What does the EU’s plan for new sustainability reporting standards mean for investors?

The European Commission recently published its final plan for revising the European Sustainability Reporting Standards (ESRS).

In hundreds of pages of proposals, policymakers explain the extent to which they’ll follow recommendations from their advisory body, the European Financial Reporting Advisory Group (EFRAG), and where they hear requests from industry and co-legislators.

“We’re in a pretty good place with these standards,” believes Leo Donnachie, a senior policy specialist at the Institutional Investor Group on Climate Change (IIGCC).

“The Commission has adopted the sensible revisions that EFRAG put forward wholesale, more or less.”

In particular, the Commission rejected last-minute pressure to rewrite ESRS so that information about environmental and social impacts was treated as secondary to disclosures about the short-term financial risks and opportunities stemming from sustainability.

“We’re very pleased to see the retention of the double materiality approach,” Donnachie says, adding that IIGCC also welcomes the retention of requirements on climate transition plans.

Elise Attal, head of European policy at the Principles for Responsible Investment (PRI) agrees.

“We’re pleased to see the Commission maintain most elements of EFRAG’s proposal,” she tells IPE. “The modifications it has introduced will, on the whole, strengthen the Standards.”

Asset managers out?

But some parts of the proposal have prompted a more mixed response from observers.

Among them is a clarification that asset managers don’t have to report on investment activities undertaken “subject to a fiduciary duty on behalf of its clients without retaining risks or rewards of ownership”.

“The current proposal basically removes asset managers from reporting against ESRS,” says Susanna Arus, EU public affairs manager at non-profit law firm Frank Bold.

That’s “problematic”, she argues, because entity-level disclosure requirements are also being removed from the Sustainable Finance Disclosures Regulation (SFDR), meaning there’s no obligation for asset managers to report on their overall sustainability risks or impacts anywhere.

“It will create a vacuum that will make it difficult for supervisors to assess sustainability risks in the finance industry,” Arus believes.

But the Association for Financial Markets in Europe (AFME) welcomes the update.

“The ESRS should contain proportionate measures which take into account the complexity of financial sector value chain reporting, considering where financial institutions have no ownership of assets,” says Rachel Sumption, associate director of sustainable finance at the trade body.

She adds that AFME will provide further feedback “to ensure [the proposals] are workable in practice”.

Donnachie points out that, in reality, the carve-out for asset managers is unlikely to be transformative, because so few asset managers were captured by the EU’s Corporate Sustainability Reporting Directive (CSRD) in the first place.

“There aren’t many asset managers with more than 1,000 employees, so it will probably be most relevant for those that are part of a big consolidated group like a bank or insurer,” he says.

“We’re still awaiting more clarity on the implications of these carve-outs for asset managers reporting on investments they manage on behalf of asset owners,” Donnachie adds, suggesting that sector-specific guidance on ESRS compliance in the finance industry could help the situation over the longer term.

Other proposed carve-outs are more significant.

“There are some decisions that stand to undermine the overall objective of CSRD,” claims Donnachie. He’s referring in part to the plan to introduce a set of permanent reliefs for companies.

“We don’t think the reliefs around lack of skills, resources and capabilities, and undue cost or effort, should be permanent, given that the CSRD now only covers very large companies, so the argument that they might not have the skills or resources doesn’t feel appropriate.”

Instead, IIGCC thinks the reliefs should be temporary, to give companies a chance to build the systems they need without allowing them to excuse themselves on an indefinite basis.

Europe’s supervisory bodies expressed similar positions earlier this year.

And then there’s the postponement of a requirement to quantify the anticipated financial effects of the sustainability disclosures, which will now only be mandatory from 2030.

Until then, only qualitative disclosures will be required.

“While we regret that this has been pushed back, we’re glad to see that the disclosure requirements remain mandatory and broadly in line with standards from the International Sustainability Standards Board,” says Attal.

The Commission’s proposal is open for feedback until 3 June.