In November 2022, when EFRAG submitted the first set of universal standards to the European Commission, preparatory work for the creation of sector standards was already underway. As of early January 2023, the Sustainability Reporting TEG, of which I am a member, and the Sustainability Reporting Board were working intensively on the draft standards.
First on the agenda were two standards: Mining, Quarrying and Coal and Oil and Gas. The economic sectors covered by these standards have a significant impact on environmental, human and social issues, and there are many industry guidelines issued for them in recent years by various European and global initiatives. This has facilitated the construction of disclosure requirements that will enrich the reports of companies in these sectors beyond what is required by universal standards.
The SR TEG will adopt drafts of both standards in the next two weeks. The SR Board is then scheduled to adopt them. Once this is done, the draft standards will be submitted for public consultation. After consultations lasting about four months, the drafts will again be handled by the SR TEG and the SR Board, with the goal of adopting the final drafts and submitting them to the European Commission in the fall of 2023.
Although work on the first two drafts of the sector standards is nearing completion, important discussions are still underway at the SR TEG and SR Board, so much so that the outcome will determine how all subsequent sector standards will be handled. These discussions concern the approach to determining materiality in sector standards. Of several possible approaches, two have the greatest support among members of both bodies. The first is to leave the determination of materiality entirely up to the reporting company. In practice, this means that the regulator creates sector-specific disclosure requirements in the sector standard, but it is the company that determines, as a result of its materiality test, whether it will fulfill those requirements. The second approach is to create a certain set of disclosure requirements that must be fulfilled in any case by all companies belonging to a given sector or subsector.
The first approach, while more liberal, places the full burden of determining which issues are material on the company's shoulders, and assumes a leading role for the auditor, who must verify that the materiality test has been conducted robustly. The second approach places more of a top-down dictate on what should be reported, but should lead to greater comparability of the reported data and further reduce the temptation to greenwash.
The coming days will be decisive, as the principles adopted for the first two draft standards will also be applied to all subsequent drafts. I encourage you to follow the SR TEG and SR Board discussions. Meetings of both bodies are broadcast by EFRAG, just sign up on the page dedicated to the respective meeting, available from the calendar >
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