FINAL REPORT PROPOSALS FOR A RELEVANT AND DYNAMIC EU SUSTAINABILITY REPORTING STANDARD- SETTING February 2021 © 2021 European Financial Reporting Advisory Group. DISCLAIMER This report and its appendices, published as a series of seven documents, were prepared by the European Lab Project Task Force on preparatory work for the elaboration of possible EU non-financial reporting standards (PTF-NFRS), for submission to the European Commission in response to a mandate including a request for technical advice dated 25 June 2020. The contents of the PTF-NFRS report and its appendices are the sole responsibility of the PTF-NFRS. The European Lab Steering Group Chair has assessed that appropriate quality control and due process had been observed to the extent possible within the context of the relevant mandate and the timeframe allowed, and has approved the publication of the PTF-NFRS report and its appendices. The PTF-NFRS report and its appendices do not represent the official views of EFRAG and are not subject to approval by the EFRAG governance bodies: EFRAG General Assembly and the EFRAG Board; or the European Lab Steering Group. As regards the views expressed in the PTF-NFRS report and its appendices the following observations and clarifications should be noted: • the PTF-NFRS report taken as a whole reflects a very large consensus; • it is understood that members of the PTF-NFRS are not expected to endorse each and every one of the 54 detailed proposals in the PTF-NFRS report and may have different views on some of them; • in addition the views expressed may not reflect the views of the organisations or entities to which individual PTF-NFRS members may belong; • the assessment work for the different project focus areas, presented in Appendices 4.1 to 4.6 to the PTF-NFRS report, was the result of separate sub-groups of the PTF-NFRS, for which only peer review within the PTF-NFRS was performed. Links are included in the PTF-NFRS report and its appendices to facilitate readers accessing the reference or source material mentioned. All such links were active and functioning at the time of publication. Questions about the European Lab and its projects can be submitted to [email protected]. 2 Commissioner McGuinness Financial Services, Financial Stability and Capital Markets Union Rue de la Loi, 200 B-1049 Brussels [email protected] Brussels, 28 February 2021 Dear Commissioner McGuinness, We are writing to you in our respective capacities as EFRAG Board President and Chairman of its European Lab Steering Group and as Chair of the Project Task Force on preparatory work for the elaboration of EU non-financial reporting standards (the ‘Task Force’). Please note that the Chair of the Task Force is acting on behalf of all Task Force members. In accordance with the mandate sent on 25 June 2020 by Executive Vice-President Dombrovskis, we attach the Report prepared to reflect the work accomplished by the Task Force over five months. This Report is the outcome of the collective and intensive work of the Task Force which has required constant dedication and commitment from its 35 members and nine representatives as well as from its seconded support staff (representing in total the contribution of 30 to 40 highly qualified individuals full time over the period). The Report taken as a whole reflects a very large consensus even if it is understood that members of the Task Force are not expected to endorse each and every one of the 54 detailed proposals and may have different views on some of them. Consensus building was challenging under the circumstances since it was not possible to hold physical meetings. However, it followed a careful process including successive online voting procedures on proposals, discussions in plenary meetings (13 in total), submission of drafts for comments, and preparation of an amended final draft submitted for final approval on 19 February. To prepare the Report the Task Force also carefully considered the feedback received from the seven outreach events EFRAG organised mid-January across the EU (on the basis of an outreach document released early January). More than 100 panelists and 3000 participants from all EU horizons had indeed the possibility to express their views on the key questions in the scope of the Task Force’s work. In summary we wish to highlight the Task Force key conclusions: • The EU has a unique sustainable development and sustainability reporting landscape which constitutes strong foundations for standard-setting. • Standard-setting should be built on robust EU conceptual guidelines, addressing public good alignment, expected qualitative characteristics of information, relevant time-horizons, clear boundaries, double materiality and connectivity between financial and sustainability reporting. • The overall target architecture of standards should be coherent and comprehensive and reflect appropriate layers of reporting (sector-agnostic, sector-specific and entity-specific), relevant reporting areas and a coverage of sustainabilty topics classified under an ESG+ categorisation. Presentation should preferably be organised under ‘sustainability statements’ and digitisation should be considered from the start. • The standard-setting roadmap towards the target architecture should be implemented in realistic phases. However, the first-time application of the revised EU Non-Financial Reporting Directive should benefit from a robust first set of ‘core’ standards. • Finally, there is significant merit in promoting a mutually reinforcing cooperation between EU standard-setting efforts and international initiatives or fora. 3 The Task Force wishes to further highlight that meeting the technical challenges of EU sustainability reporting standard-setting has implications in terms of governance and resources which are not in the Task Force’s remit, but which are critical success- factors. We remain at your disposal and at the disposal of DG FISMA to answer any questions and receive comments that you may have. We would welcome the opportunity to present the Report to you in more detail. Yours sincerely, Jean-Paul Gauzès Patrick de Cambourg EFRAG Board President and Chair of the Task Force and Chairman of the European Lab Steering Group Chair of Autorité des normes comptables Copy: Executive Vice-President Dombrovskis Sean Berrigan, Director-General, DG FISMA Ugo Bassi, Director Financial Markets, DG FISMA Alain Deckers, Head of unit Corporate reporting, Audit and Credit rating agencies, DG FISMA 4 EXECUTIVE SUMMARY February 2021 This Executive Summary highlights the main recommendations (54 proposals) of EFRAG’s Project Task Force on preparatory work for the elaboration of possible EU non-financial reporting standards (PTF). The detailed Report taken as a whole reflects a large consensus. However, it is important to note that PTF members are not expected to endorse every recommendation or view entailed in this Report and each has the right to take a different view on some of the views expressed. These recommendations are made in a context where the content of the revised Non-Financial Directive (NFRD) is not finalised. These recommendations do not constitute a first attempt at standard-setting. Their objective is to describe the scope and structure of future sustainability reporting standards that contribute to the achievement of the EU’s policy objectives, not to set out specific disclosure requirements, indicators or metrics. The latter is a task for the EU’s future standards-setter. 1 The revision of the NFRD is essential to meet the needs of users for relevant, comparable and accessible information. Sustainability reporting must therefore rapidly improve to progress alongside the equally rapidly developing EU policies in the context of the EU Green Deal, including sustainable finance. Most of these policies require more robust data about the risks that companies face in relation to sustainability matters and about their impacts on society and the environment. 2 The EU has taken a leadership position in relation to sustainable development and sustainable finance policies. International fora such as the G20, the Financial Stability Board and the International Platform on Sustainable Finance as well as important jurisdictions such as the United States, are taking an increasing interest in this policy area, including sustainability disclosures/reporting. However, the PTF considers that international initiatives cannot in the short term match the speed and scope of EU’s level of ambition. The EU’s next steps should be implemented in a spirit of cooperation and partnership with international initiatives and partners in order to converge efforts but should not slow down the momentum achieved in the EU. Nor should it undermine the level of ambition (in terms of both speed and scope) that the EU has demonstrated, for example in the European Green Deal and the EU’s climate strategy. 3 The purpose of publicly available sustainability reporting is to provide relevant, faithful, comparable and reliable information: a) about (i) material sustainability impacts of the reporting entity on affected stakeholders (including the environment) and (ii) material sustainability risks and opportunities for its own value creation; b) enabling users of information (i) to understand the reporting entity’s sustainability objectives, position and performance and (ii) to inform their decisions relating to their engagement with the entity. 4 Sustainability reporting should be directly connected to management reporting