The European Commission has officially mandated the European Financial Reporting Advisory Group (EFRAG) to develop recommendations about potential EU non-financial reporting standards, a move it flagged earlier this year.
In addition, the EFRAG board president and chair of the European Lab Steering Group has been given a mandate to consider the possible need for changes to the governance and financing of EFRAG if it were entrusted with the development of such standards.
The mandates were trailed in a speech by Commission executive vice president Valdis Dombrovskis in January, when he announced that the EC was going to “support a process” to develop European non-financial reporting standards.
The move is in connection with the Commission’s plan for a revision of the Non-Financial Reporting Directive (NFRD), which comes as investors face new environmental, social and governance (ESG) disclosure requirements under regulations stemming from the Commission’s sustainable finance action plan.
In a letter setting out EFRAG’s mandate, Dombrovsksis said the Commission had not yet taken any decision about the future role, if any, of standards in the context of the revision of the NFRD, but that “I consider it necessary to already launch technical preparatory work to allow for the swift adoption and implementation of European standards should that be the choice included in the Commission’s proposal”.
“It will ultimately be for the Council and the European Parliament, as co-legislators, to decide whether the use of standards should be included in the revised NFRD and, if so, pursuant to which modalities,” he added.
EFRAG’s preparatory work is to be carried out by a task force to be appointed by the steering group of the European Reporting Lab at EFRAG, with a call for candidates for this body to be issued shortly.
According to the text of the mandate, the task force is to consider “the full sustainability spectrum of ESG factors in line with the overall aim of the European Green Deal and Agenda 2030”.
It is also to have in mind that one of the objectives of any future EU non-financial reporting standards would be to ensure that companies subject to the revised NFRD disclose information that would allow investors to meet the requirements coming their way from “at least” the new EU taxonomy and disclosure sustainable finance regulations.
Although overall supportive of the mandate, Hilde Blomme, deputy CEO of trade group AccountancyEurope and a member of the EFRAG Reporting Lab, expressed some concerns about the requirements for the composition of the task force, in particular with respect to institutional investors’ involvement.
The mandate document states that the task force should as a minimum include representatives from nine stated categories of stakeholder organisations, such as non-financial corporations; financial institutions; SMEs; NGOs; and auditors, assurance providers, and accountants.
Another group is “other financial market participants”, as defined by the new sustainable finance disclosures regulation, which includes asset managers, pension funds, insurers, and pan-European personal pension product providers.
“What will come out of this?,” said Blomme. “Do they want one of each? We believe preparers and institutional investors are critical and although there are references to a slew of them is the balance right?
“Hopefully we will see the really important institutional investors on this task force.”
In its consultation on the NFRD the Commission noted that investors, companies and auditors/accountants had historically been the key stakeholder groups with an interest in and contributing to the elaboration of financial reporting standards. It asked respondents to what extent they thought these groups should also be involved in the process of developing a European non-financial reporting standard.
PensionsEurope’s answer was that representatives from IORPs must be involved.
The EFRAG-appointed task force is expected to complete its work in early 2021, with a progress report to be released at the end of October 2020. The Commission has indicated planning to introduce a legislative proposal for a revised NFRD in Q1 2020.