6 July 2022

European stakeholders share confusion and concerns over ESRSs

A series of outreach events in European countries conducted by EFRAG on its European Sustainability Reporting Standards (ESRS) exposure drafts highlighted stakeholders' confusion and concerns over the proposed standards.

The outreach events are an opportunity for EFRAG to explain its proposed standards but also gather feedback from stakeholders ahead of the deadline (8 august) for the consultation on the exposure draft.

With events already held in Croatia, Germany, Netherlands, France and the Nordics, some common observations are emerging. These were best summarised by Royal Philips director and EFRAG sustainability board member Simon Braaksma during a board meeting in June.

"In general, people were overwhelmed, they did not always understand all of the elements," he said summarising the Dutch outreach event.

Like in the outreach event in France and Germany, Dutch stakeholders questioned the concept of 'rebuttable presumptions', Braaksma said.

The ESRS are designed so that the standards' disclosures are deemed to be material to all companies concerned, however through the materiality assessment a reporting company can, by providing evidence, exercise a rebuttal on this assumption on one topic or subtopic, thus not having to report on it.

Stakeholders across Europe are divided on this aspect of the standards, with many arguing that it's looking at the issue the wrong way around as for them it is the materiality assessment that should drive the reporting rather than having everything material unless you can prove it is not.

Dutch stakeholders were opposed to the concept, while French and Germans asked for further clarification around it.

French stakeholders also asked for more guidance beyond the standards themselves around the concept of 'double materiality to help prepares and users. Croatia stakeholders also noted confusion around the concept and argued that the term should be defined at an industry level.

Some confusion stemmed from differences in the terminology across the various documents of the proposed standards. According to Patrick de Cambourg, president of the French accounting standards setter (ANC), "differences were spotted and rightly so" and there is therefore a, "need to harmonise terminology across the various documents".

The short timeframe for integrating the standards was a concern raised in France, Germany, the Netherlands and the Nordic countries. Participants in Germany said the time pressure "poses risk of low-quality standards" and that issues could emerge from the fact that the standards are based on an "unfinished directive".

Respondents in the Netherlands shared this concern and said that they expected issues and legal complications because of the short timeframe.

The concerns over the timeframe in France and the Nordic countries were that the proposals didn't allow adequate time to field-test the standards before they come into effect. Stakeholders in France said that a cost/benefit perspective would be needed to properly assess the proposed requirements and this would require more time than is currently set out in the proposals.

The cost of the required reporting for companies was also raised as a concern in multiple countries particularly with regard to the impact this could have on SMEs. Relaying feedback from the event held for the Nordic countries, Charlotte Söderlund, associate partner at EY Sweden and EFRAG sustainability board member, said: "Proportionality for smaller companies and growth companies was needed."

Similarly, stakeholders in the Netherlands said it would be difficult to audit all of the sustainable disclosures from companies. Braaksma summarised: "The auditors expressed concerns at the capabilities and the resources (needed) to do all of this."

This problem is especially apparent for smaller audit firms who do not currently have the expertise or funding to be able to audit companies' disclosures effectively.

Finally, stakeholders in the Netherlands and Nordic countries highlighted the extensive integrated reporting that companies already conduct in those countries and expressed their concerns at how well the proposed framework will match up with what is already in place.