The public consultation on the exposure drafts of the first set of the European sustainability reporting standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG) closed on 8 August 2022. EFRAG is developing these disclosure standards for the European Commission under the Corporate Sustainability Reporting Directive (CSRD) (see our previous blog post). 

The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) have both provided responses to the public consultation (see here and here).

Focus of EBA and ESMA comments

Both EU supervisors noted their support for the objective of enhancing the quality of sustainability reporting to provide reliable, comparable and understandable disclosures. However, they expressed some specific concerns in relation to the content of the ESRS exposure drafts.

Both the EBA and ESMA support the use of the principle of “double materiality” in the ESRS. However, both raised concerns with the “rebuttable presumption” (i.e. the presumption that all mandatory disclosure requirements should be presumed material, rebuttable with reasonable and supportable evidence). ESMA noted, in particular, that this may incentivise companies to treat ESRS as a “menu” of disclosure requirements they can choose from, contrary to the spirit and the letter of the CSRD. Further, both noted that the final ESRS should contain more explanation and guidance on the implementation of the materiality criteria, including the prioritisation of impacts.

Concerns were also raised in relation to reporting on value chains because of potential difficulties in collecting the required information. The EBA believes that EFRAG should provide more guidance and practical examples on the application of the definition of the value chain, considering the wide range of different business models of in-scope entities. ESMA has suggested that the use of some estimates may be necessary, and should be permitted subject to clear conditions.

Alignment and interoperability

Both authorities emphasise the importance of consistency and interoperability of ESRS with other sustainability disclosure standards, in particular those being developed by the International Sustainability Standards Board (ISSB) (see our previous blog post). In particular, EFRAG has been asked to consider minimising the differences in architecture between the ESRS and the Task Force on Climate-related Financial Disclosures (TCFD) disclosure framework (on which the ISSB’s draft standards are based), and to seek closer alignment of terminology and definitions between the ESRS and the ISSB’s standards.

Alignment and interoperability between ESG disclosure standards remains a key issue for standard setters, as well as business. In response to the ISSB’s consultation on their exposure draft standards (which closed on 29 July 2022), the European Central Bank commented that two-way cooperation between standard setters is key, and “the ultimate goal should be an alignment that is as close as possible between the two standards, while remaining mindful of the fact that the EFRAG standard… is, by design, broader that of the ISSB, given its double materiality perspective and that it provides information for a larger group of stakeholders”. 

The ISSB has established a working group to enhance compatibility between the ISSB’s exposure drafts and other initiatives. EFRAG is a member of that working group (along with the US SEC and regulators in other countries that are currently developing climate/ESG disclosure standards). However, it remains to be seen to what extent the final forms of the ESRS and the ISSB standards are aligned.

What comes next?

EFRAG will submit final drafts of the ESRS to the European Commission by November 2022. The Commission will then need to adopt the final ESRS by delegated acts. This will need to be done before 1 January 2024, which is when the first set of reporting requirements under the CSRD are due to start (see our previous blog post).  

The ISSB intends to issue the final form of its first standards by the end of 2022.

For more information on ESG disclosure regimes, see our ESG Summer School.