Navigating and mapping the jungle of sector standards | Q&A with Philippe Diaz

Since impacts are largely the starting point for identifying financially material risks and opportunities, yes, I think it’s sensible to kick off with GRI.

EFRAG works closely with GRI, including at the sector level. EFRAG is not interested in creating something entirely new that differs greatly from what companies already implemented as per GRI. The intention is if GRI already has a sector-specific standard, EFRAG will take it, adapt it to the European context, if necessary, and update it with some elements that weren’t covered.

Deviations between GRI and the ESRS will certainly occur, however. Partly because of European law and partly because of feedback from members of the Technical Expert Group (TEG) and the Sustainability Reporting Board (SRB). The arguments are not always technically well founded, as was the case with ESRS E4 deviating from GRI and TNFD by not asking for coordinates of sites with material impacts on biodiversity and ecosystems. The justification was that it would make it easier for terrorists to identify the location for attacks. I mean, we have freely accessible satellite data anyway today. So there is a political element to it, which is a bit unfortunate. Another reason can be that processes at standard-setters are running in parallel.

I guess it can complement what GRI developed, but I wouldn’t use it as the sole starting base.

Firstly, SASB is focused on risks and opportunities.

Secondly, SASB has been designed with a US focus in mind.

Thirdly, what I hear from within ISSB is that SASB is outdated. When you look around on LinkedIn, you will find a lot of criticism about SASB not covering certain sustainability topics that are now clearly financially material at the sector level. So, I am not particularly fond of SASB, even though I would not dissuade anyone from taking a closer look. Check it out, but keep in mind that it only covers part of what is required under the ESRS.

If you look at the impacts at the sectoral level from an environmental point of view, kick off with a tool like ENCORE instead. ENCORE helps you get a first glimpse at what material impacts you are likely to have in the sector you operate in. Drill deeper from there.

There will also be a lot of initiatives at the sectoral level that will pop up. Many industry associations will likely support their member firms in their materiality assessment. There will certainly be differences between individual members, but it is a better starting point than looking at a blank sheet of paper.

Consulting firms will provide sector-specific guidance, saying you should probably disclose this information since you are in this sector.

Other initiatives are emerging even from civil society to define what should be disclosed across certain sectors. So, the ecosystems around sectoral disclosures are well on the way to being developed. Early stages, but progress is all around.

This will also help EFRAG do its work. For the first eight priority sectors, the material is partially already quite advanced. Especially for Oil & Gas and Coal & Mining. GRI also has sector standards for both and it was much easier for EFRAG to draw upon existing material. GRI complemented by SASB’s risk and opportunity focus is a good starting point.

If you look at, for example, the IT sector, there is much less out there. That will make EFRAG’s work much harder since it has to cook it all up by itself.

The dynamics are changing.

When we started working on Set 1, some work was already happening on the sector-specific standards. Initially, there were ten. Then it was cut down to about five. Then the work was stopped entirely, even though some of the sector-specific standards, such as Oil & Gas and Coal & Mining were literally ready. They were almost ready for public consultation. It was a political decision by the European Commission to put them on hold. They told EFRAG to focus on developing guidance for Set 1.

Fair enough. EFRAG worked on guidance. With three pieces of guidance now available for public consultation, EFRAG is now ready to turn its attention elsewhere.

In its yearly planning, EFRAG allocates roughly 30% of its capacity to deal with sectoral standards in 2024. In addition, they need to plan for the capacity of the TEG and the SRB, not just for the capacity of the staff at the EFRAG Secretariat.

The TEG this year will have approximately 260 hours of meetings. I guess that’s not much different to last year, but certainly less than during the rush in 2022 to hand Set 1 over to the European Commission. However, even 260 hours is still substantial because you need to add the time spent for reading and commenting on the materials, and also reaching out to stakeholders who can assist you in providing technical feedback. You can’t know everything yourself, right? Sometimes you know very little about the topic being discussed. To come up with something sensible, you need to gather information. This is an unpaid and time-consuming job.

Right now two standards, Oil & Gas as well as Coal & Mining, are closing in on being released for public consultation. They are already with the SRB for final discussions. Some feedback was already provided and it was returned for review with sector communities – a loose group of experts with sector-specific expertise. It might have to go through another iteration with the SRB, but both are close to being released for public consultation.

After the public consultation, EFRAG Secretariat will synthesize the results and update the draft. Then they would have to run it through the TEG and SRB again. It will certainly go through multiple iterations again before being approved and submitted to the Commission. After the Commission examines the proposal by EFRAG, they will probably do another consultation, and then publish the standard as Delegated Act. So, even if an EFRAG standard is ready for public consultation, you’re still looking at quite a lengthy process.

This being said, the draft standards as they are now provide a good indication of what will probably be included in the sector-specific standards the Commission adopts. Even though it is not law yet, auditors and firms in those sectors will closely examine what EFRAG releases. It doesn’t really make sense for a firm to disclose something entirely different before and after the sector standards are released. So, it makes sense to set up the processes in a way that addresses the disclosure requirements and datapoints included in the draft sector standards. Anything else would be a waste of money. My bet is that whatever EFRAG releases for public consultation will likely already have quite an impact.

I guess that by mid-2025, the commission might release something on Oil & Gas and Coal & Mining. But that’s only a guess.

As you’ve seen, EFRAG wanted to release the materiality assessment guidance months earlier but got bogged down in internal discussions. A significant delay in the sector standards can also happen. What doesn’t usually happen is that EFRAG finishes early.

It’s not clear.

I believe there weren’t really any sector names mentioned in what the Parliament released, except that EFRAG should focus on what is there already. There are eight standards that are listed on EFRAG’s website, where working groups are already in place. Some of them aren’t really active at the moment and resemble ‘sleeping cells’. These working groups must be reactivated. The work done so far by those groups also varies greatly in terms of maturity. Some, like Oil & Gas, are much more advanced than others.

The Textiles, Accessories, Footwear & Jewellery standard is nowhere near ready. The Agriculture, Farming & Fisheries standard is much more advanced. But there you have a very different dimension to it. As you have seen with the farmers’ protests in France and Germany, politicians will be extremely cautious when it comes to anything that goes against the interests of farmers. Some standards are politically much more sensitive than others. Hence, even though the Agriculture, Farming & Fisheries standard might be a bit more advanced and has significant environmental impacts, it may be much harder to push through. In contrast, unpopular industries such as Oil & Gas and Coal & Mining are easier to pass. Less popular, hence less controversial.

Yes, via the Sector Working Groups.

But then again, think of a big German petrochemical firm that produces pesticides. Would you want to ask them what they want to disclose about their production of pesticides? Not so much. So, while contributions from the firms affected by the sector-specific ESRS are welcome, a certain distance makes sense.

The issue here is that there doesn’t seem to be much appetite from large financial market associations for the sector-specific standards. At least this is my impression. However, the further EFRAG advances with the sector-specific standards, the closer we will get to the sector-specific standards for the financial industry.

However, I don’t mind so much as in my opinion, financial industry standards should not be prioritized for several reasons.

First of all, we already have the Sustainable Finance Disclosure Regulation (SFDR).

Furthermore, EFRAG will develop specific guidance for the finance industry. There are also working groups currently being formed. This week TEG gets a look at how these groups are set up. So the content-related work hasn’t even started yet.

The third point is that the finance industry relies on the real economy to provide data so they can aggregate it at the portfolio level. Until EFRAG is done with the high-impact sectors, it doesn’t make too much sense to request the finance industry to be more granular. Much of the data would have to be extrapolated, and estimated. Possible, but not ideal.

That is at least what was discussed within civil society. It’s also my position. From what I understand, the European Parliament hasn’t made a strong effort to squeeze in finance, either.

There is a discussion about how many sector-specific standards there should be. We are now at around 40. But some say it should be 100. This isn’t because there are more sectors, but simply because we could down in the level of granularity. Divide the Energy Sector into Oil & Gas and Renewables, for example. Or just have the Energy Sector as one standard. What is more appropriate? More granularity, so more standards, helps in being more specific. On the other hand, having more standards, just adds to the timeline, as it is different standards, separate processes, and separate working groups.

And there is a way around it. You can have a standard at a higher NACE code level and then distinguish within that standard by more granular NACE codes. Multiple-digit NACE codes would only have to apply to certain disclosure requirements, not all. Thus, there is some flexibility.

There is a good chance that the outcome will be around 40. Some sectors may be merged, some may be split, so it’s impossible to see an exact number right now. But 40 will likely remain.

But if the first two sector-specific standards get released by mid-next year, there are 38 more to go. Don’t expect EFRAG to be done anytime soon! It will take years…

 

 

Philippe Youssef Garduño Diaz led the development of ESRS E4 Biodiversity & Ecosystems during the public consultation and is currently a member of the Sustainability Reporting Technical Expert Group (SR TEG) at EFRAG.  He also works on other fields of EU legislation, including the EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Due Diligence Directive (CSDDD).

 

Gabriella Lovas is a GRI Certified Sustainability Professional with a CFA Certificate in ESG Investing and a Masters in Economics. She specialises in ESG and corporate sustainability reporting.

As a financial journalist and business writer, she has worked with international news agencies, such as Bloomberg, Big 4 consulting firms and start-ups. The purpose of her content is to educate and inform readers about sustainability in a clear, compelling way. She researches, writes, and edits articles, blog posts, and educational materials, using SEO tools and techniques to optimize them for online visibility.

Her passion is to support the transition to a more sustainable and inclusive economy.