The EU Commission-appointed EFRAG Project Task Force published its final report on the creation of European non-financial reporting standards. CDSB welcomes recommendations on international co-construction and digitisation, but cautions around areas of duplication that can be avoided.
Alongside the upcoming
review of the Non-Financial Reporting Directive (NFRD), expected to be
released in April 2021, the European Commission has mandated EFRAG to
start preparatory work on European non-financial reporting standards.
The outcome to that work, which aims to advise the European Commission
on what EU non-financial reporting standards could look like, was
published today (08 March 2021).
CDSB is committed to the
improvement of the NFRD through more granular and specific reporting
requirements to provide clear guidance to European companies on what to
report to meet the needs of their investors and other stakeholders. We
have produced several analyses to assess the implementation of the
Directive which demonstrated that it falls short of its intended
purpose. As a result, companies’ disclosure remains low in quality and
do not provide decision-useful, consistent and comparable information to
the report users.
The consistent use of
non-financial reporting standards across European businesses can play a
key role in that regard, to ensure that companies consider and report on
risks and impacts related to environmental matters.
We would like to acknowledge the
amount of work the Project Task Force and EFRAG staff have contributed
to come up with the set of 54 recommendations presented in the report,
including principles and building blocks, conceptual guidelines,
architecture and a roadmap to discuss priorities and timeline for the
gradual implementation of EU non-financial reporting standards. We do,
however, question how this work can feed into the objective of the NFRD,
which is about strengthening
the company's transparency and accountability, while limiting any undue
administrative burden. We should not also forget that delivering on the
European Green Deal requires mobilising at least half a trillion euros
per year of additional investments in the EU, which means that the
regulatory framework must incentivise a shift towards sustainable
investments, including through high quality disclosures. The various
legislative and non-legislative initiatives the EU is currently taking
should not create a ‘wait and see’ attitude amongst businesses based on
their perception of a lack of regulatory certainty or a regulatory
fatigue.
We particularly welcome the call
to work towards “a global convergence of sustainability reporting”
reflected in the second building block. We look forward to fruitful
collaboration on this matter. CDSB has incorporated European innovation
into its Framework in the past and welcomes future input from the
European standard setting process, to ensure that our work supports
Europe’s priorities. We welcome input and engagement from all
jurisdictions globally.
At the same time, we urge the
need for Europe to engage as much as possible in the formulation of
standards at the international level, as opposed to adjusting them as
they are transposed into the European context, which would result in
additional standards being created for the region. The process and
governance for the adoption of standards should allow such global
convergence of standards.
We also welcome that the
recommendations recognise the various needs of different stakeholders.
We believe that the standard setting process could further be supported
through the definition of a clear theory of change outlining how use of
reporting should allow various stakeholders to make better decisions and
how those decisions may support Europe’s policy priorities.
We also see positively the
emphasis put on the connectivity between financial and non-financial
information – a crucial element to support the realignment of private
sector financial flows in line with Europe’s priorities.
We commend the recommendation to
move towards digital reporting. This position would ensure Europe leads
the way in ensuring non-financial information is delivered to its users
in the best possible format for their needs. Given that digitisation is
the direction of travel for all corporate reporting in Europe and
globally, it would also avoid additional issues and financial resources
with converting an ‘analog’ standard into a digital one.
As the European Commission
finalises the draft of the new NFRD and its thinking around the future
of EU standards setting, we would like to raise a few points we believe
to be critical to ensure a successful EU standard setting:
- Clear architecture connected to market practices:
we welcome the reference to the TCFD recommendations, which have
already been integrated in the EU regulatory framework through the 2019
climate reporting guidelines. At the same time, the three reporting
areas of Strategy, Implementation and Performance measurement seem to
cover similar recommendations set out via TCFD on Governance, Strategy,
Risk Management and Metrics & Targets, but categorised differently,
warranting questions as to why this is necessary. We instead recommend
an alignment with current reporting practices, standards and existing
provisions that would result in lowering burden to report preparers, as
well as ensuring consistency for readers of such reports in Europe and
beyond;
- Consistent use of concepts and terminology:
we saw within the report a number of new concepts or concepts used in a
different way compared to existing reporting practices. This is likely
to create more confusion for both report preparers as well as readers of
such reports in Europe and beyond. Materiality is an example where
there needs to be a clearer articulation of the alignment between the
double materiality and the dynamic materiality concept, introduced by the five largest sustainability reporting frameworks and standard setters;
- Clear topics and sub-topics structure –
we noted that the report calls for an extension of the scope of topics
to be included in the “Governance” of ESG. We question whether this
would help increase the consistency of governance disclosures, which
according to our assessment, are already challenging for companies to
report on and often confused with other concepts such as due diligence.
Alignment with Europe’s legislative developments on corporate governance
is crucial in this respect;
- Sound prioritisation and timeline –
it should be clear from the start that despite giving a priority to
climate-related standards as part of the first “core” set of standards,
equal importance should be given to the standards on other environmental
and social matters.
CDSB remains committed to work
with EFRAG and the European Commission, together with the sustainability
reporting frameworks and initiatives, and look forward to close
collaboration with the European standard setting process so as to keep
the current momentum around the convergence of sustainability reporting.
We will continue to keep supporting businesses in their reporting
exercise in Europe and beyond.
CDSB’s work and resources for policymakers and businesses to improve corporate reporting in Europe
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