The European Financial Reporting Advisory Group’s (EFRAG) Sustainability Reporting Board (SRB) has received an urgent reminder of the pressing need for preparers to have timely guidance on assessing materiality when applying the bloc’s new sustainability rules.
During a board meeting on 23 August, SRB member Simon Braaksma emphasised that guidance on applying the concept of materiality under the European Union’s new sustainability reporting framework was crucial, stating that “it is the beginning of the whole process.”
Braaksma, who is responsible for sustainability reporting at Dutch conglomerate Philips, warned that many companies are at a loss regarding compliance with the new rules.
He said they have “no experience” and “no tools” to properly fulfill the requirements. He opined that “they need at least two or three more years because they can’t manage” the implementation of the new standards.
SRB staff technical lead Chiara Del Prete confirmed that the board was “less advanced” with the materiality guidance than it was with linked but less critical guidance dealing with the corporate value chain.
The urgency to finalise the guidance comes after the European Commission released an initial batch of 12 European Sustainability Reporting Standards (ESRSs) on 31 July.
The move makes the EU the first jurisdiction to adopt a robust sustainability reporting system based on the principles of the Corporate Sustainability Reporting Directive (CSRD).
The standards will undergo formal scrutiny from 21 August to 21 October, after which the European Parliament or the European Council can reject the EC’s work, also known as a Delegated Act.
The scrutiny period may be extended to 21 December, but neither the EC nor the Parliament can modify a Delegated Act. If the Delegated Act passes scrutiny, the new standards will take effect from January 2024, with reporting under the new standards expected to begin on 1 January 2025.
In introducing the topic, SRB chair Philippe de Cambourg cautioned that the guidance documents “are drafts and, of course, subject to change.”
He added: “So I express caution about using that as finalised guidance on how to implement ESRS.”
The ESRSs are sustainability reporting standards developed by EFRAG for companies of all sizes and sectors to report on their sustainability performance.
The EU has adopted a materiality approach, requiring companies to consider both the impact of a sustainability topic, such as climate, on their activities and the impact of their activities on that topic.
This contrasts with the single materiality model by the International Sustainability Standards Board (ISSB), where companies report only on the impact of a sustainability topic on their business.
The meeting also noted a significant degree of interoperability or overlap between the ISSB’s standards, the Global Reporting Initiative’s rules, and the new ESRSs.