Digital from the outset: EU sustainability standards

Posted on March 12, 2021 by Editor

The European Financial Reporting Advisory Group (EFRAG) has published two milestone reports. They set out recommendations to the European Commission (EC) on the development of EU sustainability reporting standards and on changes to EFRAG’s governance and funding if it were to expand its remit to non-financial standards.

The first report contains 54 detailed proposals for a comprehensive set of reporting standards, covering foundations, conceptual guidelines, target standards architecture, and an ambitious roadmap that aims to produce a first set of draft standards by mid-2022. The rule of three applies: it suggests a three-layered structure (with sector-agnostic standards at the core, then sector- and entity-specific standards), three reporting areas (strategy, implementation and performance), and three topics, corresponding to the Environmental, Social and Governance (ESG) classification, with comprehensive sub-topics.

EFRAG supports the digitisation of reporting and the use of an XBRL taxonomy from the outset, along similar lines to the European Single Electronic Format (ESEF) for financial information. “The challenge for users today with sustainability reported data is that they encounter significant difficulties in accessing, comparing and using the companies’ financial and sustainability-related information published pursuant to the relevant EU legislation,” notes the report, with manual data extraction forming a time-consuming, error-prone, inefficient and costly process.

“Users are increasingly seeking sustainability information that is trustworthy, audited, accessible, and machine-readable, as well as relevant to all user groups, timely, and automatically updated … Having easy access to the data in one place and/or through a machine-readable structure would be easily and quickly integrated in software tools and search engines, freeing time for value-added analysis and interpretation by regulators, investors, rating agencies or other stakeholders.”

The second report, from Board President Jean-Paul Gauzès, proposes reforms to EFRAG’s governance structure and funding, introducing a non-financial reporting pillar. It aims to ensure that future EU sustainability reporting standards are developed using an inclusive and rigorous process.

As the EC, which mandated the work in June 2020, observes, sustainability standards are vital for the scope and urgency of the European Green Deal. They are also necessary for consistency in the reporting rules at the heart of the EU’s sustainable finance agenda, including the existing Sustainable Finance Disclosure Regulation (SFDR), the coming Non-Financial Reporting Directive (NFRD), the Taxonomy Regulation, and forthcoming legislation on sustainable corporate governance and due diligence. At the same time, the Commission recognises the importance of coordinating the development of EU standards with existing and emerging global initiatives.

We at XBRL International are very pleased to see this recognition of standards as an essential foundation for meaningful reporting, and in particular to see digital, structured data baked into the EU’s approach.

Read more here and here, or coverage here and here.

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