28/06/2024 - EFRAG publishes paper addressing interplay of connectivity and Annual Report boundaries

​As part of its proactive research workplan, EFRAG has published a paper "Connectivity considerations and boundaries of different Annual Report sections" (hereafter referred to as the EFRAG Connectivity and reporting boundaries paper). This paper has been developed amidst an ongoing corporate reporting evolution marked by the growing prominence of sustainability reporting, which aims to facilitate the creation of sustainable businesses and the allocation of investment capital towards them. However, the prominence of sustainability reporting has been coupled with an often-disconnected reporting of sustainability-related matters in the financial statements. At the same time, there is a risk of duplicated reporting of other matters across sustainability and financial reporting. Hence, both European and global stakeholders have called for increased connectivity (including linkages/connections, consistency and coherence) of information across the distinctive sections of the Annual Report.

What is the paper trying to achieve? Connectivity is a new and multi-dimensional concept that has only been introduced into the mandatory sustainability reporting requirements, which are applicable for a) ESRS-reporting entities in the EU; and b) entities in jurisdictions that will adopt the ISSB Standards. Hence, the EFRAG Connectivity and reporting boundaries paper lays out the conceptual foundations and different aspects of connectivity.  Amongst other things, this is intended to contribute to a shared understanding amongst stakeholders of the different aspects of connectivity. 

The benefits of connectivity include a) enhancing the coherence and complementarity of the information in the Annual Report; b) lessening potential gaps (missing) information and overlaps (duplicative information) across the Annual Report; c) enhancing the predictive value of sustainability reporting information through connections to future financial statements, e.g., disclosure of triggers of migration to financial statements and anticipated financial effects; and d) fostering the strategic-oriented communication of the Annual Report. Several other benefits of connectivity are outlined in the paper.

The paper also aims to enhance stakeholders' understanding of reporting boundaries (i.e., what information is included or excluded across the different Annual report sections) in a manner that can a) shed light on what information can or cannot be connected; and b) reduce expectation gaps, particularly around what information can be reported in the financial statements. Relatedly, the paper points out several grey areas on the location of reported information (i.e., where there is duplicated reporting and/or diverse views amongst stakeholders on the location of information). These grey areas include disclosures of climate-related commitments, unrecognised intangibles, and synergies from M&A transactions.  The paper suggests steps to enhance connectivity and lessen the grey areas and expectation gaps including leveraging XBRL-tagged technology, the development of a sustainability reporting conceptual framework, and enhanced management commentary guidance.

 "With the rise of sustainability reporting, everyone is talking about connectivity these days. However, many have different ideas of what connectivity means, is supposed to achieve and why it is beneficial. EFRAG's paper sheds light on these questions. The paper greatly benefits from including as many stakeholders' views as possible including from the EFRAG CAP and the technical bodies of EFRAG."

EFRAG Connectivity Advisory Panel (EFRAG CAP) Chairman and EFRAG FR TEG Vice Chair, Jens Berger

"I trust this paper will help the many stakeholders of annual reporting better understand the function and interaction of the various components of the annual report, including the sustainability report and the financial statements. The connectivity considerations in the paper may also help preparers in their thinking about how to tell a coherent story through the connectivity between these annual report components."

 EFRAG CAP Subgroup leader, Leo van der Tas

Other points of note:  The EFRAG Connectivity and reporting boundaries paper is an initial deliverable of EFRAG's proactive research workplan project on the connectivity between financial reporting and sustainability reporting (EFRAG connectivity project).  A Discussion Paper that will include illustrations of connectivity will be published at a later date.

The EFRAG Connectivity and reporting boundaries paper is a by-product of the technical discussions held by the 23-person EFRAG CAP, EFRAG's FR TEG and SR TEG and EFRAG's FRB and SRB; and a review of the requirements of ESRS and ISSB Standards and other related guidance. Insights were also drawn from multiple stakeholder (including EFRAG's) publications and events.

This paper is neither part of EFRAG's ESRS development activity nor is it part of the ESRS implementation support.  This paper should not be construed as being part of the ESRS implementation guidance.

Access the EFRAG Connectivity and reporting boundaries paper and its short version.