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Shaping European reporting standards

Author: ICAEW Insights

Published: 05 Jan 2022

EFRAG has been given a mandate to expand its remit into developing a European sustainability reporting standard. Board President Jean Paul Gauzès talks through progress so far.

The European Financial Reporting Advisory Group (EFRAG) has seen its remit expand considerably over the past 12-18 months. It is now mandated by the European Commission in the proposal of a Corporate Sustainability Reporting Directive (CSRD) to work on the development of European sustainability reporting standards. 

In 2020, two initial mandates were issued: one to EFRAG to undertake the preparatory work necessary to create EU sustainability reporting standards and one ad personam mandate to its Board President Jean Paul Gauzès to look at the changes to EFRAG’s governance and financing if it were to become a sustainability reporting standard setter. 

“We managed to respect the short deadlines, even with public consultation including outreaches on the main elements on standard-setting matters, and our reports were published in early March last year,” says Gauzès. 

EFRAG was subsequently invited by the Commission to start work on draft standards and the governance reform as soon as possible, in parallel with the legislative negotiations on the draft CSRD. This is an unusual step, Gauzès explains, as usually there would be political agreement between the European Parliament and Council before moving forward. “But there was a precedent with the EU Taxonomy. It illustrates not only the urgency of the sustainability agenda implementing the Green Deal, but also the momentum.”

The work of the EFRAG Project Task Force on European Sustainability Reporting Standards (PTF-ESRS) is of considerable interest to a very broad range of stakeholders. To address this, it published a detailed five-month status report on 16 November 2021, outlining its progress to date and explaining how its “EU-wide mobilisation of multi-stakeholder resources” has ensured that all stakeholders are included in the project. It recently appointed 11 expert working groups to engage with various stakeholders as the project continues.

Public consultation will also follow, says Gauzès, who calls on wider stakeholders to provide comments through that channel. 

“The responses to our public consultation on the proposed due process procedures for EU sustainability reporting standard setting, which were held over summer last year, underlined that proper due process and transparency during the interim work phase is very important,” he says. “Public consultation on exposure drafts of draft standards will start during this interim project phase and will be launched by the PTF-ESRS in the coming months, and finalised by the new governing bodies – the EFRAG Sustainability Reporting Board (SRB) and the EFRAG Sustainability Reporting Technical Expert Group (SRTEG).”

When it comes to EFRAG’s own governance and due process, the organisation is currently implementing recommendations set out in Gauzès’ report to integrate sustainability into its structure. 

The sustainability reporting ‘pillar’ will run much the same as the financial reporting one, with a dedicated board and technical expert group, alongside working parties, advisory panels and a consultative forum.

The oversight and administrative activities will move from the existing EFRAG board to a new administrative board, which will cover both the financial reporting and sustainability reporting pillars. Organisations can become members of one or both pillars.

To make EFRAG more inclusive, Gauzès proposes a new civil society chapter to sit alongside its two existing chapters – European stakeholder organisations and countries. The new chapter will include NGOs, trade unions, academics and consumer organisations. The organisation has issued a call for expression of interests in EFRAG membership in relation to sustainability reporting.

Reflecting on the IFRS Foundation announcement at COP26 paving the way to the establishment of an International Sustainability Standards Board (ISSB) within months, Gauzès says that, from an EU perspective, it is clear that sustainability reporting standards should be developed collaboratively, in line with international initiatives. “Policymakers, standard setters and regulators across the world have been pushing for a collaborative approach to sustainability reporting standards. “European standards,” adds Gauzès, “should align with international initiatives as far as possible, while taking into account the European specificities and policy targets.” 

EFRAG’s PTF-ESRS has entered into statements of cooperation with the Global Reporting Initiative, Shift and the World Intellectual Capital/Assets Initiative. It has been having regular conversations with the IFRS Foundation Technical Readiness Working Group since summer 2021 and will continue to cooperate with the IFRS Foundation’s ISSB, says Gauzès. “In the new governance structure, the administrative board will ensure that the SRB and SRTEG establish appropriate cooperation arrangements with global and other relevant standard-setting initiatives.”

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