I. In April 2022, the European Financial Reporting Advisory Group (EFRAG) published proposals for sustainable standards for public consultation, which have been widely criticised
EFRAG is the European Union body responsible for advising the Commission on accounting standards. Starting this year (2022), it is also responsible for proposing sustainable and/or ESG (Environment, Social, Governance) standards to the Commission.
The proposals for sustainable standards made in April by EFRAG experts should have marked an important step forward towards better corporate transparency.
However, they have raised many criticisms, in particular about their heaviness, complexity and number.
I took part in these criticisms in an article published by Europe Jacques Delors in May 2022 entitled: " The moment of truth is approaching for European Sustainable Reporting Standards as they face a challenge brought by international standards!”.
I recalled that the international standards proposed by the International Sustainable Standards Board (ISSB) created in October 2021 are less ambitious than those of the European Union. They only address climate concerns and are based on financial materiality - i.e., the risk that climate policy poses to the company - whereas the European legal framework is based on double materiality, which also included the impact of the company on its environment and partners.
EFRAG's experts chose to propose too many standards at once, some of which were overly complex in areas that had not yet been fully explored (biodiversity, for example). In the end, disclosure requirements became particularly burdensome (167 additional indicators on top of company sector indicators), leading to fears that many companies would become "fed up" and potentially result in the European project and its ambitions being called into question. It was therefore necessary to propose fewer standards and concentrate on the most important ones in the first instance, including climate as a priority.
Furthermore, the comparability and compatibility of EU standards with those proposed by ISSB was not ensured, which made life difficult for companies.
The public consultation on the April proposals, which ended in August, attracted 800 responses, many of which echoed the criticisms summarised above.
II. EFRAG's new proposals represent a major step forward
Following the consultation, EFRAG sent its proposals to the Commission wherein they essentially address the criticisms of the first draft.
It is a framework that remains ambitious on the main priorities of sustainable development - notably climate and environment - but is more limited in the number of disclosure requirements (almost 50% less), leaving the most complex indicators to a later stage.
The new system includes 12 standards with disclosure requirements, 2 of which relate to general principles, and 10 relating to environmental issues (climate, pollution, marine resources, water, etc.), social affairs, governance and business ethics.
Each of these standards requires a large amount of information and figures to be provided. For example, the climate standard, which is more or less 40 pages long, includes 9 disclosure requirements, the first of which is the climate change transition plan, the second being the company's climate change policy, and the third the company's actions and resources related to this policy.
This is followed by reporting requirements for metrics and targets; for example, Scope 1 greenhouse gas emissions (directly related to the production of a product), Scope 2 (indirectly related to production), and Scope 3 (related to other stages of a product's life: procurement, transport, consumer use, etc.). The Scope 3 indicator is obviously the most difficult to estimate. The text specifies that it must be calculated for each category that is significant for the company; it therefore introduces a welcome dose of proportionality.
In addition, a major effort to ensure comparability and compatibility with ISSB climate standards is to be commended. Firstly, the structure of the EU standards now follows, similarly to the ISSB, that of the G20 Taskforce on Climate-related Disclosures (TFCD), which made its recommendations in 2017. More importantly, as ISSB standards are less ambitious than EU standards (given they only include the principle of financial materiality), the objective is that when a company complies with EU standards, it ipso facto complies with ISSB standards.
These standards proposed by EFRAG to the European Commission will be subject to consultation with the three European Banking, Insurance and Markets Supervisory Authorities and subsequently, with the Council and the European Parliament. The final 12 standards are expected to be published by the Commission in mid-2023 and completed thereafter.
For the 50,000 companies that will have to apply EU sustainable standards in 2024, this will entail significant effort, while at the same tile, remaining achievable, especially since many of these companies already publish the most part of the required information and indicators. A more difficult aspect will be how these companies will collect data from their suppliers and customers, especially SMEs, which hopefully won’t come to bear excessive constraints. EFRAG is set to work on simpler standards for SMEs, however these are not due to be published until 2024.
EFRAG's proposal of these standards is therefore a major step forward in the progress of sustainable corporate transparency in conjunction with the implementation of the Corporate Sustainable Reporting Directive (CSRD) and of the European taxonomy framework. It will also allow the creation of a large database that will be useful to each company, as well as other stakeholders in the sustainable economy (public authorities, scientists, economists, NGOs, media, etc.) to better understand the state and prospects of the sustainable transformation of the economy, therein supporting this transformation in line with the Green Deal’s action plan.