The European Financial Reporting Advisory Group (EFRAG) has published its initial proposals for the climate information that EU companies will be required to disclose under the bloc’s new sustainability reporting standards.
The proposals were presented at an EFRAG plenary yesterday as part of a ‘Climate Standard Prototype’ working paper, and is described as providing a “robust basis” for the EU’s incoming Corporate Sustainability Reporting Directive (CSRD). 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.
The climate element is one of nine focus areas that will feed into the CSRD, which is also expected to include specific provisions for SMEs and sector-by-sector disclosures.
The climate prototype establishes 10 separate disclosure areas, which fall under the headings of Strategy, Implementation and Performance Measurement. It is designed to be compatible with the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD) and standards from the Global Reporting Initiative and CDP.
In line with the TCFD framework, reporting firms may be asked to make narrative and quantitative disclosures on their governance around climate-related risks and opportunities, the impact of climate on business strategy and resilience, the processes in place to identify climate impacts, and climate metrics and targets.
However, the prototype includes a number of additional disclosure areas – most notably on alignment with the EU’s Green Taxonomy and financial exposure to climate risks. Under the former, companies may be asked to report historical data – going back one year – and current annual data on the turnover, and capital and operating expenditure aligned with Taxonomy-compliant activities.
These proposals will only apply to non-financial companies. Insurers, banks and investors will be subject to different reporting requirements which have been developed by EU financial regulators.
Next, EFRAG is proposing that companies quantify their financial exposure to climate risks by reporting the financial cost of physical risks in the absence of mitigation actions, and the transition risks associated with technology advancement, evolving social attitudes and others. Both line items are currently being considered by the TCFD for inclusion into new guidance on climate metrics, targets and transition plans.
In a break from existing climate reporting frameworks, EFRAG has also proposed requiring companies to provide narrative disclosure on their contributions to climate change throughout the value chain, other than Greenhouse Gas emissions, but it did not provide additional detail on what this will encompass.
The prototype – which will not be opened to public feedback – will now be submitted to a review panel and members of the nine EFRAG subcommittees developing proposals for the CSRD for comments and consensus building. Once feedback has been incorporated into a final draft, it will be reviewed by a dedicated expert working group which is soon to be established by EFRAG.
EFRAG expects to deliver its draft standards for the CSRD to the European Commission in mid-2022.
Separately, EFRAG announced the signing of a Statement of Cooperation with human rights non-profit Shift yesterday, to contribute to the development of CSRD reporting standards “in the social domain and at the same time the progress of converged standards at international level”.
Commenting on the news, Caroline Rees, President and Co-founder of Shift, said: “The development of EU sustainability reporting standards is a timely and much needed effort. It offers an opportunity for companies to raise their reporting to a level that reflects the UN Guiding Principles on Business and Human Rights.”