CDSB’s reactions on the EFRAG report on EU sustainability reporting standard-setting

The EU Commission-appointed European Financial Reporting Advisory Group (EFRAG) Project Task Force published its final report on the creation of European non-financial reporting standards. CDSB welcomes recommendations on international co-construction and digitisation, but cautions around areas of duplication that can be avoided.

Alongside the upcoming review of the Non-Financial Reporting Directive (NFRD), expected to be released in April 2021, the European Commission has mandated EFRAG to start preparatory work on European non-financial reporting standards. The outcome to that work, which aims to advise the European Commission on what EU non-financial reporting standards could look like, was published today (08 March 2021).

CDSB is committed to the improvement of the NFRD through more granular and specific reporting requirements to provide clear guidance to European companies on what to report to meet the needs of their investors and other stakeholders. We have produced several analyses to assess the implementation of the Directive which demonstrated that it falls short of its intended purpose. As a result, companies’ disclosure remains low in quality and do not provide decision-useful, consistent and comparable information to the report users.

The consistent use of non-financial reporting standards across European businesses can play a key role in that regard, to ensure that companies consider and report on risks and impacts related to environmental matters.

We would like to acknowledge the amount of work the Project Task Force and EFRAG staff have contributed to come up with the set of 54 recommendations presented in the report, including principles and building blocks, conceptual guidelines, architecture and a roadmap to discuss priorities and timeline for the gradual implementation of EU non-financial reporting standards. We do, however, question how this work can feed into the objective of the NFRD, which is about strengthening the company's transparency and accountability, while limiting any undue administrative burden. We should not also forget that delivering on the European Green Deal requires mobilising at least half a trillion euros per year of additional investments in the EU, which means that the regulatory framework must incentivise a shift towards sustainable investments, including through high quality disclosures. The various legislative and non-legislative initiatives the EU is currently taking should not create a ‘wait and see’ attitude amongst businesses based on their perception of a lack of regulatory certainty or a regulatory fatigue.

We particularly welcome the call to work towards “a global convergence of sustainability reporting” reflected in the second building block. We look forward to fruitful collaboration on this matter. CDSB has incorporated European innovation into its Framework in the past and welcomes future input from the European standard setting process, to ensure that our work supports Europe’s priorities. We welcome input and engagement from all jurisdictions globally.

At the same time, we urge the need for Europe to engage as much as possible in the formulation of standards at the international level, as opposed to adjusting them as they are transposed into the European context, which would result in additional standards being created for the region. The process and governance for the adoption of standards should allow such global convergence of standards.

We also welcome that the recommendations recognise the various needs of different stakeholders. We believe that the standard setting process could further be supported through the definition of a clear theory of change outlining how use of reporting should allow various stakeholders to make better decisions and how those decisions may support Europe’s policy priorities.

We also see positively the emphasis put on the connectivity between financial and non-financial information – a crucial element to support the realignment of private sector financial flows in line with Europe’s priorities.

We commend the recommendation to move towards digital reporting. This position would ensure Europe leads the way in ensuring non-financial information is delivered to its users in the best possible format for their needs. Given that digitisation is the direction of travel for all corporate reporting in Europe and globally, it would also avoid additional issues and financial resources with converting an ‘analog’ standard into a digital one.

As the European Commission finalises the draft of the new NFRD and its thinking around the future of EU standards setting, we would like to raise a few points we believe to be critical to ensure a successful EU standard setting:

  • Clear architecture connected to market practices: we welcome the reference to the TCFD recommendations, which have already been integrated in the EU regulatory framework through the 2019 climate reporting guidelines. At the same time, the three reporting areas of Strategy, Implementation and Performance measurement seem to cover similar recommendations set out via TCFD on Governance, Strategy, Risk Management and Metrics & Targets, but categorised differently, warranting questions as to why this is necessary. We instead recommend an alignment with current reporting practices, standards and existing provisions that would result in lowering burden to report preparers, as well as ensuring consistency for readers of such reports in Europe and beyond;
  • Consistent use of concepts and terminology: we saw within the report a number of new concepts or concepts used in a different way compared to existing reporting practices. This is likely to create more confusion for both report preparers as well as readers of such reports in Europe and beyond. Materiality is an example where there needs to be a clearer articulation of the alignment between the double materiality and the dynamic materiality concept, introduced by the five largest sustainability reporting frameworks and standard setters;
  • Clear topics and sub-topics structure we noted that the report calls for an extension of the scope of topics to be included in the “Governance” of ESG. We question whether this would help increase the consistency of governance disclosures, which according to our assessment, are already challenging for companies to report on and often confused with other concepts such as due diligence. Alignment with Europe’s legislative developments on corporate governance is crucial in this respect;
  • Sound prioritisation and timeline it should be clear from the start that despite giving a priority to climate-related standards as part of the first “core” set of standards, equal importance should be given to the standards on other environmental and social matters.

CDSB remains committed to work with EFRAG and the European Commission, together with the sustainability reporting frameworks and initiatives, and look forward to close collaboration with the European standard setting process so as to keep the current momentum around the convergence of sustainability reporting.  We will continue to keep supporting businesses in their reporting exercise in Europe and beyond.

CDSB’s work and resources for policymakers and businesses to improve corporate reporting in Europe