EC published two reports that were prepared on a request from EC and set out recommendations on the development of sustainability reporting standards. One report proposes a roadmap for the development of a comprehensive set of EU sustainability reporting standards while the other proposes reforms to the governance structure of the European Financial Reporting Advisory Group (EFRAG) to ensure that future EU sustainability reporting standards are developed using an inclusive and rigorous process. The report on governance structure proposes to create a new non-financial reporting pillar, alongside the existing financial reporting pillar of EFRAG. EC will consider these reports as it prepares the proposal to strengthen the Non Financial Reporting Directive (NFRD), which is being planned for April.
EC notes that sustainability standards are necessary to ensure consistency of reporting rules at the heart of the sustainable finance agenda, especially the existing Sustainable Finance Disclosure Regulation, the Non-Financial Reporting Directive (NFRD), the Taxonomy Regulation, and the requirements of forthcoming legislation on sustainable corporate governance and due diligence. The report on development of sustainability standards in EU highlights the main recommendations (54 proposals) of the EFRAG Project Task Force on preparatory work for the elaboration of possible EU non-financial reporting standards. This report, which was prepared by a multi-stakeholder task force established by EFRAG, presents the key conclusions of the Task Force:
- Standard-setting should be built on robust EU conceptual guidelines, addressing public good alignment, expected qualitative characteristics of information, relevant time-horizons, clear boundaries, double materiality, and connectivity between financial and sustainability reporting.
- The overall target architecture of standards should be coherent and comprehensive and should reflect appropriate layers of reporting (sector-agnostic, sector-specific, and entity-specific), relevant reporting areas, and a coverage of sustainability topics classified under an ESG+ categorization. Presentation should preferably be organized under "sustainability statements" and digitization should be considered from the start. Sustainability reporting should be directly connected to management reporting systems, enabling reporting entities to better understand and manage sustainability matters. The resulting standards must also provide a basis to develop a data taxonomy that facilitates the digitization of sustainability statements.
- The standard-setting roadmap toward the target architecture should be implemented in realistic phases, with the expectation that . However, the first-time application of the revised EU Non-Financial Reporting Directive should benefit from a robust first set of "core" standards.
- Significant merit exists in promoting a mutually reinforcing cooperation between EU standard-setting efforts and international initiatives or fora.
The report highlights that change of paradigm in standard-setting requires careful prioritization; this implies a step-by-step project toward a comprehensive and stable reporting platform, allowing companies to report in line with the provisions of the revised NFRD. The first set of standards should allow companies to report pursuant to the revised NFRD and should tentatively include two priority conceptual guidelines (on double materiality and quality of information); cross-cutting "core" standards covering reporting areas, reporting structure, and entity-specific materiality assessment; and "core" standards for most sub-topics (reasonably mature) and "advanced" standards for some priority sub-topics such as climate change. The second set of standards for reporting should start enhancing content and should tentatively cover the remaining four conceptual guidelines; "advanced" cross-cutting standards (if need be); and "advanced" standards for other priority sub-topics. The Project Task Force understands that the possible due dates for the two initial sets of standards are as follows:
- For set 1, draft standards are to be proposed by the European standard-setter by June-September 2022 (applicable for reporting year 2023 and applying to the reports published in 2024).
- For set: draft standards are to be proposed by the European standard-setter by June-September 2023 (applicable for reporting year 2024 and applying to reports published in 2025).
The report proposes that sustainability reporting for small and medium enterprises, or SMEs, should be addressed as part of the first two sets and SME-specific standards should be elaborated focusing on business model, summarized sustainability challenges and retrospective key performance indicators, and corresponding to the expectations of the SME management team, the value chain counterparts, and financial institutions. Alongside the first two sets of sector-agnostic standards, sector-specific disclosures should be considered—either prioritizing the most-impactful/most impacted sectors and covering all sectors over time or under an all-sector coverage based on an initial "core" (more limited in terms of depth) approach.
- News Release
- Report on Roadmap for Reporting Standards (PDF)
- Report on Changes in EFRAG Structure (PDF)
Keywords: Europe, EU, Banking, Insurance, Securities, NFRD, ESG, EFRAG, Reporting, Climate Change Risk, SFDR, Taxonomy Regulation, Sustainability Reporting Platform, EC
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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