EFRAG and CSRD: why you are going to hear (more) about it

In 2021, the European Financial Reporting Advisory Group (EFRAG), the European public-private advisory group on financial reporting, has been charged by the European Commission with a mission of unprecedented scope: to define uniform sustainability reporting standards for companies in the European Union, as part of the revision of the former Non-Financial Reporting Directive (NFRD) – now renamed the Corporate Responsible Reporting Directive (CSRD).

The first set of draft European Sustainability Reporting Standards (ESRS), that concern by default all categories of companies and are therefore considered "sector-agnostic", must be finalized by EFRAG by mid-November. This calendar shall give the Commission enough time to translate this draft into a regulatory text by June 2023, so as to allow for the implementation of the first corporate reportings to be released in 2025 for the year 2024. The stakes are enormous, both for sustainability, for companies and for the European Union (EU).

The EU must be credited with its immense ambition, which is all too quickly decried by those who see only the regulatory constraint without grasping the purpose.

First, the ambition lies in the scope of users and preparers: the information to be published by companies as per the updated directive must serve not only investors, but also regulators and civil society. The EU ambition is also reflected in the extension of the coverage of this transparency obligation to a much wider number of European companies, as well as European subsidiaries of multinational groups established in the EU, increasing from approximately 11,000 entities concerned to more than 50,000, taking into account - to a reasonable extent - their value chain. The CSRD thus materializes an ambition of international influence for the EU.

Second, the disclosed information is aimed not only at estimating the material financial impact of sustainability issues on companies, assets and related investments, but also at enabling users to monitor that the reporting entities operate in a way that does not jeopardize respect for the environment, fundamental rights and professional ethics. This is the famous "double materiality" principle.

Third, the ambition of the CSRD is to centralise and adapt corporate disclosure requirements to help financial market participants complying with their own disclosure obligations, mainly under the SFDR and taxonomy regulations.

It is an understatement to say that defining those standards is in itself a challenge. The need to ensure coherence between European texts, the necessity to provide useful information for users that have very different needs, is coupled with the necessity of limiting the burden and costs on reporting entities. The level of granularity, the extent and the relevance of the disclosure requirements are today at the core of the EFRAG discussions with a challenge for the EU to preserve its ambition while delivering operational standards that can be widely endorsed, including at the international level.

Indeed, with the parallel definition of sustainability-related financial disclosure requirements by the International Sustainability Board (ISSB) of the IFRS on sustainability and the US SEC,  the European and Anglo-Saxon approaches are challenging each other, between complementarity and competition. The regulatory and therefore mandatory dimension of the European text (whereas the ISSB will provide only guidelines) remains its strength to compensate for its cumbersome implementation.

The first result will be necessarily imperfect and will need to evolve and be refined over the coming years and updates. Financial reporting has not been built in two years but over decades: it would be unfair to ask EFRAG to immediately reach perfect standards set in stone, while we are still all working collectively to frame our understanding of complex sustainability issues. Acknowledging that the result will necessarily be imperfect while going into the right direction is a prerequesite to consider these standards beyond mere regulatory compliance. Rather than a compliance obligation, they should be used as a transparency tool to the best advantage of investors and completed intelligently by issuers with appropriate presentation and bespoke information. This will enhance the sustainability of companies strategies and investment funds alike.

The policy and regulatory context of sustainable finance is becoming more and more complex to navigate. However, it is also a growing lever for differentiation and competition for issuers and investors. In order to respond to this new situation and to better assist its clients in this respect, the Green & Sustainable Hub is strengthening its capacities with the arrival of Laurene Chenevat from Mirova, who will be fully dedicated to these subjects. In support mostly of the origination and syndication teams, her mission will be client-oriented in order to decipher the issues and expectations related to these regulations and advise on how to make the most of them, in a constant dialogue with the regulators. We are convinced that today, a robust integration of sustainable finance policies and regulations is now an essential prerequisite to differentiate in its financing and investment strategies.