European Commission (EC) welcomed the timely submission of the draft sustainability reporting standards from the European Financial Reporting Advisory Group or EFRAG. Once adopted, companies subject to the Corporate Sustainability Reporting Directive (CSRD) will use these reporting standards. Such mandatory reporting standards will ensure that companies are fully transparent about their impact on people and the environment as well as about the risks they face from climate change and other sustainability issues. In another relevant development, the European Parliament adopted the Corporate Sustainability Reporting Directive (CSRD), bringing ~50,000 companies under the new rules, up from the current 11,700. EC will adopt the first set of standards by June 2023 and the rules will start applying between 2024 and 2028.
This first set of draft European sustainability reporting standards (ESRS) from EFRAG is composed of 12 cross-cutting and topical standards. The publication of the draft standards is accompanied by a Cover letter, a Due process note setting out the process applied and the main differences between the exposure drafts and the draft ESRS, an Explanatory note (including its Annex of how draft ESRS take account of the initiatives and legislation listed in Article 1 (8) of the CSRD adding article 29 (b) -5 to the Accounting Directive), EFRAG’s Cover Letter on the Cost-benefit analysis of the First Set of draft ESRS, a Cost-benefit analysis of the First Set of draft ESRS prepared by CEPS and Milieu and six appendices. The bases for conclusions will be published in December.
The Explanatory Note states that the prudential requirements for credit institutions and investment firms require undertakings that are under the Capital Requirements Regulation, or CRR, to disclose specific sustainability-related information about their lending and investment portfolios, as defined in the relevant implementing standards developed by the European Banking Authority or EBA. To support the creation of the necessary data infrastructure for credit institutions and investment firms to meet the CRR obligations, draft ESRS incorporate a limited number of specific datapoints required by the EBA implementing standards. Such datapoints have been identified to reflect the sector-agnostic nature of the draft standards included in the first set of draft ESRS—that is, applicable to all undertakings irrespective of their sector. EFRAG expects to advise EC to incorporate the remaining datapoints in the EBA implementing standards in the draft Sector-specific ESRS that will be developed in the coming years. These datapoints are always mandatory and applicable irrespective of the outcome of the materiality assessment.
EC will now consult EU bodies (such as the European Environment Agency and the European Central Bank) and member states on the draft standards, before adopting the final standards as delegated acts in June 2023, followed by a scrutiny period by the European Parliament and Council. The reporting requirements will be phased in over time for different companies. Next year, EFRAG plans to develop proportionate standards for listed small and medium enterprises (SMEs) as well as a first set of standards adapted to individual economic sectors. The first companies will have to apply the standards in financial year 2024, for reports published in 2025. Listed SMEs are obliged to report as from 2026, with a further possibility of voluntary opt-out until 2028, and will be able to report according to separate, proportionate standards that EFRAG will develop next year.
Keywords: Europe, EU, Banking, CSRD, EFRAG, ESRS, Reporting, ESG, Climate Change Risk, Disclosures, CRR, Basel, EBA, EC
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The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
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