EFRAG group says current sustainability reporting insufficient for investor decision making, highlights best practice

A task force appointed by the European Financial Reporting Advisory Group (EFRAG) has concluded that sustainability disclosures by companies “often fail to provide content that can be used by capital providers to predict the future performance of the business”.

The group, named the Project Task Force on Reporting of non-financial risks and opportunities and linkage to the business model (PTF-RNFRO), was appointed more than a year ago to conduct a stock-take of current sustainability disclosure practices by companies and to identify class-leading examples.

It found that most companies, including those identified as leaders, did not provide sufficiently detailed information on their exposures to sustainability risks and opportunities over the timeframes needed for users to “assess the long-term viability of business models”.

This is in part due to “inadequate” disclosure on how sustainability risks and opportunities may impact a company’s future cash flows, the group said.

In addition, PTF-RNFRO described the reporting of sustainability opportunities compared to risks as “less mature… possibly suggesting that sustainability is perceived as a restraint on the business rather than an opportunity”.

“The leap is still to be made by some to move from construing it as a cost or risk rather than as an opportunity that brings potential new areas of growth,” it added. 

PTF-RNFRO provided a list of 27 companies identified as having leading practices in a supplementary report, which included Dutch development bank FMO, renewables utility Orsted, Allianz, ABN Amro and BNP Paribas.

The group’s analysis was based on a review of the reporting practices of 44 EU companies, in addition to feedback received from stakeholders via an online survey, interviews, written submissions and outreach events.

The study was carried out in parallel to the ongoing development of the incoming Corporate Sustainability Reporting Directive (CSRD), which will establish new sustainability reporting standards for EU companies. This project is overseen by the Project Task Force on preparatory work for the elaboration of possible EU non-financial reporting standards (PTF-NFRS), another group appointed by EFRAG.

The revamped standards will replace the EU’s legacy Non-Financial Reporting Directive, which has long been criticised for being too vague, producing inadequate and incomparable data on sustainability issues.

In his foreword to PTF-RNFRO’s findings, EFRAG Board President Jean-Paul Gauzes said that the good practices highlighted by the group “may go beyond what would be expected to be within the requirements” of the CSRD, which has the objective of providing “a baseline of the expected reporting by all companies”.

“However, companies can learn from the PTF-RNFRO identified examples of good reporting practices and use these to improve their current reporting for the benefit of users and other stakeholders.”

Last month, EFRAG published its initial proposals for the climate information that EU companies will be expected to disclose under the CSRD as part of a ‘Climate Standard Prototype’ working paper.