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Commission bid to streamline ESRS unsettles special interest bodies

Author: ICAEW Insights

Published: 03 Jul 2023

Finance profession welcomes revised standards for buying companies time – but ESG thought leaders in civil society organisations weigh in with concerns and critiques.

Key voices in the finance profession have hailed the European Commission’s release of the European Sustainability Reporting Standards (ESRS) as delegated acts. 

The 9 June publication marks the penultimate step on the standards’ path towards taking full effect as the backbone of the EU Corporate Sustainability Reporting Directive (CSRD).

Following the draft standards’ publication in November last year, the Commission submitted them to consultation among stakeholders – including corporate report preparers – leading to a set of revisions.

But while the finance profession has welcomed the changes, some special-interest bodies have signalled concerns that it deviates too sharply from the draft text of the European Financial Reporting Advisory Group (EFRAG), which oversaw the standards’ development.

Challenging measures

In an Explanatory Memorandum published in tandem with the delegated acts, the Commission says that the consultation confirmed that EFRAG’s draft standards met the mandate of CSRD, and would achieve intended policy goals under the European Green Deal.

However, it notes, some respondents “drew attention to the challenging nature of many of the disclosure requirements” for many companies – particularly for organisations “that have not previously been subject to legal requirements” to report sustainability data.

Among the most challenging measures that respondents cited in EFRAG’s draft standards were requirements covering biodiversity, companies’ own workforces, value-chain workers, consumers and affected communities. As such, the Commission says, its revisions have “streamlined” reporting obligations, while “not affecting” the pursuit of CSRD’s objectives.

In terms of what that streamlining looks like, some of the key revisions are:

  1. Materiality Apart from foundational rules set out in the so-called ‘cross-cutting’ ESRS 2, covering general disclosures, all the major standards across the spectrum of environmental, social and governance (ESG) categories – including their disclosure requirements and data points – are now subject to materiality assessment by the reporting entity.
  1. Phasing-in of certain requirements In the first year of applying ESRS, companies with fewer than 750 employees may omit Scope 3 greenhouse gas emissions data and disclosure requirements specified in the ‘own workforce’ standard. In the first two years, they may omit disclosure requirements set out in standards on biodiversity, value-chain workers, affected communities and consumers.

Meanwhile, in the first year of application, all companies may omit data on anticipated financial effects related to non-climate related environmental issues (for example, water use, biodiversity, pollution and use of resources), plus certain ‘own workforce’ data points linked to social protection, people with disabilities, work-related ill health and work-life balance.

  1. Making certain disclosures voluntary The changes reframe as voluntary a number of data points that EFRAG proposed as mandatory – eg, biodiversity transition plans, key indicators around ‘non-employees’ under the ‘own workforce’ standard and an explanation of why the reporting company may consider a particular sustainability topic not to be material.

Major milestone

ICAEW Head of European Policy Dr Susanna Di Feliciantonio says: “Having committed to presenting measures to alleviate the reporting requirements on European companies in the coming months, the Commission’s move to streamline the first set of ESRS comes as no surprise. Once the delegated acts undergo scrutiny later this summer, the revisions will likely be important for securing buy-in from MEPs and EU countries. Given the imminent date of application, the pressure to get to a final legal text as soon as possible continues to grow.”

In the view of Sarah Dunn, ICAEW Senior Manager, Corporate Reporting, the Commission’s timetable for the development of ESRS, and their subsequent implementation, has always been extremely ambitious. 

“Significant progress has been made in a short time,” Dunn says, “and the eventual publication of the first set of ESRS will be a major milestone for sustainability reporting across Europe. Allowing companies sufficient time to prepare for these new reporting requirements will be important – particularly because, for many, there will be challenges around developing systems to capture and report on the required information. Not to mention around the underlying data itself.”

“Europe continues to push the global sustainability reporting debate forward and we welcome the efforts that are being made to promote interoperability with other international developments,” Dunn adds, “in particular, with the International Sustainability Standards Board. This is a new and evolving area of corporate reporting and, while time is of the essence, it is also important that the underlying framework is sufficiently clear and robust to ensure high-quality reporting.”

‘Significant setback’

However, the revised ESRS by no means met with a uniformly positive response. On 12 June, surprised and concerned reactions emerged from ESG thought leaders in a number of special-interest bodies. Sebastien Godinot, Senior Economist in the European Policy Office of WWF and a member of EFRAG’s General Assembly, said that the new text “brushes aside” the multi-stakeholder approach that EFRAG applied to the standards, which it had “meticulously developed” over three years, in collaboration with the Commission itself.

Godinot stressed that the revisions would “increase complexity for companies, lower EU ambition compared to global reporting standards and open the door to greenwashing.”

For the European Sustainable Investment Forum (Eurosif), the delegated acts mark “a significant setback in ambition”, compared to EFRAG’s text of November 2022. And in the view of the Alliance for Corporate Transparency, the revisions would incentivise companies to continue to take a ‘wait and see’ approach, while effectively preventing investors from gathering reliable data required by the Sustainable Finance Disclosure Regulation.

‘Misleading’ coverage

Criticisms did not end there. In an EFRAG online forum on 14 June, which invited stakeholders to hear about the revisions first-hand from Commission figures and ask questions, some attendees queried how the changes would affect companies’ relationship with auditors. Focusing on the ‘own workforce’ standard (ESRS S1), European Trade Union Confederation Deputy General Secretary Isabelle Schömann said that companies would now have to convince auditors that areas such as remediation processes, non-employee workers and collective bargaining are material topics.

Adding to Eurosif’s official response, its Executive Director Aleksandra Palinska said that reserving mandatory status for only “a certain set of indicators” while making the majority subject to materiality assessment leaves “so much leeway” that she finds it “hard to believe that auditors will go through every single data point that will now be considered material.”

Explaining the changes, Commission Team Leader, Sustainability Reporting, Tom Dodd took issue with “misleading” coverage suggesting that making topics subject to materiality assessment means that they are now voluntary, and that companies are “entirely free to pick and choose” what they want to report. “That’s categorically not the case,” Dodd said. “Material information must be reported. The materiality assessment process must be audited. That is a provision of the CSRD.”

Speaking from the preparers’ side, Luc Vansteenkiste – Chair of EuropeanIssuers, the body representing the interests of 8,000 publicly quoted companies on European stock exchanges – said: “Big companies are already moving fast, and are very motivated on ESG. They know that, without ESG, they will no longer be the companies we need them to be. The smaller ones are those that are in difficulties and in a transition zone. So, creating and bringing time to them is of the essence.”

Further reading

Accountancy Europe has published a full comparison of EFRAG’s draft ESRS of November last year and the delegated acts of 9 June.

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