The Institute has issued its response to the public consultation on draft European Sustainability Reporting Standards (ESRSs), prepared by the European Financial Reporting Advisory Group (EFRAG).
Under the Corporate Sustainable Reporting Directive (CSRD), the European Commission have proposed changes to the nature and extent of sustainability reporting in the EU over the coming years. The CSRD proposes mandated European Sustainability Reporting Standards and aims to strengthen sustainability reporting requirements currently mandated under the Non-Financial Reporting Directive.
The public consultation involved the consideration of 13 exposure drafts across the following areas;
- Two cross-cutting exposure drafts covering general principles, strategy, governance and materiality assessment.
- Five environmental topical standards covering
- Climate change
- Pollution
- Water & marine resources
- Biodiversity, and
- Resource use and circular economy.
- Four social topical standards covering
- Own workforce
- Workers in the value chain
- Affected communities, and
- Consumers and end users
- Two governance topical standards covering
- Governance, risk management and internal control, and
- Business conduct
The Institute assembled an experienced working group of industry experts to review the consultation and prepare a response. Some of the summary points to note in the response include;
- The Institute fully support the introduction of sustainability reporting standards to ensure that certain entities report transparently on their Environmental, Social and Governance (ESG) impacts.
- There are concerns regarding the short timeframe allowed for responding to such a comprehensive consultation.
- It is critical that the ESRSs are closely aligned to the ISSB standards which are currently being drafted. One way of achieving this alignment would be for EFRAG to work with the ISSB to agree on a global baseline of minimum disclosure requirements. This would be an alternative to having standards requiring differing disclosures about the same ESG matter.
- The Institute has voiced concerns regarding materiality as proposed in the draft standard. There is a lack of guidance on how to apply “double materiality” as proposed in the ESRSs which may lead to inconsistent use across entities. There are also concerns regarding the workability of the rebuttable presumption contained in the standard and it is unclear how this can be applied which may lead to a lack of comparability between entities.
- The transition to the ESRSs will be challenging for entities as many of the concepts within ESRS and the systems needed to report are not yet well established.
- There are some concerns noted regarding the verifiability of information required to be reported on under the ESRSs. Information to be reported about an entity’s supply chain may be difficult to verify and gain assurance on in some instances.
- The response highlighted some terminology improvement recommendations as well as opportunities for greater harmony across governance disclosure requirements.
- There is no provision for disclosure exemption on the basis of commercial sensitivity and legal prejudice in the ESRSs.
Overall, whilst the Institute believes that the introduction of ESRSs is an important step in businesses reporting transparently on their ESG impacts, there is much room for improvement in the standards as they are currently drafted. The Institute encouraged EFRAG to take the time necessary to address respondents concerns and to make the standards more operable before they are finalised.