While ICAEW fully supports the ambitions of the European Green Deal and the mandating of sustainability reporting in Europe, it is concerned that the draft standards – in their current form – do not promote sufficient interoperability with the International Sustainability Standards Board’s (ISSB) proposed global baseline of sustainability disclosures.
ICAEW has responded to EFRAG’s suite of draft European Sustainability Reporting Standards (ESRSs) in a high-level comment letter.
EFRAG’s ESRSs are being developed under the legal framework of the EU’s proposed Corporate Sustainability Reporting Directive (CSRD). This legislation, which amends the 2014 Non-Financial Reporting Directive (NFRD), will oblige a wide range of listed and private entities to report in accordance with the ESRSs.
CSRD requirements extend to non-EU companies that are either listed on an EU-regulated market or have a net turnover of more than €150m in the EU and at least one subsidiary or branch in the EU (subject to certain thresholds).
In its comment letter, ICAEW emphasises the need for greater global convergence of sustainability reporting frameworks and asks EFRAG to reconsider how it can achieve closer alignment with the ISSB’s proposals: “If a high degree of consistency is not achieved, compliance for entities will be unduly complex, costly and result in unnecessarily lengthy reports of questionable value to stakeholders and investors.”
ICAEW suggests that EFRAG explicitly identifies requirements within the standards that are over and above the ISSB’s global baseline to reduce the burden for entities subject to both reporting regimes.
EFRAG’s ESRSs are based on double materiality principles, which are intended to address wider stakeholder needs. In comparison, the ISSB’s proposals are focused on the investor perspective. While mindful of this difference, ICAEW calls on EFRAG to prioritise the global agreement of fundamental definitions and terms relating to sustainability-related information.
There is scope in the draft ESRSs to align key definitions more closely with the standards of both the ISSB and the Global Reporting Initiative (GRI) – a framework also focused on the multi-stakeholder perspective and aiming to achieve best practice in this area.
“Making the architecture, structure, and terminology more consistent with global sustainability frameworks where possible would help preparers, investors and other stakeholders better understand EFRAG’s proposed requirements,” says Kate Beeston of ICAEW’s Financial Reporting Faculty. “Without understandability, there is a risk that the objectives of the CSRD will not be achieved.”
Concerns are also raised in the letter about the high level of detail required by the proposed disclosures. ICAEW warns that “the level of prescription and granularity within these proposed standards risk the creation of a compliance driven exercise that could result in low quality disclosure.”
A call for simplification where possible and a significant degree of phasing-in of the requirements is suggested to help companies prepare for the challenges involved in implementing these standards; challenges that should not be underestimated.
EFRAG is working to an ambitious timetable to submit the first set of draft ESRSs to the European Commission by November 2022. ICAEW cautions against rushing the process at the expense of quality.
Sally Baker, ICAEW’s Head of Corporate Reporting Policy, says: “The ability of European companies to access global capital and support the ambitions of the European Green Deal may be undermined if EFRAG is not given adequate time to develop a high-calibre set of European sustainability reporting standards. Ultimately, we want to see the goal of relevant, consistent and comparable sustainability disclosures be achieved and we respectfully ask EFRAG to improve their proposals as necessary to do just that.”
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