EDHEC-Risk concerned about availability and quality of ESRS disclosures

EDHEC-Risk Climate Impact Institute has welcomed the preservation of the double materiality principle and broad coverage of  ESG issues but has, however, expressed concerns about the availability and quality of disclosures, following the recent announcement regarding the European Commission’s adoption of the European Sustainability Reporting Standards (ESRS).

This adoption, under the Corporate Sustainability Reporting Directive (CSRD), comes less than a month after the end of a feedback period that had been kept short but had nevertheless produced some 600 stakeholder contributions.

The institute has also expressed disappointment over the Commission’s decision to dispense with unconditional disclosure of key indicators of corporate sustainability, and is calling for industry efforts to standardise materiality assessments to reduce the cost and enhance the relevance of disclosures.

For EDHEC-Risk Climate Impact Institute, there is little doubt that the same dynamics that led the Commission to disregard the final advice of its technical adviser – European Financial Reporting Advisory Group (EFRAG) – and put forward a draft regulation with curtailed ambitions also explain why stakeholder consultation was conducted as a ceremonious requirement.

By increasing the scope of sustainability disclosures by listed and large companies, the CSRD may contribute to better identification and management of sustainability impacts, risks and opportunities by reporting companies and to better information of internal and external stakeholders in respect of these issues, the institute said.

“In this regard, it is a source for comfort that the finalised ESRS preserve the ‘double materiality’ principle that has been the hallmark of the original European Union approach to sustainability reporting,” it stated.

Under the approach, companies are required to report not only on how ESG issues create material financial risks and opportunities for them – financial materiality lens – but also on their impacts on people and the environment – impact materiality lens.

The ESRS Delegated Act was also an opportunity to ensure that, at a minimum, reporting entities produce the data required by other entities under the scope of existing sustainability regulation.

“While the proposal prepared by the Commission’s adviser had embedded the relevant indicators, as mandated by the CSRD, this Delegated Act falls short of ensuring that reporting entities produce data that other parties require to comply with the extant European Union sustainability regulation,” the institute claimed.

In this regard the Delegated Act allows reporting entities to disclose voluntarily in respect of certain issues (irrespective of their impact or financial materiality), to withhold disclosure for non-material issues (apart from core general disclosures), and to avail of further flexibility in respect of certain mandatory disclosures (it also introduces multiple phase-ins).

Frédéric Ducoulombier, director at the institute, said: “As a research centre specialised on climate issues, we regret that the Delegated Acts fails to make climate-related disclosures mandatory but welcome the Commission’s last-minute adjustment requiring the disclosure of a detailed explanation when a reporting entity concludes that climate change is not material.”

He added: “We also regret that the Commission missed an opportunity to provide clear, science-based, guidance on materiality assessments and set minimum criteria to be respected by reporting entities.”

He said that EFRAG is tasked with producing guidance on materiality assessment in the short term and called on reporting entities and stakeholder groups to contribute to efforts aimed at enhancing the availability and quality of data that are key to the EU sustainable finance framework.

Read the digital edition of IPE’s latest magazine