better integration of its proposed standard with the global baseline being established by the ISSB, to ensure the final standards it issued were fit for purpose and command the confidence of both preparers and users.
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