The finance profession’s role in the transition to a sustainable economy took a big step forward on 23 November, as the European Financial Reporting Advisory Group (EFRAG) submitted the first batch of draft EU Sustainability Reporting Standards (ESRS) to the European Commission.

As well as setting general requirements for disclosure in sustainability reporting, the ESRS cover a range of more specific topics under three main categories: environment (including climate change, pollution, marine resources, biodiversity and the circular economy), social (including companies’ own workforces, workers in the value chain and affected communities) and governance (business conduct).

Developed between June 2021 and April this year, the ESRS were subsequently opened up to a three-month public consultation over the summer. Approved last week by EFRAG’s Sustainability Reporting Board (SRB) and Sustainability Reporting Technical Expert Group, the draft standards handed to the Commission take account of input received during that exercise.

In terms of next steps, the Commission will now consult on the standards among EU agencies and member states before adopting the final ESRS as delegated acts in June 2023. These will then be put to the European Parliament and Council for a short scrutiny period.

Fostering progress

Once enshrined in law, the reporting requirements will be phased in for different types of companies. The first wave will need to apply the standards in the financial year 2024 for reports published in 2025. While listed SMEs will be obliged to report in line with the ESRS as of 2026, they will have scope for a voluntary opt-out until 2028.

During the next 12 months, EFRAG will focus on refining a second batch of draft ESRS, which will feature additional standards designed specifically for SMEs. That set will also include a range of sector-specific standards encompassing five industries covered by the Global Reporting Initiative (agriculture, coal mining, mining and both upstream and mid-to-downstream oil and gas), plus five high-impact sectors (energy production, road transport, motor vehicle production, textiles and food and beverages).

In a statement, former EFRAG Acting SRB Chair Kerstin Lopatta – Professor of Financial Accounting, Auditing and Sustainability at the University of Hamburg – said: “We can be proud of this outcome … and of this critical contribution to establishing sustainability reporting in the EU on robust foundations. Our goal has been to strike the right balance between a game-changing step forward and a pragmatic implementation, and to foster global sustainability reporting progress while taking full account of the feedback received through our public consultation and deliberations. We are confident that we will all in due course benefit from this collective effort towards more transparency and accountability.”

Upon receiving the draft ESRS, EU Commissioner for Financial Services, Financial Stability and Capital Markets Union Mairead McGuinness noted: “It is time to put sustainability reporting on an equal footing with financial reporting and that is exactly what we are doing here. Mandatory reporting standards will be an important tool to combat greenwashing. Standards will also help companies to communicate and manage their sustainability performance more efficiently.”

A just transition

In an announcement, professional body Accountancy Europe said: “We welcome this first set of draft ESRS, which represent a significant step forward. We will further analyse the details and next steps as these standards, once adopted by the Commission, will need to: 

• reflect the feedback received from stakeholders during the short public consultation and from the SRB members;

• align with the International Sustainability Standards Board and Global Reporting Initiative standards;

• serve the European public good, and

• be operationalised pragmatically to support a just transition.”

It added: “We are ready to help engage constructively with the Commission, European agencies and bodies in the next steps of the process that lead to the ESRS delegated acts’ finalisation. In our view, the ESRS need to become a pragmatic tool to support the urgent need to move to a sustainable economy; however, we appreciate that reporting alone is only a small part of the change that this requires.”

Meanwhile, ICAEW Head of European Policy Susanna Di Feliciantonio said: “Delivered on time despite tight constraints, the finalisation of the first set of ESRS by EFRAG marks a significant moment in the move towards a corporate reporting system that encompasses both financial and sustainability reporting, in line with the ambitions of the Corporate Sustainability Reporting Directive (CSRD).

“Attention will now start to turn to how to ensure the effective and successful operationalisation of the standards across Europe in the coming years.”