EFRAG launched on 29 April 2022 a public consultation (here) on the exposure drafts (hereafter ED) of the ESRSs developed by the EFRAG PTF-ESRS. The exposure drafts include cross-cutting standards as well as topical standards on environmental, social and governance matters. A set of basis for conclusions was issued on 31 May 2022 to supplement the exposure drafts. The basis for conclusions accompanies but is not part of the exposure drafts and, as such, its content has no authoritative status.

Sector-specific and SME- proportionate standards will be developed and adopted in a second set.

The consultation asks stakeholders’ feedback on three key aspects of the exposure drafts:

The consultation also includes:

During the consultation period which will run until 8 August 2022, EFRAG is holding a series of outreach events to engage with key stakeholders in a number of EU countries as well as educational sessions (recordings available here). EFRAG will then deliver its technical advice to the EC by November 2022, which will use it as a basis to adopt the ESRSs through delegated acts. Accordingly with the provisions of the CSRD proposal, ESMA will be required to provide an opinion on the EFRAG’s technical advice within two months from the date of request from the EC. In addition, the EC should consult the Member State Expert Group on Sustainable Finance before adopting the standards and a number of EU bodies can give an opinion within two months of the EC consultation request (PSF, EBA, EIOPA….).

In addition to the public consultation, and as part of its due process, EFRAG has invited on 25 May 2022 preparers to test the draft ESRSs (here). The focus group is invited to complete a questionnaire on the operational and other challenges when reporting under the draft ESRSs. The questionnaire contains the following modules:

After analysis of responses, the focus group will be invited to participate in workshops to discuss the results and outcomes from the use test. The workshops will be organised in the first half of July 2022. The results will then be presented to the EFRAG Sustainability Reporting Board (EFRAG SRB) and Sustainability Reporting Technical Expert Group (EFRAG SR TEG).

In May 2022, EFRAG issued a public call for experts to provide input on the preparation of the draft sector- specific ESRSs. As for the development of the sector- agnostic draft standards, EFRAG is seeking additional expert advice on the development of these sector- specific draft standards, in particular for sectors which are currently underrepresented in EFRAG’s existing sector-oriented Expert Working Group. Selected applicants (application form here) will participate in dedicated workshops (list here).

EFRAG completed the major steps of its governance reform by the end of March 2022. The reform was further progressed through the following activities:

The EFRAG SR TEG will provide technical advice, on the draft ESRSs, to the EFRAG SRB based on its own professional judgement, arguments, technical analysis resulting from its technical expertise and EFRAG’s due process.

The EFRAG SR TEG is responsible for the development of exposure drafts with input from EFRAG Expert Working Groups and Advisory Panels. The EFRAG SR TEG together with the EFRAG Financial Reporting TEG also ensures connectivity between financial reporting and sustainability reporting. The EFRAG SRB has the final responsibility for the content of the draft standards and draft amendments before submitting them, as technical advice, to the EC and subsequently to be adopted by the EC as delegated acts.

With the completion of this important step in the implementation of the governance reform, the handover of the work of the PTF-ESRS to a permanent structure has taken place.

The overall architecture of the sustainability reporting is characterised by the “rule of three”:

For the architecture of future sustainability reporting, an understanding of how the two cross-cutting standards interact with the topical standards on ESG is essential.

ED ESRS 1 provides general guidance which concretises the conceptual requirements of the CSRD proposal and lays a foundation of general reporting principles. In addition, ED ESRS 1 specifies, from a generic perspective, the key aspects to disclose when the undertaking is required to describe policies, targets, actions and action plans, and resources in relation to sustainability matters as described by the topical ESRSs and/or in relation to entity-specific sustainability matters. These disclosure principles provide a common reference for reporting area 2 about implementation measures.

ED ESRS 2 addresses reporting area 1, providing disclosure requirements on general reporting issues, on the strategy and business model, on governance and on the materiality assessment of sustainability impacts, risks and opportunities.

ED ESRS 1 and 2 are transversal (cross-cutting) as they are relevant for all sustainability matters. They are complemented by the topical standards addressing reporting areas 2 and 3 with topic-specific disclosure requirements. In addition, the topical standards refer back to ED ESRS 2 by providing additional focused disclosure requirements and application guidance for reporting area 1 from a topical standpoint. ED ESRS E4 Biodiversity and ecosystems (hereafter ED ESRS 4), for example, foresees the disclosure of how far the undertaking’s business model and strategy are compatible with the specific biodiversity targets.

ED ESRS 1 stipulates generally accepted reporting principles such as presenting comparative information, estimating under conditions of uncertainty and reporting errors in prior periods. Furthermore, ED ESRS 1 provides guidance on the application of the fundamental concepts of the CSRD proposal for sustainability reporting.

The central CSRD concept is double materiality, which means the union (not intersection) of impact materiality and financial materiality. The starting points of all reporting obligations are the material sustainability impacts, risks and opportunities, which are to be determined under the concept of "double materiality".

The other CSRD concepts are subordinate to or follow this central concept. For example, a sustainability matter is material from an impact perspective if it is connected to significant impacts by the undertaking on people or the environment over the short-, medium- or long-term. The relevant time horizons are defined as one year for short-term, two to five years for medium- term and more than five years for long-term.

The term “material impact” includes impacts directly caused or contributed to by the undertaking in its own boundaries as well as impacts which are otherwise directly linked to the undertaking’s upstream and downstream value chain. Adverse impacts are managed by the undertaking as part of its sustainability due diligence (see illustration below).

It should be noted that even though the sector- agnostic (and future sector-specific) ESRSs mandate disclosure requirements for all undertakings (within a specific sector), the materiality of these disclosures is only assumed and can be rebutted in individual cases by the undertaking based on its double materiality assessment (rebuttable presumption). Additionally, undertakings must develop entity-specific disclosures covering the three reporting areas with regard to material sustainability impacts, risks and opportunities not covered by the topical ESRSs. Information quality means in this respect that information to be reported (following the double materiality assessment) must be relevant, represented in a faithful manner, comparable, verifiable and understandable.

Given this fundamental importance of double materiality, one would think that the cross-cutting standards present a clear method for implementing this concept. But this is not the case, although many definitions and aspects to be considered in the assessment are given. For example, to identify significant negative impacts, the undertaking has to assess the severity (determined by scale, scope and irremediable character of the impact) and likelihood of the impact. During this process, the undertaking needs to engage with all relevant stakeholders, where stakeholders means users of sustainability reporting and affected stakeholders (i.e., people with interests that are or could be affected by the undertaking’s activities or through its value chain). The concept of value chain is equally boundless defined as the concept of stakeholders: the full range of activities or processes needed to create a product or service, not limited to direct contractual relationships.

In view of such broad definitions, it is fundamental to define entity-specific thresholds, boundaries and criteria to cut through the fog of double materiality.

In this context, it should be noted that simply complying with all ESRSs, unless some of them are obviously irrelevant to the undertaking’s unique situation, is no option. First of all, because compliance with all ESRSs is not simple but highly challenging. Second, because the undertaking needs to report its material sustainability-related impacts, risks and opportunities (ED ESRS 2 - DR IRO 2). And this is to be done at a certain level of disaggregation as required by ED ESRS 1 (e.g., by country, by site or by asset) that does not permit simple statements such as “climate change is a material risk to my undertaking”. It therefore remains to be said that the development of “generally accepted principles of double materiality assessment” still requires some time and experience from implementation.

ED ESRS 2 contains in total 22 disclosure requirements covering and providing a common context for all topical disclosure requirements. It should be noted that they are not rebuttable, i.e. they are fully obligatory for all undertakings.

Ten of the 22 disclosure requirements are of a general nature (ED ESRS 2 - DRs GR 1 to 10), covering inter alia key aspects of the undertaking’s business in the context of sustainability reporting (e.g. key features of the value chain) and compliance issues (e.g. significant estimation uncertainty, prior period errors).

The four disclosure requirements related to strategy and business model (ED ESRS 2 - DRs SBM 1 to 4) focus on the question of how sustainability matters are related to, interact with, and inform the undertaking’s strategy and business model. This includes a description of how the views, interests and expectations of the undertaking’s stakeholders inform its strategy and business model.

The five disclosure requirements on governance (ED ESRS 2 - DRs GOV 1 to 5) provide for a description of the roles and responsibilities of the administrative, management and supervisory body with regard to sustainability matters, how these bodies are informed about sustainability matters, which sustainability matters were addressed by them and the integration of sustainability strategies and performance in incentive schemes. Furthermore, the undertaking must provide a mapping that reconciles the main aspects of sustainability due diligence with the relevant disclosures in its sustainability statement (see table below).

The three disclosure requirements on the materiality assessment of sustainability impacts, risks and opportunities (ED ESRS E2 - DRs IRO 1 to 3) focus on:

The outcome consists mainly of a list and a description of the material sustainability impacts, risks and opportunities and from this description:

The disclosure principles, contained in ED ESRS 1, specify the key aspects for reporting area 2 which are to be followed when applying the topical ESRSs or for entity-specific disclosures.

ED ESRS 1 foresees that undertakings will report all disclosures within identifiable parts of the management report, i.e. Sustainability Statements.

There are three options for the structure of the sustainability statements:

Incorporation by reference to some mandatory information is permissible but only within the management report.

Art. 19b(2a) of the CSRD proposal covers environmental-related matters and identifies six specific subtopics for which five exposure drafts have been designed, with the two climate-related subtopics of mitigation and adaptation being covered by one single exposure draft ED ESRS E1 Climate change (hereafter ED ESRS E1).

The exposure drafts cover sector-agnostic disclosure requirements and thus, are considered material to all undertakings regardless of their sector. Sector- specific disclosure requirements are being developed separately and will be issued at a later stage.

Climate change is attracting most of the attention when it comes to the “Environment” dimension of ESG. Commonly agreed frameworks like TCFD and commonly agreed methodologies such as the GHG Protocol already support companies in disclosing their GHG emissions.

The importance of climate change is also reflected in the two proposals on climate reporting recently published by the SEC and the ISSB. Against this background, ED ESRS E1 represents the most elaborated draft standard as EFRAG previously published two working papers (see the March edition for more insights into the last climate prototype here). Nevertheless, the other four environmental topics should not be underestimated. Especially considering that there is no or only little reporting experience and thus, the systems and data required for future reporting might currently not be available.

EDs ESRS E1 to E5 build on existing EU legislative frameworks and policies, for example, the EU Green Deal, the EU Action Plan “Towards a Zero Pollution for Air, Water and Soil”, the EU water framework directive, the EU Circular Economy Action Plan, the EU industrial strategy as well as the SFDR and the Taxonomy Regulation. Against this background, the environmental exposure drafts are structured in the same way as the environmental objectives of the Taxonomy Regulation and explicitly require undertakings to disclose taxonomy-related disclosures required by the Article 8 Delegated Act.

In addition to being connected to ED ESRS 2 (see Cross-cutting standards), the five environmental standards do not represent standalone disclosures; rather, they should be applied and considered in their entirety. In order to provide a comprehensive overview of what could be material to one of the environmental topics, relevant disclosure requirements can also be found in other environmental standards.

The application guidance includes comprehensive instructions on the application of the disclosure requirements, contains information relating to the calculation of metrics and provides mandatory and voluntary tables for the presentation of metrics.

However, for some disclosures it can be observed that there is no or only little guidance on “how” to calculate the metrics. This is shown by the absence of a relevant methodology. For example, disclosures of the quantified financial effects from pollution-, water and marine resources-, and biodiversity-related impacts, risks and opportunities (ED ESRS E2 - DR 7, ED ESRS E3 - DR 7 and ED ESRS E4 - DR 10 respectively) are proposed without a requirement for the quantification methodology as no corresponding application guidance has been provided. This could lead to methodological differences in the calculation of metrics and, thus, make direct comparability difficult.

The last edition of our newsletter provided insights into the climate change working paper (here). In this edition, a deep dive into the various qualitative disclosures and metrics required by EFRAG under ED ESRS E1 is presented. They can be divided into the following categories:

Certain disclosures will be difficult to prepare. For example, the concept of “locked-in emissions” is relatively new and very few companies are disclosing this information.

In the present state of the exposure drafts, Scope 3 GHG emissions are to be disclosed in the first year of application. It means that undertakings will have more or less 12 months to screen, assess and disclose their Scope 3 GHG emissions when many of them do not currently report this indicator.

Several disclosures do not provide explicit application guidelines. ED ESRS 1 - DR 15 to 17 cover potential financial effects from impacts, risks and opportunities. Corresponding application guidance is not prescriptive and leaves room for interpretation and may lead to disclosures that may not be comparable from one undertaking to another. Furthermore, from an operational standpoint, such disclosures will require finance teams to be involved in order to produce reliable and high-quality data that can be assured.

ED ESRS E2 sets out disclosure requirements related to pollution of air (both indoor and outdoor), water (including groundwater), soil, substances of concerns, most harmful substances and enabling activities in support of prevention, control and elimination of pollution.

It is important to point out that some undertakings are already required to comply with certain targets due to legal requirements under specific reporting frameworks, such as the Industrial Emissions Directive (IED) (see par. 27 of ED ESRS E2 - DR 2 Measurable targets for pollution). In addition, there might be specific national requirements that undertakings can refer to.

One disclosure requirement out of a total of seven refers to the SFDR PAI indicators and another one is dedicated to the taxonomy-related disclosures. ED ESRS E2 includes references to the Zero Pollution Action Plan (ZPAP), the Organisation Environmental Footprint (OEF) and the Industrial Emissions Directive (IED).

While there are only seven disclosure requirements, most of them will be new for companies. Some disclosures are proposed without any application guidance on “how” to disclose the metrics (e.g. ED ESRS E2 - DR 7 Financial effects from pollution-related impacts, risks and opportunities).

Some disclosures are not structured in a way to minimise room for interpretation and improve comparability. For example, companies must describe their contribution to the EU Action Plan ‘Towards a Zero Pollution for Air, Water and Soil”, according to par. 25 of ED ESRS 2 - DR 2 Measurable targets for pollution.

Marine resources is a cross-topic subject which covers not just water, but also climate change, pollution, biodiversity and ecosystems as well as the circular economy in relation to water. Therefore, it is crucial to consider DRs included in the other environmental standards.

“Water” covers disclosure requirements related to an undertaking’s relationship with water in its upstream and downstream value chain, in terms of dependencies, impacts, risks and opportunities and how it effectively addresses these issues. This covers where and how much water is withdrawn, consumed and discharged for the undertaking’s activities, products and services and what are the water-related impacts caused or contributed to by the undertaking. It also covers how the undertaking is exposed to water-related risks (flood risks, water scarcity risks, etc).

“Marine resources” covers disclosure requirements related to an undertaking’s activities which cause or contribute to impacts either through the use of ocean-based resources, discharges and emissions to the environment which end up in the ocean, or activities located in maritime (naval matters) areas.

ED ESRS E3 builds on the EU Water Framework Directive and the EU Marine Strategy Framework and includes references to the GRI or the Climate Disclosure Standards Board (CDSB) Framework application guidance for water-related disclosures.

Three disclosure requirements out of a total of seven refer to the SFDR PAI indicators and another one is dedicated to the taxonomy-related disclosures.

Some disclosures require a high level of granularity. For example, according to ED ESRS E3 - DR 4 Water management performance, an undertaking is required to prepare a breakdown of water withdrawals, water consumption and water discharges at least per geographical area and per segment. Very few companies currently disclose at such a granularity level in their sustainability reporting.

Similarly to EDs ESRS 1 and ESRS 2, EFRAG does not provide any methodology on how to assess the financial effect of water and marine resources-related risks, impacts and opportunities. In these circumstances, undertakings must start developing a methodology that can be used to disclose any financial effect.

Companies having no or little impact on water will have to collect, prepare and disclose information which can be less material to them compared to other companies that are heavily dependent on water; for example, the mining industry.

Biodiversity and ecosystems is a cross-topic subject as the main drivers of biodiversity loss according to the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) are climate change, pollution, land-use change, natural resource use and exploitation and invasive species. In order to provide a comprehensive overview of what is material to biodiversity and ecosystems, all the relevant disclosure requirements for the main biodiversity loss and degradation impact drivers arising from other draft ESRSs, in particular other environmental standards, are listed and referenced in the draft standard.

ED ESRS E4 sets out disclosure requirements related to an undertaking’s relationship to terrestrial, freshwater and marine habitats, ecosystems and populations of related fauna and flora species, including diversity within species, between species and of ecosystems and their interrelation with many indigenous and local communities.

Biodiversity and ecosystems is a less mature topic that is only just evolving. Several initiatives and tools exist in the public domain, such as the Taskforce on Nature-related Financial Disclosures (TNFD) or the IPBES. These initiatives are currently working on performance measures on biodiversity and ecosystems, but commonly-agreed methodologies do not exist. In drafting the exposure draft, EFRAG tried to align the disclosure requirements under ED ESRS E4 with these initiatives.

ED ESRS E4 builds on the EU Biodiversity Strategy for 2030 and includes references to initiatives and tools in the public domain; for example, TNFD requirements, the ENCORE (Exploring Natural Capital Opportunities, Risks and Exposure) tool and other useful datasets such those from the IPBES.

One disclosure requirement out of a total of ten refers to the SFDR PAI indicators and another one is dedicated to the taxonomy-related disclosures.

At present, companies have little or no experience with reporting on biodiversity and ecosystems. Most of the proposed disclosures are complex, new and require extensive data that might not be available right now. For example, under ED ESRS E4 - DR 6 Impact metrics, metrics on material impacts on species (population size, and extinction risk) and ecosystems (condition, extent, and functioning) must be broken down by material geographical sites and/or by material raw materials.

ED ESRS E4 presents disclosure requirements which are mostly principles-based. This could lead to different application methods and thus to comparability issues, notably when it comes to the definition of biodiversity targets or conducting biodiversity and ecosystems scenarios as part of the resilience analysis.

ED ESRS E5 sets out disclosure requirements related to resource use and circular economy. A circular economy is a restorative system in which waste and pollution are eliminated and resource use is minimized through systemic design, maintaining and improving the value of products and components and achieving a circular flow of resources, while regenerating natural ecosystems. The goal is to retain the value of the resources, products and materials by creating a system with innovative business models that allow for renewability, long-life optimal use or reuse, refurbishment, remanufacturing, recycling and biodegradation.

A circular economy is based on three principles, driven by design:

It is underpinned by a transition to renewable energy.

While resource use is based on the activities of undertakings, a circular economy addresses the globally required change of the way we are producing and consuming. Due to the maturity of the topic there is currently only little reporting guidance on the market. In addition, the guidance that exists is mainly focused on sector-specific metrics. Therefore, EFRAG tried to find the right balance between a conceptual approach and the operationalisation of specific metrics in order to propose sector-agnostic disclosures.

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ED ESRS E5 builds on the EU Green Deal, the EU Circular Economy Action Plan and the EU industrial strategy.

One disclosure requirement out of a total of ten refers to the SFDR PAI indicators and another one is dedicated to the taxonomy-related disclosures.

From linear to circular economy is a less mature topic and performance metrics covering resource use and circular economy are just being developed.

In terms of reporting on resource use, companies might draw on some experience, but reporting on circular economy will be completely new to most of them, which is mostly explained by the collective lack of maturity on this topic. Thus, it will be a challenge for companies, for example, to collect the reliable data on material inflows and outflows (ED ESRS E5 - DRs 4 and 5) and to report them on such a granular level without methodologies provided.

All four standards have the similar objectives of helping users understand:

A typical example of a negative impact creating a material risk for the company is discrimination in hiring and promoting women. This reduces the company’s access to qualified labour and harms its reputation. Conversely, an example of a positive impact creating an opportunity would be that trust in a company’s products can bring long business benefits, such as the widening of the future consumer base. The draft social standards aim to highlight areas of improvements by identifying impacts and provide remedies for the well-being of all groups of stakeholders.

Each stakeholder group covers a different type of population:

To meet the above objectives, each standard addresses three main topics relevant to its population, topics which are in turn subdivided into several categories.

Disclosures related to strategy governance, governance and materiality assessment must be reported alongside information required under ED ESRS 2.

The first six disclosure requirements of each standard, relating to “Policies, targets, action plans and resources” are the same, adapted for their respective population.

A total of 20 performance indicators to be reported have been developed for ED ESRS S1. They are related to general matters, working conditions, equal opportunities and other work-related rights. Corresponding disclosure requirements will be developed in a second set for ED ESRS S2 to S4.

Social data vary greatly from one country to the next due to the differences in social legislation, concept and indicators within the EU. For instance, a women's quota in leadership roles might be well-received by some. Some others strongly reject the idea of such a quota as they consider it an unfair advantage that goes against the core idea of equality or because it is seen as a form of pity that depreciates women. Comparability between companies, sectors and countries could prove to be difficult.

Materiality is a difficult principle to apply to social disclosures. Materiality assessment is up to the company’s judgement but rebutting the materiality of a social concept seems nearly impossible. For instance, the subtopic “Equality in pay” under the “Equal Opportunities” topic, could be assessed as not material by a company. However, how can Equality in Pay not be a material topic in essence?

Some indicators are not ambitious or comprehensive enough. For instance, in ED ESRS S1 – DR 13 Worklife balance indicators, a company must disclose the percentage of employees entitled to and taking familyrelated leave. Work-life balance encompasses many other concepts than just family matters, such as free time for leisure activities. Moreover, the disclosure itself does not give long-term insights because people return from family leave after less than a year. It would be more useful to have a measure of work-life balance satisfaction after two years of return to work, or other key indicators like the years of service rate.

Some disclosure requirements are not relevant in some countries where legal obligations on the matter are already established. For instance, ED ESRS S1 – DR 15 Social security eligibility coverage requires companies to disclose the percentage of its workers eligible for social security. In some European countries, the entire population is already covered and therefore this data is not necessarily meaningful.

Some disclosure requirements could be difficult to prepare for companies. For instance, ED ESRS S1 – DR 8 requests workforce characteristics for nonemployees (temporary and self-employed workers), data which is hard to obtain when you do not have direct control of the worker.

ED ESRS S2 to S4 require companies to disclose their material and financial impacts relating respectively to workers in the value chain, affected communities, and consumers & end-users. In contrast to ED ESRS S1, the stakeholder groups addressed in ED ESRS S2 to S4 are not directly controlled by the company. This creates significant reporting challenges, in particular when it comes to workers in the value chain and affected communities:

These issues are further exacerbated by the fact that definitions of the standards are not precise enough. For instance, the spatial dimensions of local communities are not clear-cut, ranging from ‘those living adjacent to the organisation’s operations to those living at a distance’. This makes it difficult for companies to decide which information on their operation sites should be included. Because companies do not have direct access and control of these populations, a different set of performance measurements will be developed for each population from August 2022. Social metrics are difficult to establish because of the relative nature of social aspects.

The objective of ED ESRS G1 is to specify disclosure requirements to better understand the governance structure of the undertaking, and its internal control and risk management systems.

The requirements are intended to provide information on the role and composition of the administrative, management and governance bodies along with their diversity policy, internal controls and risk management. This effectively adds another layer of understanding about how well an entity is equipped to manage the impact and dependencies, including its associated risks and opportunities relating to social and environmental dimensions.

ED ESRS G2 sets out disclosure requirements that facilitate the stakeholders’ understanding of an entity's strategy and approach, processes and procedures as well as its performance in respect of business conduct. It effectively addresses the requirement of the CSRD proposal to disclose information about business ethics and corporate culture, including anti-corruption and anti-bribery.

The two governance standards prescribe disclosure requirements on matters such as business ethics and conduct, diversity and inclusion at top and middle management level, and risk management, treating governance as a standalone sustainability topic.

The disclosure requirements per pillar (Strategy, Implementation and Performance measurement) that would be required to report on the two governance standards can be summarised as follows:

Looking at the international initiatives, the ISSB also published two exposure drafts, namely the general requirements and the climate thematic exposure drafts, on 31 March 2022. Both exposure drafts ESRS 2 and IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information provide disclosure requirements to cover governance of sustainability matters in general terms, i.e. they are applicable to all sustainability matters. Thus, EFRAG with the issuance of the EDs ESRS G1 and G2 is already a step ahead of the ISSB on the governance topic.

To understand the new governance disclosures requirements and how far they would be extended by the implementation of the two new standards, a comparison has been made with the GRI governance indicators.

The principal general considerations to take into account are the following:

At pillar level on the disclosure requirements, the following can be highlighted:

ED ESRS G1 - DR 1 Governance structure and composition is set to disclose information about a company’s setup for those responsible for directing and controlling the organisation in achieving its objectives and goals. It coincides for the most part with GRI 2-9, except that it also requires companies to include the identity of members of the governance body and a description of the roles and key responsibilities of each of its committee members.

ED ESRS G2 - DR 1 Business conduct culture gives an insight into how these administrative, management and supervisory bodies are steering the organisation in its business conduct culture. Its provisions are meant to be considered and reported alongside ED ESRS 2 - DRs GOV 1 to 3, which address governance in relation to sustainability matters, and DRs IRO 1 to 3, which cover material sustainability impacts, risks and opportunities. While ED ESRS G2 - DR 1 Business conduct culture is based on GRI 2-12, it adds new requirements to provide information on the entity’s initiatives to establish, develop, and promote a business conduct culture.

The disclosure requirements under this section are designed to provide an understanding of a company’s policies, practices, processes and systems in place that determine the well-functioning of the company.

ED ESRS G1 - DR 2 Corporate governance code or policy, DR 4 Diversity policy and DR 7 Risk management processes are not addressed in GRI standards at the same level of granularity. This means that companies will need to provide information on their corporate governance code and diversity policy with their associated objectives and practices, specifying where these are required by national law or voluntarily adopted. For risk management disclosures, companies will have to include a description of the assessment approach taken, prioritisation methodology and main features of the process.

This section of ED ESRS G1 is meant to provide information about the diversity of organisations’ administrative, management, and supervisory bodies and committees, the number of meetings held by members in the reporting period as well as their attendance rate.

While ED ESRS G1- DR 10 Meetings and attendance rate is not part of GRI disclosures, the composition of the administrative, management and supervisory bodies (ED ESRS G1- DR 9) corresponds to GRI 405- 1 Diversity of governance bodies and employees. However, unlike the GRI standard, ED ESRS G1 does not require disclosure of this information separately for the employee category and for the governance body. Additionally, ED ESRS G1 - DR 1 Governance structure and composition also requires disclosure of the percentage of independent shareholder-elected members.

With ED ESRS G2 performance measurement disclosures, entities will have to disclose information about their efforts and initiatives to prevent corruption and bribery events as well as on any such events that occurred during the reporting period, and provide transparency on their ultimate owners, political contributions and payment practices.

The ED ESRS G2 disclosures generally require more nuanced information compared to the GRI equivalent standards. For instance, under ED ESRS G2 - DR 5 Anti-competitive behaviour prevention and detection, companies will also have to disclose the scope and depth of their training, and the percentage of at-risk persons covered by training programmes, while GRI 205-2 Communication and training about anti-corruption policies and procedures mainly requires the provision of the percentage of people that received training by different categories etc.

ED ESRS G2 - DR 6 Corruption or bribery events, which is aligned with GRI 205-3, extends the reporting scope to also cover ongoing legal proceedings. Anticompetitive behaviour events ( ED ESRS G2 - DR 7) coincide with GRI 206-1 Legal actions for anticompetitive behavior, anti-trust and monopoly practices, except that under ED ESRS G2 companies would have to include the number of new, continuing or finalised legal actions in their disclosures.

Beneficial ownership (ED ESRS G2 - DR 8), which corresponds to GRI 2-1 Organisational details, additionally asks for disclosure of the ownership or control percentages of beneficial owners. ED ESRS G2 - DR 9 Political engagement and lobbying activities which is also aligned with GRI 415-1 Political contributions, goes further by requiring information on individuals responsible for oversight, and the scope is also extended to cover advocacy activities.

ED ESRS G2 - DR 10 Payment practices has tangents with GRI 204 Procurement practices, which mentions ordering and payment routines in its procurement practices. However, ED ESRS G2 - DR 10 would require the provision of specific details such as the average time to pay an invoice, details about the standard contractual payment terms and complementary information necessary to provide sufficient context.

There is some topical overlap between the ED governance ESRS and the SFDR PAI indicators that financial market participants will need to disclose under the SFDR, with one mandatory PAI indicator (Board gender diversity), and optional five PAI indicators in their ‘Statement of PAIs of investment decisions on sustainability factors’. The relationship between the two seems to be rather synergistic than complementary in nature, demonstrating the willingness of EFRAG to respect the legislative coherence that is desired by the EC on sustainability matters.

The two governance exposure drafts will require companies to include an increased number of mandatory sustainability disclosures, which is in line with the wider trend of providing increased transparency on non-financial reporting.

While reading the requirements of these exposure drafts, certain companies applying the Accounting Directive and already issuing a sustainability report under the GRI framework, could conclude that they are on a good track towards ESRS implementation.

However, the implementation of EDs ESRS G1 and G2 will require an additional effort to assess the impacts of these two new standards, identify potential gaps, and review and update their governance policy and procedures. They will have to adapt their control environment to ensure their correct and complete implementation.

For companies which are at the beginning of their sustainability journey, these exposure drafts represent the opportunity to take this step it in a well-structured and organised manner as regards their governance practices.

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