August 8, 2022
ATTN: Secretary Vanessa Countryman
U.S. Securities and Exchange Commission
100 F Street NE
Washington, D.C. 20549-1090
ATTN: Mairead McGuinness
Commissioner for Financial Services,
Financial Stability and Capital Markets Union
European Commission
CC: Sven Gentner
Head of Unit DG FISMA, Corporate reporting,
Audit and credit rating agencies
European Commission
CC: Hans Buysse
Administrative Board President
EFRAG
CC: Kerstin Lopatta
Acting EFRAG SRB Chair
EFRAG
CC: Chiara Del Prete
Acting SR TEG Chair
EFRAG
CC: Saskia Slomp
Chief Executive Officer
EFRAG
Subject: Benchmark Gensuite’s® response to the European Financial Reporting Advisory Group’s request for public consultation on the first draft set of European Sustainability Reporting Standards
Dear Commissioner McGuinness,
It is with tremendous pleasure that I write to congratulate the volunteers of the European Financial Reporting Advisory Group’s (EFRAG) Project Task Force (PTF) for the progress in their effort to support, at your behest, the European Commission’s ambition to develop, implement, and enforce a leading non-financial reporting regime.
EFRAG’s recent publication of the 13 Exposure Drafts (EDs) that comprise the first tranche of European Sustainability Reporting Standards (ESRS) for the imminent EU Corporate Sustainability Reporting Directive (CSRD) is most encouraging. Though they are intentionally “sector-agnostic,” both the disclosure requirements and application guidelines contained in this first set of ESRS are unique in their scope, specificity, and prescriptiveness; attributes that promise to bring much needed rigor, effectiveness, and credibility to the Environmental, Social, and Governance (ESG) information ecosystem.
Even still, as the Director of ESG Market Strategy and Partnerships at Benchmark Gensuite®, a leading global provider of cloud-based enterprise ESG data management and reporting solutions with a global footprint, I would be remiss if I did not offer three high-level recommendations for how the ESRS might be improved.
1. Investment-Grade ESG Performance Data
In its description of “characteristics of information quality” in the ESRS, EFRAG makes a good-faith and generally well-executed effort to ensure that the companies covered by the CSRD issue disclosures that meet certain degrees of relevance, faithful representation, comparability, verifiability, and understandability.
While these definitions act as a quality control mechanism for companies’ CSRD-required disclosures, EFRAG stops short of establishing a similar quality control mechanism that applies specifically to the underlying data that companies use to complete these disclosures. Generally speaking, it is our position that EFRAG bring greater clarity to both the required methods that companies use to collect certain disclosure-relevant operational ESG performance data, as well as the required methods that companies use to derive (i.e., calculate) certain disclosure inputs.
Our reasoning is that, for the CSRD to achieve its primary intent, EFRAG will need to ensure that there is uniformity in the accuracy, contemporaneity, completeness, financial and impact materiality (i.e., double materiality), and auditability of the data that companies collect to complete their disclosures.
One example action that EFRAG can take to ensure this uniformity in CSRD-required disclosures regards the ESRS requirement that all companies execute comprehensive Scope 3 (S3) emissions reports, regardless of whether those emissions are considered material for the CSRD-covered company (i.e., financial materiality) or the CSRD-covered company’s stakeholders (i.e., impact materiality).
Specifically, it’s in the Application Guidance (AG) for this particular disclosure requirement that greater clarity would be beneficial. While companies are instructed by the ESRS E1 Climate Change to consider the principles and provisions of the widely-accepted GHG Protocol to complete their S3-related disclosure requirements, the standard equivocates, or is at least imprecise, in certain critical areas.
For instance, when referring to AG 48 (d), (e), (h), and (i), companies may conclude that they are afforded a degree of discretion when selecting the methodologies that they use to perform S3 emissions significance determinations (i.e., magnitude assessments), S3 emissions calculations and estimates, and separation of S3 emissions from Scope 1 and 2 emissions (i.e., avoidance of “double counting”).
On an ad hoc basis, such equivocation in the ESRS may yield nominal discrepancies between what a CSRD-covered company says are its S3 emissions risks, impacts, and opportunities and corresponding management outcomes, and the actual S3 emissions risks, impacts, and opportunities and corresponding management outcomes of the CSRD-covered company. But even if these discrepancies are nominal on a case-by-case basis, their undermining of the CSRD’s intent to yield reliably comparable corporate sustainability disclosures would prove disastrous at scale.
To avoid these effects, we recommend that EFRAG consider two remedies for the ESRS. First, with regard to Scope 3 emissions reporting specifically, we recommend the ESRS be supplemented with a provision for a “safe harbor” period, similar to what is proposed in the U.S. Securities and Exchange Commission’s (SEC) Enhancement and Standardization of Climate-Related Disclosures for Investors proposed rule. Second, generally speaking, we urge EFRAG to be as clear as possible in its application guidance for the S3 emissions report, among other similarly complex disclosure requirements found in the ESRS.
This example notwithstanding, clarity concerning the methods by which companies shall collect and calculate the operational ESG performance data needed to fulfill their various disclosure requirements is supremely advantageous.
As stated earlier in this general comment letter, it will help to ensure uniformity in the accuracy, contemporaneity, completeness, financial and impact materiality, and auditability of companies’ underlying, disclosure-relevant data. And, by extension, greater clarity will help to ensure that companies have a comparable degree of insight when setting the CSRD-required targets and achievement strategies for ESG risk, impact, and opportunity management.
2. Decision-Centric ESG Performance Data
This latter advantage relates to our second high-level recommendation, which is for EFRAG to strengthen the guidelines that companies shall use to describe how they’re leveraging their ESG performance data to inform the required disclosure inputs that relate to the establishment of ESG risk, impact, and opportunity management objectives, achievement strategies, and outcome evaluation processes.
Admittedly, this particular recommendation is more a formality than a necessity. For instance, in chapters 2-3 of ESRS 2 General, strategy, governance, and materiality assessment, there are clear descriptions of what CSRD-covered companies shall disclose with regard to how the company’s sustainability risks, impacts, and opportunities, as well as their stakeholders’ views on these matters, “interact with” the company’s strategy and business model and corporate governance protocols. The same is true of the 11 “topical” ESRS EDs, where companies are required to detail how their “E,” “S,” and “G” risk, impact, and opportunity management objectives and achievement strategies “interact with” the companies’ overarching strategy, business model, and governance frameworks.
As currently proposed, these disclosure requirements will necessarily oblige CSRD-covered companies to delineate a clear relationship between their identified ESG risks, impacts, and opportunities, the primary operational ESG data that these companies collect to evaluate those matters and inform their management of them, and how their primary operational ESG data “interacts with” their strategies, business models, and governance frameworks.
This is a step in the right direction. But to advance the comparability and, in turn, decision-usefulness of companies’ CSRD-required sustainability disclosures, there must be provisions that ensure companies are using their primary operational ESG performance data in a consistent manner.
3. The Materiality Assessment
Unifying both our preceding high-level recommendations for EFRAG is our third recommendation that the criteria for assessing double materiality in the ESRS be refined. More specifically, we are concerned with the inclusion of the “rebuttable presumption” in ESRS 2 General, strategy, governance, and materiality assessment.
This of course is the concept that all ESG risks, impacts, and opportunities identified as a required disclosure item in the ESRS are presumed to be material for a CSRD-covered company unless that company can furnish evidence to the contrary. At best, this acts as a uniformity control mechanism for CSRD disclosures.
However, the rebuttable presumption is incorporated in the ESRS without any clear guidance regarding how a company may satisfactorily refute the materiality of a required disclosure item. As a result, companies may feel compelled to complete each required disclosure item for fear of non-compliance, thus limiting the capacity of CSRD-covered companies to dedicate proportionate time, energy, and resources to their uniquely material sustainability matters.
Relatedly, we are concerned that the ESRS only requires that companies describe how they arrived at their double materiality determinations rather than stipulate the principles and thresholds by which companies’ may perform independent determination of ESG double materiality in a consistent fashion.
The reasoning behind our concerns is simple enough. Any enterprise ESG performance measurement, management, and reporting program capable of driving continuous results for both the company’s bottom line and their stakeholders is built upon a bespoke, thoroughly stakeholder-influenced materiality assessment performed at the outset.
And it’s by setting clearer standards, establishing workable definitions, and most importantly, providing more prescriptive implementation guidance for the performance of the required double materiality assessment, rather than promoting a “box ticking” exercise, that EFRAG can ensure CSRD-covered companies will drive real, credibly sustainable results for their bottom lines and their stakeholders.
Sincerely,
Peter Walsh
Director of ESG Market Strategy & Partnerships
Benchmark Gensuite®
