The European Commission faces criticism for scaling back the ambition of its European sustainability reporting standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD).
A draft standard was put out for consultation on Friday afternoon, laying out how entities should approach reporting in order to comply with the CSRD. The CSRD came into force earlier this year, with further phases of implementation due in coming years, and replaces the EU’s long-standing Non-Financial Reporting Directive.
The proposals are based on recommendations published in November by the European Financial Reporting Advisory Group (EFRAG), but the European Commission has rowed back in some key areas.
Most notably, they would make all data points and indicators voluntary instead of mandatory. Whereas EFRAG had suggested that, as a minimum, all climate indicators should be mandatory under CSRD, the Commission wants to align more closely with the International Sustainability Standards Board (ISSB) by making them voluntary.
This would mean that a firm would make its own assessment of whether a topic materially impacts its business, or its business has a material impact on a topic (a concept known as double materiality), before deciding whether to disclose.
When a topic is considered material, but data is perceived to be less mature – such as waste, water, biodiversity, resource usage and some workforce figures – the proposals give companies permission to omit that information in the first year of reporting.
The European sustainable investment forum, Eurosif, issued a statement today in which it said it was “very concerned” with the proposals, which it said “mark a significant setback in ambition compared to the final recommendations published by EFRAG.”
It said that leaving entities free to choose which areas were material before disclosing “effectively allows companies to leave out entire parts of the sustainability disclosures”.
For investors subject to reporting requirements under the Sustainable Finance Disclosure Regulation (SFDR), this could add to confusion. A document published in April by the Commission outlined the indicators that should be used to prove that a fund’s investments do not undermine the EU’s sustainability objectives (a part of SFDR called Principle Adverse Impacts).
In that document, it suggested that this information would be readily available to investors, because it would be mandatory for companies to provide it under the CSRD. However, this is potentially no longer case.
Heike Schmitz, a partner at law firm Herbert Smith Freehills, told IPE that the proposed changes could “create a longer period of uncertainty” for investors, while companies work out which sustainability risks are material and which topics they should provide information about. However, she added, while the move to a voluntary approach is likely to make it easier to get the Delegated Act through political negotiations, it’s unlikely to change the climate information provided by companies covered by the CSRD in practice.
“That’s because a company would still need to prove that it didn’t face material risks from climate change, and that’s increasingly hard to justify,” she explained, adding that the voluntary aspect does not mean it is “a fully discretionary decision”.
The consultation is open until 7 July. A spokesperson for the European Commission told IPE that it will adopt the delegated act “as soon as possible after the end of the period of public comment.”
Once adopted, the delegated act will be scrutinised by the European Parliament and Council for at least two months.
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- Corporate governance
- corporate reporting
- Corporate Sustainability Reporting Directive (CSRD)
- double materiality
- European Financial Reporting Advisory Group (EFRAG)
- European sustainability reporting standards (ESRS)
- Impact reporting
- International Sustainability Standards Board (ISSB)
- Reform & Regulation
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