The European Commission may be at risk of losing its leadership role on sustainable finance to the detriment of the commitments it made in the EU Green Deal and fail to meet investor demands to set clear standards, address greenwashing and ensure comparability between companies in their sustainability disclosures.

Recent developments over the adoption of European Sustainability Reporting Standards (ESRS) reveal a misalignment between the EU and the IFRS Foundation’s visions of what mandatory corporate sustainability disclosures should be about, which is threatening the integrity of a cornerstone EU legislation in this field – the Corporate Sustainability Reporting Directive (CSRD), industry officials have warned.

Law firm Frank Bold has produced a report noting how the commisison is being pressured to give up its ambition to define its own sustainability standards.


On 5 January 2023 the CSRD entered into force, modernising and strengthening the rules concerning the social and environmental information that companies have to report. A broader set of large companies, as well as listed SMEs, will now be required to report on sustainability – approximately 50,000 companies in total.

The new rules will ensure that investors and other stakeholders have access to the information they need to assess investment risks arising from climate change and other sustainability issues.

They will also create a culture of transparency about the impact of companies on people and the environment. Finally, reporting costs will be reduced for companies over the medium to long term by harmonising the information to be provided, accoridng to the Commission.

The first companies will have to apply the new rules for the first time in the 2024 financial year, for reports published in 2025.

Companies subject to the CSRD will have to report according to ESRS, of which draft standards are developed by the European Financial Reporting Advisory Group (EFRAG), an independent body bringing together various different stakeholders.

The standards will be tailored to EU policies, while building on and contributing to international standardisation initiatives.

The European Commission will adopt its first set of sustainability reporting standards this week. The standards will impact 50,000 companies and thousands of international corporate groups, requiring them to report information on their sustainability impacts, risks and opportunities. This is a critical piece of legislation for transparency on climate and circular economy transition, human rights, biodiversity – global leadership, which spurred developments around the globe.

Increasing pressure

In a joint statement on ESRS by European Fund and Asset Management Association (EFAMA) and 92 other asset managers, institutional investors and other financial market participants, it was stated: “Moving away from mandatory reporting of certain indicators risks undermining the EU’s status as a global leader on sustainable finance and its ability to attract capital at a time when other nations and regions are making significant progress in establishing their own sustainability frameworks. It is encouraging that EFRAG and the International Sustainability Standards Board (ISSB) have engaged in productive dialogue to promote interoperability between EU and international standards. But the EU must continue to set a high bar for ambition for others to follow and ensure consistency of the EU sustainable finance framework.”

In recent months, the Commission has faced increasing pressure from business and industry lobbies. It has already attempted to appease these forces by making concessions and weakening the standards, for example by removing strict requirements to report on climate change, biodiversity or conditions of agency workers, as evidenced in its draft delegated act.

However there is high-level political pressure on Commission president Ursula von der Leyen to further hollow out the standards and limit the EU ambition to the directions provided by the private standard-setter ISSB.

ISSB has so far only developed a general sustainability disclosure stand and one topical standard on climate. It aims to develop standards in all areas covered by the ESRS, which may take at least several years, the report by The Purpose of the Corporation Project stated.

The key difference with the ESRS is that the focus of the ISSB-standards is on only financially material sustainability issues. This was heavily criticised by scientists and civil society.

Via the collaboration with Global Reporting Initiative (GRI), the ISSB argues that impact materiality is also covered. However, in reality “there has not been much progress since the announcement and the agreement appears like a fig-leaf’, the Project said. “GRI has existed for decades and has turned into a global baseline already,” it added.

Philipe Zaouati, chief executive officer of Mirova, said: “The ISSB is a flash in the pan to prolong business as usual. […] Not only does Emmanuel Faber [ISSB chair] confirm that financial materiality remains the alpha and omega of the construction of international sustainability standards and that these are in direct opposition to the vision of double materiality of the European Union and EFRAG.”

Emmanuel Faber at ISSB2

ISSB chair Emmanuel Faber

Zaouti believes the ISSB was created to “block the developments at EU level” and that on the IFRS framework “the logic of simple financial materiality is mortifying. Applied not just to the climate, but to all other environmental and social issues in the future, it means the absence of corporate responsibility for the general interest”.

Andreas Hoepner, head of data science hub for the Sustainable Finance Platform, Smurfit Graduate Business School, University College Dublin, said: “The categorical imperative of sustainability reporting is to disclose among others the potential risks posed by a commercial entity to society and the natural environment such as CO2e emissions across all scopes or gender pay gap. Disclosing the potential risks which society or the natural environment pose to the commercial entity such as a potential strike by unions or climate activists is important and good risk management practice.”

He noted, however, that disclosing only the financially material risks to the commercial entity “benefits the wider society as many men on a sinking ship recognise the risks only to themselves and ignore the imperative to rescue women and children first”.

Hoepner added: “ISSB men like Faber are those that currently propose to leave women and children behind (unless, of course, their protest poses a material risk to men). European Union leaders don’t. I know on whose “information” ship I want to sail towards planetary sustainability.”

World Benchmarking Alliance (WBA) said that its analysis found that these draft ESRS, if fully implemented, are either aligned with or will raise the bar of current international standards used by WBA to assess corporate performance.

“This means that we expect these ESRS to have a significantly positive impact on the level of corporate information available to investors, relevant stakeholders, companies, public authorities, governments and supervisors. Therefore, we strongly urge the European Commission not to dilute or water down these ESRS in their final publication.”

A college of EU Commissioners will decide the fate of the EU standards this week with a foreseen publication of the final text on 28 July 2023.

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