EU climate rules align with ISSB and GRI standards

The European Commission adopted the European Sustainability Reporting Standards on Monday, a set of rules that take effect in 2024.

The standards cover a wide range of environmental, social, and governance issues, including climate change, biodiversity and human rights (see story). They also provide information for investors to understand the sustainability impact of the companies in which they invest.

They're in line with the EU's Corporate Sustainability Reporting Directive, which became effective in January, and take account of discussions with the International Sustainability Standards Board and the Global Reporting Initiative to offer a high degree of interoperability between EU and global standards and to prevent unnecessary double reporting by companies.

To coincide with the publication, the European Commission, the European Financial Reporting Group and the International Sustainability Standards Board offered an update on their discussions around alignment and interoperability between ESRS and the ISSB standards. GRI also outlined ways in which its standards aligned with the EU's sustainability standards.

Olivier Matthys/Bloomberg

The ESRS and ISSB standards were developed under their own mandates, with some differences that can affect materiality beyond an investor's perspective and coverage of the range of ESG matters in separate standards. However, the work undertaken on interoperability should allow organizations to apply both sets of climate-related standards with minimal duplication of effort.

To help entities apply both ESRS and the ISSB, the European Commission, along with EFRAG and the ISSB, will work on interoperability guidance material to help companies navigate between the standards and understand where incremental disclosures are required by only one set of standards.

"We have substantially advanced the reduction of the duplicative disclosure burden, and those applying ISSB standards as well as ESRS will be able to use our navigation tool, reflecting our respective mandates," said ISSB chairman Emmanuel Faber in a statement Monday. "We welcome the publication by EFRAG of a proposed table for their own work, which we have yet to review. We will complete our own analysis of the final ESRS and continue to work closely with the European Commission and EFRAG to develop suitable interoperability guidance material, providing clarity to the market as soon as practicable."

GRI also expressed its support for the EU standards, pointing out that it has formally supported the technical work to develop ESRS since 2021 through a co-creation agreement with EFRAG. EFRAG and GRI are currently finalizing their plans for the next steps to enhance cooperation in the future. They intend to simplify reporting processes through a digital taxonomy and a multi-tagging system for their standards. The ISSB also announced plans last Friday for a digital taxonomy using XBRL (see story). 

Continued efforts by EFRAG and GRI to support alignment will enable companies to report in accordance with both the ESRS and GRI standards through one report.

"As provider of the world's most widely used standards for impacts, we support the maximum level of interoperability between ESRS and GRI, which will mean double reporting by companies can be avoided," said GRI CEO Eelco van der Enden in a statement Monday. "We believe in a user-friendly reporting system that addresses all sustainability topics — for impacts as well as risks and opportunities — on a global scale. This position also reflects our commitment to continued collaboration with the ISSB to arrive at the global comprehensive baseline for sustainability reporting."

Under a memorandum of understanding between EFRAG and GRI, the two organizations joined each other's technical expert groups and committed to share information, and for standard-setting activities and timelines to be aligned as much as possible. Last December, GRI published guidance in the form of frequently asked questions to explain to reporting organizations how the GRI standards and draft ESRS interact.

GRI also signed a MoU with the IFRS Foundation, under which the two organizations have been working together since March 2022 to ensure the standards from GRI and the ISSB align and are complementary.

The Carbon Disclosure Project reported Monday that thousands of companies are prepared for the new standards to take effect. It said the majority of CDP disclosers already report on elements of the standards' cross-cutting topics, and over 18,000 organizations report on board-level oversight. Around half of companies polled in the EU already have a process in place to assess climate risks and opportunities.

"The much-anticipated adoption of the ESRS marks the dawn of a new age of environmental responsibility in business and financial planning," said Mirjam Wolfrum, policy engagement director for Europe at the CDP, in a statement. "With approximately 50,000 companies now obligated to report on sustainability, these standards are a critical stepping-stone toward making high-quality environmental reporting a business norm. However, compromises were made to ensure successful adoption: All disclosures, including climate related, are now subject to companies' own materiality assessment. In addition, certain disclosures including Scope 3 emissions and all of biodiversity-related disclosures have been phased in. Understanding why companies disregard certain topics will be essential to ensure comparable and meaningful information for investors, auditors and regulators."

The group pointed out that Europe is warming faster than any other continent, with rising temperatures contributing to heat waves, floods and wildfires. The U.S. too has seen record-breaking temperatures this month in many parts of the country.