EFRAG Update
EFRAG recently published batches of Working Papers of the European Sustainability Reporting Standards. Batch 1 was published on 20 January 2022, including a cover note and seven standards, while Batch 2 was published on 18 February 2022 including a cover note and three standards. Additional working papers respectively on ESRS SEC1 Sector classification standard and mostly social-related standards were also published at the end of February 2022 and early March 2022. Publications are available on the EFRAG’s website (-->
here)
By publishing the working papers EFRAG is following its tradition of being transparent and informative about the actual status of its work. At the same time, they emphasise that the published working papers are going to be subject to an extensive review process and as a result might be subject to changes relating to structure and content which will not be open to public consultation.
Following the publication, a structured review process has been implemented consisting of an internal review by the Project Task Force, a review by the Expert Working Groups and a financial consensus discussion before the draft standards will be handed over to the EC. In parallel to the review process, the Project Task Force is finalising the remaining working papers that will be published in the upcoming weeks.
The proposed disclosure requirements provide valuable insights for the stakeholder but will also be an immense challenge for the preparer regarding data availability, data sources and the respective processes.
The cross-cutting standards (ESRS 1 to 5) address disclosures on matters that are crucial to the relationship between the company’s sustainability matters and its strategy and business model, its governance and organisation, and its materiality assessment.
The conceptual guidelines are disclosed within ESRG 1 and ESRG 2. ESRG 1 “Double materiality” provides guidance on the double materiality assessment considering impact and financial materiality. ESRG 2 “Characteristics of information quality” explains the requirements of comparability, verifiability, and understandability as well as the definition of forwardlooking and retrospective information, and the Toneof-the-top concept.
ESRS E1 “Climate change” has been updated in comparison to the version published on 24 September 2021. The disclosure requirements are challenging and in addition to scopes 1, 2 and 3’s greenhouse gas emissions and its intensity, they reflect the requirements of the EU Taxonomy with regard to climate mitigation and climate adaptation, as well as financial exposures to physical and transition risks.
For more details, please refer to the articles “EFRAG’s updated climate prototype standard” (-->
here) and “EFRAG’s cross cutting standards and conceptual guidelines” (-->
here).
ESRS E2, E3, E4 and E5 are all sector-agnostic environmental standards. The disclosure requirements contain challenging subject-matter disclosures within the fields of pollution, water and marine resources, biodiversity and ecosystems and circular economy. The standards are structured in a manner that requires the reporter to incorporate the cross-cutting standards and conceptual guidelines from batch 1 into each material area. In addition, they reflect the requirements of the EU Taxonomy with regard to the subject-matter as well as financial exposures to physical and transition risks.
ESRS SEC 1 “Sector classification” defines 14 sector groups and 40 sectors. The sector classification standard was created by identifying, mapping and analysing the NACE classification system together with reference to additional economic activities as described in the EU-Taxonomy. This was done to create a comprehensive and pragmatic sector classification. Each sector will have an individual standard with specific sector related disclosure requirements and will come in addition to the ESRS agnostic standards.
ESRS P1 “Sustainability Statements” provides the basis for the presentation of sustainability reporting within the management report in accordance with article 19a and 29a of the CSRD.
ESRS S1 “Own workforce – general” sets out the disclosure requirements for undertakings to report on how they affect their own workforce - both positive and negative impacts - with regard to working conditions, equal opportunities and other work-related rights. It is related to ESRS S4 “Own Workforce - Other WorkRelated Rights” which is specific to work-related rights, (e.g., collective bargaining and freedom of association, social dialogue, freedom from child labour, privacy at work…). Disclosures for upstream and downstream ‘value chain workers’ are covered in ESRS S5.
Disclosure requirements for undertakings to report on both how they affect local communities – in both positive and negative ways – through their own operations and their upstream or downstream value chain and on business risks and opportunities related to their impacts and dependencies are covered in ESRS S6 for local communities and ESRS S7 for consumers and end-users.
Besides the standard setting process, on 10 March 2022 EFRAG announced the composition of its Sustainability Reporting Board, which is is responsible for all sustainability reporting positions of EFRAG including technical advice to the EC on draft EU Sustainability Reporting Standards and amendments to the Standards. The Chair of the EFRAG Sustainability Reporting Board will be appointed following the nomination by the EC, a process that is expected to be finalised before the summer.
On 10 March 2022, EFRAG also announced the next steps to complete its governance reform by the target date of end of March:
- Publication of the final due process procedures on EU Sustainability Reporting Standard Setting and the related feedback statement
- Appointment of EFRAG Sustainability Reporting TEG
- Recruitment of technical staff to support the sustainability reporting standard-setting work.
ISSB Update
In November 2021, the IFRS Foundation announced the establishment of the ISSB, and also released two prototype standards - one on the general requirements for disclosure of sustainability-related information, and the other on climate-related information. Read our In depth publication (--> here) which includes a summary of the prototype standards.
The plan is still to consult on the Exposure Drafts in the first half of 2022, with a view to finalise the sustainability standards by the end of 2022. This would be in parallel to the work of EFRAG on European sustainability standards.
SEC Update
The US Securities and Exchange Commission (SEC) is currently considering proposed rule amendments to enhance disclosures regarding issuers’ climate-related risks and opportunities. Originally expected in October 2021, the SEC commissioners and staff have acknowledged the delay in the proposal timing and, while the revised target was ‘late 2021/early 2022’, a proposal could be expected late this quarter or early next quarter. The delay is notably due to discussions about including reporting on scope 3 emissions. Public statements by SEC Chair, Gary Gensler, about the proposal have mentioned the following:
- Climate disclosures are likely to be mandatory.
- Climate disclosures might be required within Form 10-K and for FPI.
- Both qualitative and quantitative disclosures might be required.
- Certain industry-specific disclosures might be required.
- Companies might need to support advertised environmental claims.
- Fund names such as ‘green’ or ‘low-carbon’ might be subject to new regulation.
- Rules might be ‘inspired by’ the Task Force on Climate-Related Financial Disclosures (TCFD) Framework.
While working on new climate disclosure requirements, the SEC's Division of Corporation Finance has reiterated the importance of its existing 2010 interpretative guidance regarding disclosure related to climate change (-->
here). In September 2021, it also published a sample letter of staff comments that the Division might issue to companies regarding climate-related disclosures (-->
here).
Next steps
- Publication of remaining EFRAG prototypes by the end of March 2022
- EFRAG public consultations (all sustainability prototypes) from mid-May to end of July 2022