What’s an EFRAG?
Any day now, the European Financial Reporting Advisory Group (EFRAG) is planning to release new ESG standards for consultation. For those who lost their decoder ring, EFRAG is the previously obscure group that has been charged with setting the ESG disclosure standards for all European and non-European companies that do business in the EU.
These standards are intended for use with the new Corporate Sustainability Reporting Directive (CSRD) being considered by the authorities in Brussels. The CSRD replaces the old Non-Financial Reporting Directive (NFRD).
Not only is the new policy more stringent, it will also cover many more businesses. An estimated 49,000 companies will be subject to the new directive compared to just 11,000 under the NFRD. The new criteria for inclusion are more expansive - applying to companies that meet two of three criteria:
€40 million in net turnover
€20 million in assets
250 or more EU employees
Good Things Come in Threes
It’s been a very busy time in the world of ESG. Within the last five weeks, two major proposals have been released and another is expected within days.
In the coming days, we could be looking at three massive proposals which have comment periods ending on May 20 (SEC) and July 29 (ISSB). Though EFRAG has yet to issue their proposed standards - with the ISSB and the SEC alone, we’re already weighing in at a whopping combined 646 pages.
Clearly the ESG landscape is very dynamic and hard to follow. Each of these proposals would be considered monumental on their own — but having them all issued nearly simultaneously is a lot to digest. To all of my fellow ESG nerds: happy reading and make sure your laptop is charged up!
A Second Batch of Alphabet Soup?
With these three massive policy changes underway, it begs the question: will they add clarity or continue the ‘alphabet soup’ of confusion over ESG and climate reporting standards? The answer lies in how much these new proposals overlap and whether leaders are willing to collaborate.
There is reason for optimism.
For one, the largest of the incumbent ESG standard setters (GRI) has signed cooperative agreements with EFRAG—one in July of last year and one just last month. Moreover, the newly formed ISSB has subsumed several of the existing ‘alphabet soup’ components—SASB, CDSB and IIRC (Sustainability Accounting Standards Board, International Integrated Reporting Council and The Carbon Disclosure Standards Board, respectively).
Still, the current concern is whether the new paradigm will just duplicate the confusion of the past. Hope springs eternal that these organizations will collaborate, compromise and forge common ground—for the good of all. For the time being, the strongest thread that holds them all together is the international framework created by the Task Force on Climate Related Disclosures (TCFD). The TCFD is a common-sense roadmap for companies to measure, manage and disclose their climate impacts. So, for the climate issue at a minimum, there is some commonality.
Digitization to the Rescue
I am in London this week where I spoke on a panel with ISSB Chair Emmanuel Faber and attended a meeting at the iconic Chatham House on the topic of digitization of ESG information. The Chatham House meeting provided a ray of hope that digital taxonomies such as XBRL could bring alignment to this confusing world. (XBRL stands for eXtensible Business Reporting Language and is used to identify identical bits of data for comparison and analysis). Digitization is extremely helpful because formats like XBRL are easily read by computers and already built into corporate reporting software. This means the information can be sorted, analyzed and compared. In other words—it unlocks the power of ESG disclosure.
The good news is that all three of the actors in today’s ESG drama refer to XBRL as the preferred way to format the information. The bad news? There's only so much that digital taxonomy can do. If the disclosures are different they cannot be tagged as the same information. Simply put, if the final texts from the SEC, ISSB, EFRAG and others diverge significantly, the opportunity to harness these digital solutions—and meaningfully advance sustainable development—will slip away.
Missed last week's ESG & Climate News? Check it out now and stay in the know: April 15, 2022.
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Persefoni is the leading Climate Management & Accounting Platform (CMAP). The company’s Software-as-a-Service solutions enable enterprises and financial institutions to meet stakeholder and regulatory climate disclosure requirements with the highest degrees of trust, transparency, and ease. As the ERP of Carbon, the Persefoni platform provides users a single source of carbon truth across their organization, enabling them to manage their carbon transactions and inventory with the same rigor and confidence as their financial transactions.