On May 31, 2024, the European Financial Reporting Advisory Group (EFRAG) released the first batch of implementation guidelines to assist the application of the European Sustainability Reporting Standards (ESRS), including the Materiality Assessment Implementation Guide (MAIG), the Value Chain Implementation Guide (VCIG), and the ESRS Data Point Checklist, a total of three items. The implementation guidelines provide detailed guidance for companies required by the Corporate Sustainability Reporting Directive (CSRD) to disclose sustainable development information for the 2024 fiscal year, to ensure that companies improve their understanding of the requirements of the European Sustainability Reporting Standards (ESRS), conduct disclosure work more effectively, and promote the transparency and consistency of sustainable development information disclosure.
Background and development of ESG information disclosure in the EU
Since the release of the European Green Deal in 2019, the EU has gradually built a detailed sustainable finance policy system to "achieve the 2030 Sustainable Development Plan and the 2050 Carbon Neutrality Vision", guiding a large amount of funds to flow into sustainable fields and industrial activities, and promoting the transformation of member states' economies towards a greener, low-carbon and sustainable direction. ESG information disclosure policy is an important part of the EU's sustainable finance policy system, currently mainly based on the EU Sustainable Finance Taxonomy Act, the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR).
Development and application of ESRS
The European Sustainability Reporting Standards (ESRS) took a long time from proposal to final adoption. Before the Corporate Sustainability Reporting Directive (CSRD), the EU's regulatory requirements for ESG-related information disclosure were based on the Non-Financial Reporting Directive (NFRD) adopted in 2014. As the name of the directive suggests, reports a few years ago only required the disclosure of non-financial information, including environmental matters, social and employee-related matters, compliance with human rights, anti-corruption and anti-bribery matters, and board diversity, and the companies required to disclose were only about 11,700 large listed companies in the EU.
In 2020, the EU conducted a survey on the use of the Non-Financial Reporting Directive (NFRD) standards and found that investors and social organizations felt that the level of detail in the disclosed information was still insufficient to meet their needs, and there was no set of unified standards for comparison, lacking credibility and relevance. As a result, the European Commission proposed to revise the reporting directive and to authorize the European Financial Reporting Advisory Group (EFRAG) to develop a complete set of ESG disclosure standards in conjunction with the ESG reporting directive, namely the first 12 European Sustainability Reporting Standards (ESRS) adopted in July 2023.
NFRD, CSRD and ESRS Timeline
Starting from 2024, in compliance with the EU Corporate Sustainability Reporting Directive (CSRD), nearly 50,000 companies registered in the EU or non-EU regions will disclose sustainability reports in stages according to the European Sustainability Reporting Standards (ESRS) based on company size, number of employees, etc.
Purpose and core content of the implementation guide
In order to help companies better understand and apply the European Sustainability Reporting Standards (ESRS), the European Financial Reporting Advisory Group (EFRAG) released three draft implementation guidelines in December 2023, solicited market feedback from December 22, 2023 to February 2, 2024, and released the official version of the implementation guidelines at the end of May this year. It is worth noting that the three implementation guidelines themselves are not authorized regulatory documents.
EFRAG continues to promote sustainable development information disclosure
The European Financial Reporting Advisory Group (EFRAG) is a private association established in 2001 with the support of the European Commission to serve the public interest. In 2022, the European Union's Corporate Sustainability Reporting Directive (CSRD) gave EFRAG new responsibilities, and EFRAG expanded its mission to provide technical advice on the draft sustainability reporting standards issued by the EU or on draft amendments to the standards.
The work of the European Financial Reporting Advisory Group (EFRAG) is mainly divided into two pillars. The first is the financial reporting pillar, which influences the development of the International Financial Reporting Standards (IFRS) from a European perspective and provides the European Commission with recommendations on the endorsement of the International Financial Reporting Standards (IFRS) (amendments); the second is the sustainable development reporting pillar, which prepares the draft EU sustainable development reporting standards and related amendments for the European Commission.
In terms of sustainable development reporting, the European Financial Reporting Advisory Group (EFRAG) has set up a project working group to develop the draft of the EU Sustainability Reporting Standards (ESRS), which is responsible for collecting and responding to feedback on the draft and providing relevant training resources. In December 2023, the EU Sustainability Reporting Standards (ESRS) were officially published in the EU Gazette and became EU law. The European Financial Reporting Advisory Group (EFRAG) has established a question-and-answer platform for the EU Sustainability Reporting Standards (ESRS), and its current focus is to assist in the practical application of the reporting standards.
In 2024, the European Financial Reporting Advisory Group (EFRAG) will continue to advance the EU's work on sustainability reporting:
In January, the first edition of the "Sustainability Reporting Standards for Listed SMEs (ESRS LSME)" and the "Voluntary Sustainability Reporting Standards for Non-listed SMEs (ESRS VSME)" were released, and comments were solicited before May. At the same time, some SMEs will test the disclosure reports in accordance with the requirements of the standards, and the enterprise partners such as banks, investors, and purchasers will evaluate whether they meet their sustainable development information needs;
In February, the first draft of the ESRS XBRL digital taxonomy and the draft of the digital taxonomy for Chapter 8 of Regulation (EU) 2020/852 were released for public comments for two months, namely, to carry out the digitization of sustainable development reports, mark the data points disclosed in sustainable development reports with XBRL (eXtensible Business Reporting Language), achieve machine-readable, and improve the accuracy and efficiency of the disclosed information transmission;
The preparation of industry-specific reporting standards has been initiated, but the initial version of the industry-specific standards has not yet been released.
summary
The EU is the region with the most complete legislation and related guidelines for sustainable finance in the world. With the release and implementation of the Corporate Sustainability Reporting Directive (CSRD), the disclosure of sustainable development information by EU companies will enter a more complete stage. ESG (sustainable development) information disclosure is the next step after establishing a classification of green and sustainable economic activities. It will also be a routine step for integrating sustainable development into financial markets and corporate management in the future. Market exchanges and cooperation need to be based on information disclosure. The release of the implementation guidelines will provide comprehensive guidance and practical support for companies to apply the European Sustainability Reporting Standards (ESRS), and effectively help the EU Corporate Sustainability Reporting Directive (CSRD) to be steadily implemented. In 2024, with the release of more sustainable information disclosure details and specific industry standards around the world, and the joint efforts of market participants such as regulators, companies, financial institutions, and investors, the ESG market is expected to reach a higher level.
