Message from the CEO, Nina Schindler
The European Sustainability Reporting Framework established by the Corporate Sustainability Reporting Directive (CSRD) will mark the start of a new era, changing the way companies are perceived and how they see themselves in their environment. The upcoming European Sustainability Reporting Standards (ESRS) will elevate corporate reporting on sustainability performance from a mere compliance with regulatory demands to a major business strategy.
The European Association of Co-operative Banks (EACB) has made sustainable reporting its top priority. Together with the other banking industry stakeholders, the EACB strongly supported the development of EFRAG into a standard setter for sustainability requirements through active engagement in the formation of EFRAG’ sustainability pillar and participation in numerous meetings of the board.
Moreover, to keep up with the rapidly changing sustainability reporting landscape and to lay the groundwork, the association has created a new Working Group on Sustainability Reporting and Audit. Assessing and commenting on a 400-page EFRAG questionnaire on the future ESRS was its first - arduous and very time-consuming - task. Co-operative banks demand that the technical quality, feasibility, and usability of the proposed ESRS should be improved, whilst the complexity of the standards should be substantially reduced.
With sustainability inherently resting at the core of the mission and business model of European co-operative banks, the EACB members support the EU’s ambitions to provide a high quality and comprehensive reporting framework for sustainability disclosures. Forward-looking, co-operative banks have been progressively placing sustainability reporting at the heart of their businesses by proactively integrating environmental responsibility, social conduct, and principles of sound governance.
3 Questions to Sven Gentner, Head of Unit for Corporate Reporting, Audit, and Credit Rating Agencies, European Commission
Sven Gentner is the head of unit for corporate reporting, audit, and credit rating agencies in the European Commission's directorate-general for financial stability, financial services and capital markets union. Sven joined the European Commission in 2004 and has served in various positions in its Brussels headquarters and abroad. From 2013 to 2015, Sven was a counsellor in the Economic and Financial Affairs Section of the Delegation of the European Union to the United States. He dealt with EU-US regulatory issues and TTIP negotiations in financial services. From 2015 to 2021 he headed DG FISMA’s unit in charge of asset management.
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- EFRAG is on its way to deliver the first set of sustainability reporting disclosures by mid-November. What are the next steps envisaged by the European Commission to continue developing the sustainability reporting framework? What is the time frame expected for the sector specific standards? What are the challenges that you expect in the coming months? Would the Commission consider phasing-in levers to smoothen out the implementation of the disclosure requirements, while respecting the CSRD framework?
EU standards will have to reflect the level of ambition set by the European Parliament and the Council in the Corporate Sustainability Reporting Directive (CSRD). It means that, from the beginning, EU standards will cover all sustainability topics under a double materiality perspective (ESG risks to companies and impacts of companies on people and the environment).
At the same time, standards must be proportionate. They must not go beyond what is strictly necessary to meet policy objectives. Standards must be sufficiently simple and understandable for corporates and users.
After closing its public consultation on the first set of draft European Sustaniability Reporting Standards (ESRS), the European Financial Reporting Advisory Group (EFRAG) is now amending the standards based on the feedback received. In particular, EFRAG is currently addressing a number of issues such as international alignment, the reduction and simplification of standards and the possible phase-in of reporting requirements.
We expect EFRAG to send us a final set of draft standards by mid-November that are in line with the requirements of the CSRD but that are also usable for companies.
We have to move fast; the urgency of the sustainability crisis needs rapid action. The co-legislators have agreed some deadlines in the CSRD that have to be met: The Commission will adopt a first set of standards covering all ESG issues by 30 June 2023. And a second set of standards, including sectors-specific standards and standards for listed SMEs, by 30 June 2024. Standards for non-EU companies are also to be adopted in 2024.
The application of standards will be phased in for different types of companies: Companies already now subject to EU sustainability reporting requirements will have to apply the new rules for the first time in financial year 2024, for reports published in 2025. Other large companies will have to apply the new rules in financial year 2025. Listed SMEs another year later, in financial year 2026, with a further possibility of voluntary opt-out until 2028. Finally, non-EU companies with branches or subsidiaries in the EU will have to apply CSRD in 2028.
- Due to the complexity of EFRAG sustainability standards along with the tight implementation timeline, many preparers expect that the regulatory and administrative burden on financial institutions would be high. Does the European Commission foresee measures to alleviate the burden placed on financial institutions in terms of setting up processes and systems?
The practical usability and the potential burden on companies is something we take very seriously. EFRAG’s due process will ensure that the final draft ESRSs strike the right balance between the information needs of users and the burden for preparers.
We expect that the final standards will differ from the ones that were put out for consultation earlier this year. They will be less complex and with fewer disclosure requirements.
The phasing-in outlined above should also help companies by giving them more time to prepare for the new reporting requirements.
EFRAG will also explore additional guidance documents if necessary. Member States should also work on this. Business support services are usually most effective when provided at national or regional level. We can also explore the mobilisation of EU funds.
Companies can already now see the current draft standards online. By mid-November EFRAG’s revised drafts will be publicly available. This means that companies -including financial institutions- can already have a good insight into the kind of requirements to expect and can begin to prepare.
- European requirements for sustainability disclosures adopt a wider approach than ISSB to several key reporting aspects, including target audience, definitions of materiality and the rebuttable presumption principle. How does the European Commission seek to ensure the compatibility between EFRAG and ISSB sustainability standards? What can be done to limit the differences between the two standards that might hamper their interoperability and result in double reporting by companies? What does the EU aim to accomplish in the ISSB jurisdictional working group?
The EU fully supports the objectives of the ISSB to set a global baseline that different jurisdictions can incorporate into their own rules. But the narrower financial materiality reporting objective of the ISSB and the so-far limited coverage of sustainability issues (only climate-related reporting) mean that ISSB standards cannot fully meet the EU’s needs or ambitions. Moreover, European standards will fit have to into the EU’s policy objectives such as the European Green Deal and achieving climate neutrality by 2050. In comparison the ISSB is policy agnostic and is intended for use globally, with jurisdictions with varying ambition.
The CSRD does not foresee the adoption of ISSB standards in the way that the EU decided in 2002 to do for IFRS financial reporting standards. The CSRD defines the timing and the content of EU standards: the full range of sustainability issues from the start, from a double materiality perspective.
However, we expect the EU standards to integrate the content of ISSB standards to the extent that it is consistent with the EU’s legal framework and the ambitions of the European Green Deal.
The Commission and EFRAG are participating in the ISSB jurisdictional working group alongside with other jurisdictions such as the US, Japan, China and UK to discuss how the ISSB global baseline can be used by different jurisdictions.
In addition, over the last six months we had regular discussions between the Commission, EFRAG and the ISSB. We have made very good progress on alignment and interoperability between ESRS and ISSB standards. In the light of these discussions, EFRAG is currently working on further aligning our EU standards with the ISSB draft standards. For example, ESRS will use the reporting structure of the TCFD recommendations as will the ISSB standards. EFRAG is also considering other changes related to the materiality assessment and the alignment of definitions of key concepts.
There has also been very good cooperation on common definitions of essential components of the general approach and of the climate reporting standards. For example, on the sustainability reporting boundary, the value chain and the calculation methodology on scope 1, 2 and 3 and carbon credits. We are confident that we will be able to agree on the key components of a global sustainability reporting language.
Second Opinion from Annina Tanhuanpää, Board Member of EFRAG Sustainability Reporting Board & Director, ESG and Corporate Responsibility of OP Financial Group
Annina Tanhuanpää is member of the Board of EFRAG Sustainability Reporting Board and Director, ESG and Corporate Responsibility, in OP Financial Group. She is the chairperson of the OP Financial Group ESG committee and Member of the OP Corporate Bank plc’s Executive Management Team.
Previous experience covers responsibility over the ECB supervision of the OP Financial Group and the upcoming legislation. She worked for the public sector in the role of Legislative Counsellor in the Ministry of Finance.
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EFRAG’s Sustainability Reporting Board (SRB) is now working very intensively and under extreme time pressure to consider the feedback received from stakeholders on a first set draft ESRS and agree on the subsequent amendments in the exposure drafts, in order to meet the challenging deadline set by the European Commission to submit the technical advice on draft standards by mid-November. As a member of EFRAG SRB representing the European Stakeholder Chapter on banking, I apply my expertise and time to ensure that financial institutions in Europe will have sustainability reporting requirements that meets the CSRD characteristics of information quality, while being at the same time feasible.
Financial institutions in Europe and cooperative banks in particular are committed to supporting the transition to a more sustainable economy and welcome the European Commission’s objective to produce a comprehensive sustainability reporting framework, as well as the role of EFRAG as a European sustainability reporting standard setter.
Banks play an important role in tackling climate change and halting biodiversity loss. Environmental issues are central to financial institutions also from the risk management perspective. EFRAG’s sustainability reporting framework together with other international commitments should form a good basis or even inspiration for financial institutions’ work on climate and other environmental issues.
However, sustainability is not only limited to environmental topics. Economic activities have a significant traction effect and therefore a relevant socio-economic impact. This is particularly important in the case of banks and especially cooperative banks as responsible social actors. The cooperative principles, such as social responsibility or concern for communities, are strongly linked to the sustainability. Through their actions and with specific features of their business model, cooperative banks contribute to local development, financial inclusion, ethical investments, cultural activities, etc.
Sustainability reporting can be also instrumental in generating and maintaining trust of larger public, and – as responsible economic actors - cooperative banks in Europe will grasp this opportunity and demonstrate their commitment to the three ESG pillars.
Currently, the major concerns of EACB and other banking associations are twofold. First, the implementation of materiality assessment plays a key role in the reporting as it is the corner stone of the reliable reporting. By making sure that the principle is clear, even the smaller banks may conduct the assessment and report on the material issues for their business. Ensuring that the proportionality principles are duly embedded in the final ESRS is a matter of outmost priority. Second, we believe that a limitation should be inserted regarding the value chain definition, as the capability of a bank to control a long client-based chain is factually limited to the direct counterparty where the bank has contractual relationship by which it can control the information it receives.
Last but not least, we are concerned by the lack of prioritisation and phasing-in provided by EFRAG. Sustainability reporting is a massive topic for which legislators have planned many disclosures requirements, and it is crucial that its implementation is gradually conducted. While we understand that the first set of draft ESRS that EFRAG will submit to the European Commission by mid-November will already provide important indications for the companies complying with the ESRS, more time will be needed once the sustainability reporting standards are finalised.
Step by step we will manage to build a well-functioning sustainability reporting framework and given the bank’s importance to the real economy and green transition, the banking industry will play a key role.