On 17 October 2023, the Commission published its work programme for 2024. The work programme includes among other initiatives a proposal to postpone the deadline for the adoption of the sectoral European sustainability reporting standards currently planned for June 2024 by two years. The work programme can be found here.

In March 2023, Commissioner McGuinness publicly called on EFRAG to prioritise implementation guidance on the first set of ESRS over the preparatory work for the draft sector-specific standards. In late July 2023, EFRAG published its long-awaited draft ‘Implementation guidance for the materiality assessment’ (MAIG) and draft ‘Implementation guidance for value chain’ (VCIG). Both sets of implementation guidance seek to provide non-binding technical guidance on the application of ESRS and to address frequently asked questions. These questions include how to perform the double materiality assessment, how to assess risks and opportunities, the level of disaggregation across impacts, where the value chain begins and ends, what is a reasonable effort to collect value chain data, and so forth.

It is expected that EFRAG will publish its draft guidance for public consultation in November, with a one-month comment period.

In another effort to provide non-authoritative implementation guidance and other material to support the application of the sector-agnostic ESRS, EFRAG released a ‘[Draft] list of ESRS data points – Implementation Guidance” early November for approval by the EFRAG SRB. The Excel workbook presents the complete list of disclosure requirements in the sector-agnostic standards, and it covers all of the standards except ESRS 1, ‘General Requirements’, which does not set specific disclosures.

In October 2023, EFRAG released the work programme for 2024. Beside including the implementation guidance activities already referred to, the work programme includes the following activities:

As of 2025, large companies covered by the CSRD will have to comply with the ESRS defined by Europe when drawing up their sustainability reports (for the 2024 financial year). Two CSRD project managers share their experience of implementing ESRS in their companies.

The Corporate Sustainability Reporting Directive (CSRD) was published in the OJEU on 16 December 2022. The French government must transpose it into French law by the end of 2023. It provides for the mandatory use of reporting standards, ‘European Sustainability Reporting Standards’ (ESRS), to create a common language and enable comparisons between sustainability information published by companies. A first set of draft standards, covering the reporting obligations of large companies, was sent by EFRAG to the European Commission in November 2022. They were finally adopted by delegated act on 31 July 2023.

Two CSRD project managers from two large French groups, specialising in the automotive (interviewee 1) and cosmetics (interviewee 2) industries, answered our questions on the implementation of ESRS within their companies, and shared with us their advice and recommendations (action plan, double materiality assessment, transformation challenges, etc).

It's not unusual to feel discouraged by the growing number of regulations to come. The texts are indeed very complex, with a multi-layered approach:

This step-by-step approach will increase the burden and weight of the information to be provided over time.

To avoid panicking in the face of this mountain of texts, we need to think about the context that gave rise to these new regulations. The aim of these regulations is to make companies' CSR communications comparable. Stakeholders are confronted with a huge diversity of CSR messages, with different formats and KPIs, sometimes identical indicator labels, but completely different calculation methods.

The 1^st step is to take the time to understand the texts and share a common interpretation internally, because the texts are far from obvious.

The 2^nd step is to identify the people in the company who will be responsible for implementing this new reporting system. We'll need to broaden the scope of the people who were previously involved in sustainability reports, and involve all the functions concerned by this new approach to sustainability. It will also be necessary to train them in ESRS, so that everyone understands the scope of the change in mindset. In effect, this is a new approach to sustainability, since we start from risks and opportunities. We're going to be asking questions about the company's business model, its governance, its processes and the policies it has or hasn't put in place. It will therefore be necessary to involve skills that are not necessarily all coordinated around the issue of sustainability reporting, such as risk management, management control, operational functions and corporate strategy.

The 3^rd step is ‘gap analysis’, which consists of measuring the gap between the regulatory expectations and the company's reality – that is, identifying the information already published by the company, that which it is possible to obtain easily, and all the information that is missing. Finally, the last stage involves resolving the gap between the company's reality and what is expected by the ESRS.

In our company, we have begun work on a materiality assessment, which I believe is the cornerstone of the system. Indeed, it is on the basis of this materiality assessment that we will be able to engage the right levels of involvement of operational functions in ESRS-based reporting. Implementing these new regulations will involve a real effort on the part of companies, even those already subject to reporting, so my recommendation is to anticipate.

The exercise we're asked to carry out undeniably requires anticipation.

When we take a step back in ESG reporting, we can see that we've moved from an exhaustive approach with the pre-existing law (Grenelle law) to a materiality approach based on risk management. In the future, with the CSRD and ESRS, companies will be asked to revisit the materiality of ESG issues by integrating impacts and opportunities, with the dual focus of impact materiality and financial materiality. Once the subject has been considered material, companies will be asked to return to an exhaustive approach, adopting numerous standardised KPIs. This represents a considerable amount of work, especially for companies producing their first ESG reports. It is therefore advisable to start as soon as possible and, ideally, to use the 2023 financial year (and therefore the 2024 reporting) to test the new KPIs to be implemented.

Undeniably, the action plan starts with the double materiality matrix that we produced last year on the basis of the draft ESRS submitted for public consultation by EFRAG in April 2022.

On the ‘gap analysis’, we decoupled the quantitative part from the qualitative part to make the work more digestible. Faced with the increase in the number of KPIs to be produced, and with a new level of granularity, we took advantage of the opportunity to try to simplify the work of the teams by refocusing on the essentials, while also seeking to optimise processes and to pool resources to achieve an integrated vision. On this basis, we have identified three categories of KPIs:

We quickly identified ‘quick wins’, such as a ratio of greenhouse gas emissions to sales. Other KPIs, on the other hand, require more thought. This is the case for KPIs based on different units, or for certain subjects on which we have historically focused but for which the standards projects require less granularity.

I've identified two warning signs. My first point concerns the need to work more closely with the finance departments as soon as possible, because some of the indicators required by the draft ESRS are financial elements, but are not available from the finance departments. For example, it's far from easy to quantify risks and opportunities in Euros. It will therefore be necessary to anticipate the various needs of the finance departments.

My second point of warning concerns the ‘Own workforce’ part of the Social pillar of ESRS. For example, when it comes to accidents in the workplace, national regulations apply and, in France, our regulations include many more accidents in the definition of ‘accidents in the workplace’ than in other countries. This means that France is at greater risk of appearing as the country with the highest number of workplace accidents. This is a warning point that has been brought to the attention of EFRAG and the European Commission.

As you know, there are two aspects to consider. Firstly, there's financial materiality, that is the effects of sustainability factors on the company. Despite the existence of rules defining this, there is considerable room for interpretation: how is this economic materiality defined? How do we combine it with the risk assessments carried out within the company? It's not easy to define a methodology, and there's a real lack of guidance, especially for new companies about to join the scheme.

Then there's impact materiality, which consists of looking at how the company's activities have an impact on society and the environment. What is particularly new in impact materiality is the strengthening of the role of stakeholders in the system. The principle of double materiality requires issues with a strong impact or significant economic materiality to be considered. It is possible to imagine an issue with low economic materiality but high impact materiality. The issue will then be considered as material, and this is where the role of stakeholders becomes decisive.

Another point to bear in mind is that it is from this materiality matrix that the extent of reporting will derive, since, apart from the mandatory application of certain ESRS, all other ESRS will be subject to the materiality assessment carried out by the company. The role of stakeholders will therefore play a decisive role in the volume of our reporting and the amount of effort required.

A final point of warning will concern major groups in particular: the fact of deeming a subject to be non-material risks being a trap, because stakeholders will undoubtedly still expect to have information on certain subjects, even if these subjects have been considered non-material and set aside by companies.

In addition to these warning points, I have identified four major difficulties concerning the principle of double materiality:

Reporting must remain at the service of strategy and serve to steer performance. We must therefore avoid the predictable pitfall of a purely ‘compliance’ exercise, which would empty the teams' work of its content and distract them from the real challenge, which is to work towards transformation. With the CSRD and ESRS, we have changed the paradigm. In contrast to the current sustainability report, reporting is no longer simply a matter of reporting performance based on sound risk management; we now need to be able to project our business model over the short, medium and long term, anticipating the risks weighing on our business, but also taking into account the impacts generated by our business, and ultimately valuing the opportunities that could emerge from it. And, since it is not possible to publish impacts without presenting moderation or mitigation objectives, reporting undeniably encourages action.

Furthermore, to avoid ‘greenwashing’, action plans and the resources allocated to achieve the objectives defined by the company must be published, which implies being ambitious, but at the same time pragmatic and transparent. The regulator is therefore accelerating the potential of reporting as a self-regulatory tool that encourages reflection in a given direction, and de facto encourages the company to take action.

Many say that we're getting closer to the requirements of financial reporting, and rightly so in many respects, but this forward-looking part where the regulator and standard-setter encourage companies to set targets, publish action plans and allocate resources is quite unique. It is therefore important that these forward-looking data are based on reliable processes that are argued and shared with experts, both internal and external, statutory auditors, independent third parties and other stakeholders. It is also essential to promote acclimatisation to these new requirements at all levels, particularly with regard to the audit committee, which will be responsible for monitoring the integrity of the process for drawing up sustainability information, in the same way as for financial statements.

After years of increasingly vocal demand for enhanced transparency about ESG matters from investors and other stakeholders, regulators and standard setters in various jurisdictions issued definitive proposals to transform ESG reporting in 2022. The year brought proposed ESG disclosures from the European Union (EU) as part of the Corporate Sustainability Reporting Directive (CSRD), internationally by the International Sustainability Standards Board (ISSB), and in the United States (US) by the Securities and Exchange Commission (SEC). These ‘big three’ disclosure frameworks each detail expansive sustainability disclosure requirements – although their scopes and other details vary.

Given the geographic reach of the frameworks and their potential to encompass a broad spectrum of value chain contributors, most companies are expected to be impacted in some way. Proactive companies are in the process of assessing their scope and applicability so that they are prepared to meet potentially short reporting deadlines.

An SEC registrant that has a subsidiary listed in the EU and a subsidiary in a jurisdiction that requires ISSB reporting, for example, might be subject to all three requirements. With equivalency – that is, whether disclosures for one reporting framework can satisfy some or all of the requirements of another – not yet determined, companies captured in multiple reporting regimes have a vested interest in understanding which reporting applies. Further, understanding where the frameworks align and diverge will help companies to develop the requisite reporting strategy, data-gathering processes, and related controls, providing for a streamlined process and effective deployment of resources.

Our in-depth publication (here) compares and contrasts key provisions among the European Sustainability Reporting Standards (ESRS), the standards issued by the ISSB, and the SEC proposal. By understanding the different requirements, preparers can develop the appropriate reporting strategy, one designed to capture the right data the first time.

On 26 June 2023, the ISSB issued its inaugural standards (IFRS S1 and IFRS S2), clearly marking a new era of sustainability disclosures in global capital markets. Shortly after the release of the inaugural standards, the ISSB also issued ‘Ten things to know about the first ISSB Standards’ and a podcast, and recorded two webinars providing a detailed overview of IFRS S1 and IFRS S2. For more detail regarding these standards and PwC’s observations regarding some of these requirements, read our In depth here. For a short overview of IFRS S1 and IFRS S2, read PwC’s In brief here.

While the SEC is focused on the current application of existing securities laws with regard to climate-related disclosures, the exact date of the SEC’s final rule on climate-related disclosure is still unknown. The SEC also intends to issue a proposal on human capital management disclosures, which is expected in the second half of 2023.

The European and global green bond market has been growing by an average of 50% per year in the period 2015–2020 (see Annex 5 to the Commission Impact Assessment). It is set to reach USD1 trillion of yearly global issuance in 2023, with Europe becoming the global leader, as outlined by the Climate Bonds Initiative (here). However, there is a need for more rapid growth of a high-quality green bond market to achieve the targets in the Paris Agreement, as explained in the European Parliament’s briefing on green bonds legislation (here).

Despite the increasingly important role that green bonds play in financing assets needed for the transition to a low-carbon economy, there is no uniform green bond standard within the EU. Currently, the global bond standards, frameworks and principles comprise a patchwork of voluntary arrangements. Generally, underlying definitions of green projects are insufficiently standardised and, since assurance is voluntary, the standards do not always adequately ensure transparency and reliability.

As a part of the Action Plan on Sustainable Finance, adopted by the European Commission (EC) in March 2018, the Technical Expert Group (TEG) on sustainable finance published its recommendations on a voluntary EU Green Bond Standard (EU GBS) in June 2019. In July 2021, the EC published its proposal for a Regulation on European green bonds (the ‘EU GBS’). Currently, the European Parliament, EC and the Council of the European Union are in the final phase of three-way negotiations of the proposed EU GBS. The legislation is expected to enter into force in 2023–2024.

With the EU GBS, the EC aims to bridge the gap between the rising investor appetite for sustainable opportunities and the significant investments needed to finance the objectives of the Green Deal, improving transparency, credibility and effectiveness of the green bond market.

The EU GBS proposal is part of the EU’s broader strategy to foster sustainable finance as projected by the EC’s Action Plan on Financing Sustainable Growth from 2018.

Link to Taxonomy: Taxonomy is at the heart of EU GBS projects’ eligibility definition. The definition of ‘green’ is linked to the Taxonomy Regulation and CSRD, which aims to introduce mandatory EU sustainability reporting standards for approximately 50,000 undertakings. A core component of the EU GBS is full alignment of the use-of-proceeds (that is, the financed activities) with the EU Taxonomy, effectively ensuring that the proceeds only finance projects that are aligned with the requirements of 'green activities' set out in the EU Taxonomy.

Link to Sustainable Finance Disclosure Regulation (SFDR): The focus of the EU GBS proposal on transparency requirements connects to SFDR, which stipulates transparency duties for financial market participants and financial advisers on sustainability-related information.

Title II, chapter I of the Regulation covers the bond-related requirements. Importantly, all proceeds must be used to finance economic activities that meet the requirements set out in the Taxonomy Regulation, namely: the activity makes a substantial contribution to one of the six environmental objectives, does not significantly harm (DNSH) other environmental objectives, and complies with Minimum Safeguards (MS).

Title II, chapter II covers transparency and external review. It includes specific disclosure requirements as listed below. All disclosures must follow specific templates provided by the Regulation.

The process of a bond issuance under the EU GBS is illustrated below.

Independent external verification is designed to increase reliability and trust in the market by ensuring that green bonds meet the specific and published criteria over their lifecycle.

It is common market practice for green bond issuers to contract a third party to review the green bond documentation prior to bond issuance (to check alignment of the bond framework against the respective standard) and/or post-issuance (to check alignment of net proceeds spent against the Green Bond Framework). In the current green bond market, different types of verifications can be observed:

(1) Second party opinions (‘SPOs’): An SPO entails an assessment of the alignment of the issuer’s green, social or sustainability bond framework with the relevant Principles. In particular, an SPO includes an assessment of the issuer’s overarching objectives, strategy, policy and/or processes relating to environmental, social or sustainability bond issuance.

(2) Certification: An issuer can have its green, social or sustainability bond certified against a recognised external green, social or sustainability standard. A standard such as EU GBS defines specific criteria, and alignment with such criteria (and, for EU GBS in particular, alignment with the EU Taxonomy) and is normally tested by qualified, accredited third parties, which might verify consistency with the certification criteria.

(3) Green/social/sustainability ratings: The output of any external review might include a focus on environmental and/or social performance data/process relative to the Principles, or another benchmark, such as a 2-degree climate change scenario. Such scoring/rating is distinct from credit ratings, which might nonetheless reflect material environmental/social/sustainability risks.

(4) Verification: Verification focuses on the alignment with internal and external standards or claims made by the issuer.

The types of verification differ in the level of confidence that they provide, as illustrated by the graphic below. These verifications are offered by a range of providers including rating agencies, accounting/audit firms or other service providers.

The EU GBS mandates an independent external review (by an independent auditor) of the pre-issuance green bond fact sheet and the final allocation report. A verifier should align with the requirements of the EU GBS and needs to be accredited by the European Securities and Markets Authority (ESMA).

On 5 October 2023, the European Parliament adopted the provisional agreement on the EU GBS. On 23 October 2023, the Council adopted the Regulation. Now that both co-legislators have formally approved the final text, the Regulation will be published in the Official Journal of the European Union and will enter into force on the 20th day following its publication. The EU GBS will apply 12 months after its entry into force.

Green bonds are an important instrument in the transition, because they lead to emission reductions by issuing firms. EU GBS is the highest standard for green bonds, both in terms of quality (taxonomy alignment) and in terms of assurance.

On 13 June 2023, the European Commission (EC) published a proposal for a Regulation on the transparency and integrity of environment, social and governance (ESG) rating activities, thereby completing its plan for sustainable finance in the European Union. This proposal is designed to strengthen the reliability of ESG ratings, to enable investors to make more informed investment decisions and more effectively redirect investments towards sustainable assets. Currently, the activities of ESG rating providers are not subject to any regulation by Member States.

Under the proposed Regulation, ESG rating providers operating in the EU would be subject to the new rules. Financial institutions would not be subject to the new Regulation, nor would market players developing ESG ratings for their own needs or use.

The proposed Regulation defines an ESG rating as:

To improve the reliability of ESG ratings, the EC's proposal includes transparency requirements on the methods, models and main assumptions used by ESG rating providers.

It is important to highlight that this proposal is not about standardising the ratings but about improving the transparency of the methods applied.

The draft Regulation also suggests a series of measures designed to boost investor confidence, including the introduction of:

The draft Regulation is currently being examined by the European Parliament.