In the Omnibus proposal, the Commission suggested that the ESRS should be stripped of their sector-specific standards layer. Despite many voices, both from financial institutions and from many companies, the legislators – i.e. the European Parliament and the Council – decided that there should be no sector-specific standards at all. Only in one of the recitals of the directive (i.e. not in the actual provisions themselves) was the possibility introduced for the Commission to issue non-binding guidance for individual sectors.
Meanwhile, already after the first set of standards was issued in 2023, and then throughout 2024, EFRAG received many questions from companies about how specific provisions of the cross-cutting standards should be applied in particular circumstances. These circumstances most often stem from sector-specific characteristics, and the questions were put off for later, because sector-specific standards were supposed to be developed in the second phase. The number and specificity of the questions clearly showed that it would be much easier for companies to report if they received “user manuals” for the standards tailored to the industries in which they operate. Unfortunately, the Commission, together with the Parliament and the Council, deprived companies of this tool.
Meanwhile, sustainability reporting systems around the world are being expanded. The IFRS Foundation, after taking over the SASB standards, began working intensively on their revision and enhancement. The Global Reporting Initiative has also accelerated work on issuing a number of new sector-specific standards. Both organisations are developing sector-specific standards because the companies themselves expect them.
EFRAG, and within it the Sustainability Reporting TEG and the Sustainability Reporting Board, currently spend most of their time participating in public consultations launched by the IFRS Foundation and GRI. Instead of creating materials and guidance that would make reporting easier for European companies, explaining how to apply the ESRS in individual sectors, we are trying to exert whatever influence we can on how the sector-specific standards developed by other organisations will look. And yet, in the absence of European sector-specific standards, companies will have to resort to these international standards.
The influence of European companies on the standards developed by EFRAG, here, in the European Union, is incomparably greater than on the standards developed by international organisations such as the IFRS Foundation or GRI. In the EFRAG Sustainability Reporting Board representatives of institutions from EU member states naturally account for 100%, in the International Sustainability Standards Board (the council adopting tadopting sustainability reporting standards of the IFRS Foundation) 25%, and in the Global Sustainability Standards Board (the analogous body in the case of GRI) 29%. Not to mention that standards or guidance created within the ESRS framework would have been tailored to EU legislation and to the conditions in which European companies operate. Instead, we will have to adapt to standards that are being developed for Chinese, Japanese, British, or American companies.
The fact that by removing sector-specific standards or guidance from the ESRS framework we would lose our influence over how reporting is done in individual sectors was clear to all experts involved in standards development. We said this clearly and explicitly throughout the past year. Unfortunately, first the Commission, and then the Parliament and the Council, ignored these warnings. I find it hard to call this anything other than short-sightedness, for which all European companies will now pay the price.
A European company in a given sector, instead of applying a single sector-specific ESRS (developed in the EU, adapted to European law, consulted with European companies) when preparing its report, will have to read a number of SASB and GRI standards and work out which of them best fit its business activities. And then it will have to cope with the interpretation of the provisions of those standards, with no one to help (I wish good luck to those who will expect answers or clarifications from the IFRS Foundation or GRI on how to apply a specific standard provision in the context of European regulations applicable to a given company).
Although the amendments to the CSRD resulting from the Omnibus are already in force, the Commission has not yet tasked EFRAG with developing sector-specific guidance. I hope that the Commission will not delay and will make use of the possibility contained in Recital 20 of the directive. We need this guidance to make it easier for companies to prepare their reports. I am convinced that in the future we will need standards. It would be good if decision-makers in the Member States and the European Parliament understood this too 😊
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