As part of the ESRS simplification process, the French Accounting Standards Authority (ANC) organized an outreach session on September 12th between French stakeholders and EFRAG on the ESRS simplification proposal published on July 31st.
The objective was to better understand the issues and changes underway, and to ensure the voice of French stakeholders was heard by EFRAG.
Representatives of preparers and auditors attended in person at the Ministry of Economy and Finance in Paris, and approximately 80 participated remotely. Patrick de Cambourg, Chair of EFRAG’s Sustainability Reporting Board (EFRAG SRB), was also present in person.
The session began with an introduction by Patrick de Cambourg, who explained, among other things, that the ESRS simplification proposal was a combination of two policy priorities: (1) reducing administrative burden and (2) ensuring high-quality sustainability reporting.
6 Simplification Levers
EFRAG has implemented six simplification levers:
- Simplification of the double materiality assessment – including the assessment process and documentation for audit purposes.
- Increased readability/conciseness of sustainability statements – improved flexibility in organizing information, including the ability to add an executive summary and use annexes, and a focus on how the company manages its sustainability topics and the interconnectedness of the disclosed information (Topics-IROs-Policies-Actions-Targets-Metrics relationships).
- Relationship between minimum disclosure requirements (formerly MDRs, now GDRs) and topical standards – removal of most of the detailed narrative requirements in the topical standards in favor of general requirements for policies, actions, targets, and metrics (GDRs), including for the G1 standard.
- Understanding, clarity, and accessibility of the ESRS standards – shortened text, voluntary publications eliminated, language clarified, several concepts simplified, and several data points moved to a separate non-binding implementation guidance (NMIG) document intended as a guide for reference purposes only.
- Cross-functional burden-reducing reliefs – new flexibilities and reliefs have been introduced, including the avoidance of undue costs or effort.
- Enhanced interoperability with global reporting standards – particularly with the ISSB IFRS S1 & S2.
Patrick de Cambourg clarified that the number of data points in itself is important but should not be an obsession, as it depends on the context and how they are counted (publishing comparative data, for example, automatically doubles the number). The data point reduction methodology applied by EFRAG consisted in:
- Removing the least relevant data points, defined as those not necessary to achieve the objectives of the disclosure requirement (DR).
- A less prescriptive, or rules-based, approach, and a more principles-based approach (cf. rules-based standards, such as US GAAP, vs. principles-based standards).
- Removing narrative requirements for policies, actions and targets (PAT) from topical standards, in favor of general requirements for policies, actions, targets and metrics (GDR), including for the G1 standard.
EFRAG clarified that merging two data points was not counted as a reduction.
Some data points have also moved from voluntary to mandatory:
- Water – total withdrawals from own operations (E3)
- Total discharges from own operations (E3)
- Biodiversity transition plan summary, but only if a plan has already been made public (E4)
- Procurement team training on business conduct (G1)
- Confirmed business-related incidents (numbers and nature) (G1)
And four have been added:
- Declaration of compliance with ESRS 1 (ESRS 2 BP 1)
- Secondary microplastics (clarification) (E2)
- % or weight of materials considered critical and strategic (E5)
- % or weight of waste with unknown destination (E5)
The result of this work is a 68% reduction in the total number of data points, which includes a 100% reduction in voluntary data points and a 57% reduction in mandatory data points.
The discussions that followed this introduction were of high quality, and were impressed to hear how familiar these groups and large French companies are with the ESRS standards, how they have had detailed discussions with their auditors, and how thoroughly they had studied the implications of the proposed simplifications.
Listening to them, it struck us that the gap is widening between these first-wave companies (in countries that have successfully transposed the CSRD on time and in a compliant manner), and the second-wave companies and those that will be subject to voluntary compliance, on these highly strategic issues for Europe and its companies.
Waiting and not preparing will not be good for business! When second-wave companies enter the stage, these first-wave companies will be publishing their 4th report.
Overall, the participants praised the proposed simplifications and the work carried out by EFRAG within very tight deadlines.
Here is a summary of some of the comments and discussions that followed.
On the Double Materiality Assessement (DMA)
Gross vs Net assessment
The discussions focused on the issue of gross versus net assessment. The general opinion was in favor of assessing gross IROs (sustainability impacts, risks, and opportunities), except for actual impacts where successfully implemented measures should be allowed to be taken into account.
However, the table in Appendix C of ESRS 1 could be too detailed and create confusion. EFRAG wanted to be precise because this is a difficult topic that has generated much debate.
Patrick de Cambourg clarified that it is important to maintain momentum in addressing impacts, that it is important to report on how the company has taken these impacts into account, and that this is rewarding for the company.
A large company added that it is important not to have to consider everything that could possibly happen in absolute terms, but to focus on what is relevant to the company. (On this point I add that it is for this same reason that the future financial effects have been renamed “anticipated” instead of “potential” already in the current ESRS.)
Frequency of the DMA
A request was made to further clarify the required frequency of DMAs.
Patrick de Cambourg clarified that a comprehensive DMA should likely take place every 3-5 years, with updates needed in the interim to account for any changing circumstances.
Positive impacts
A representative asked a question about reporting on the management of negative impacts, particularly when the measures implemented create additional positive value beyond simple corrective action.
Patrick de Cambourg explained that when the standards were developed, the primary focus was on managing value destruction first, but that it would undoubtedly also be necessary to focus on value creation.
We can move beyond managing the negative to creating additional positive value, especially in the social sphere. A sustainability statement should not be punitive, we must also address the positive when appropriate.
On the structure and clarity of the proposed standards
Incorporation by reference
There is a considerable reluctance regarding incorporation by reference, which is used primarily for strategy and governance aspects, and which can cloud the overall picture and compromise the readability of the report.
Patrick de Cambourg clarified that it is not widely used in France, but that Northern Europe is very supportive of it.
EFRAG reasoned as it does for financial statements, where incorporation by reference is rarely used. The ANC chairman also clarified that statements should be sufficient and “form a whole.”
Connectivity between financial and sustainability information
“Too complicated, we’re not mature enough, we’ve been told that a lot. So, we’ve reduced the connectivity between the sustainability statement and the financial statement.”
But Patrick de Cambourg also insisted that the line between the two must not be blurred, and that sustainability information should not be included in the financial statement. This is one of the objectives of the CSRD.
NMIG – Non Mandatory Implementation Guidance
Many detailed data points, particularly narrative ones, have been moved from the standard itself to a so-called “NMIG” document, with non-mandatory guidance.
EFRAG will propose that this document not be part of the ESRS delegated act, which would allow it to be maintained and updated as experience is gained.
On this point, companies have expressed concerns, stating that a guidance document quickly becomes almost mandatory in discussions with auditors, especially when it is published by EFRAG.
Won’t they become de facto mandatory? Ambiguities lead to lengthy discussions with auditors and different approaches between companies, which hinders comparability.
One representative proposed deleting the NMIG document altogether.
Patrick de Cambourg clarified that the hierarchy of standards must be respected: if it’s not in the document, it’s not mandatory.
But in a field as complex and pioneering as sustainability reporting, there needs to be direction and guidance. Questions will be asked. Interpretation should not be left to auditors. Not having guidance means pushing interpretation into the dark while we try to standardize and standardize. Creating a vacuum isn’t necessarily helpful to businesses.
On ESRS being a fair presentation framework
The less prescriptive, less rules-based approach of the proposed ESRS standards allows companies more flexibility, but relies on the exercise of judgment, which is the basis of the duty to provide a fair presentation of sustainability information.
This de facto increases the responsibility of companies, and by extension, of their auditors. Representatives expressed their concerns and said that companies are not reassured.
Patrick de Cambourg clarified that the responsibility for judgment already lies in ESRS Set 1 and the CSRD. Advancing common sense necessarily implies judgment.
Fair presentation is derived from the CSRD (particularly the qualitative characteristics). In reporting, there are only two types of frameworks: compliance or fair presentation—EFRAG has made explicit something that was already implicit.
One representative suggested that the principle of fair presentation might need to evolve to better integrate this new non-financial area of application.
On the reliefs
Without undue cost or effort
How can we understand and apply this cross-cutting relief so that we all have the same interpretation? And where do we draw the line between the reliefs and faithful presentation?
Representatives also pointed out that the term “significant” is widely used in the standards, which deserves clarification to avoid endless discussions with auditors.
Patrick de Cambourg responded that the maturity of financial reporting has taken decades to develop, and that this is not yet the case for sustainability information.
The application of the relief will need to be judged on the basis of evidence; the goal is not to exonerate companies. And the link between the relief and the concept of faithful presentation will undoubtedly need to be better presented.
Anticipated financial effects from risks and opportunities
Opinions on the two options presented for reporting on anticipated financial effects (ESRS 2 SBM-3 and E1-11) were divided.
- Option 1 requires the disclosure of both qualitative and quantitative information, but allows for the exclusion of certain quantitative information under certain conditions. It is substantially aligned with the IFRS relief, but specifies that the company may use it when there is no reasonable and justifiable information from its business plans that can serve as a basis for calculating the anticipated long-term financial effects.
- Option 2 limits the requirement to qualitative information only and allows companies to choose to disclose qualitative information voluntarily, without having to meet any conditions.
Unsurprisingly, companies opted for Option 2, specifying that the information would not achieve the required quality and raises liability issues given the uncertainties of the future and confidentiality issues. Even if there are reliefs, “we’re sending the message that the company should be able to do it.”
Auditors and the financial market opted for option 1. “We need to understand the company’s risks and opportunities, we need to have quantitative evidence on these issues, otherwise the markets will operate in the dark. And there are many reliefs, particularly the ‘without undue costs or effort’ relief. The anticipated financial effects are in any case essential for financial materiality and for connectivity with the financial statements.”
Patrick de Cambourg concluded that we know the difficulties, but views are divided. The requirement will push for maturity; we must push for maturity through effort. It is not good for the transparency and fluidity of the markets to leave this information to bilateral relations (between banks and companies, for example).
One representative proposed making information mandatory for climate-related issues, and optional for other issues.
On financial institutions
Patrick de Cambourg pointed out that the financial sector has very specific characteristics. In the absence of sector-specific standards—and there are sectors that really need them—it becomes “entity-specific,” requiring coordination within the sector, which is not always easy.
In particular, there were discussions around the issue of measuring GHG emissions in absolute terms or in terms of intensity.
One representative clarified that it is irrelevant for a bank to define reduction targets (linked to the value chain) in absolute terms “because it is precisely the high-emitting companies today that need the most investment—banks are intended to finance all economic sectors, including those in transition.”
It was added that the ECB—the central bank of European Union countries using the euro—measures in terms of intensity.
Intensity indicators have been removed from the proposed simplified ESRS standards.
Other comments on metrics
The metrics were not discussed in detail, but two comments were made at the end of the session:
- not having an adjusted indicator for the gender pay gap does not provide enough information
- and a minimum wage is not necessarily adequate.
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