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ECB urges priority introduction of ESRS for financial sector

Author: ICAEW Insights

Published: 03 Mar 2023

Financial institutions and their intermediaries require sectoral standards on sustainability reporting rules for clarity and coherence, argues ECB.

Sector-specific terms for financial institutions must be added to the European Sustainability Reporting Standards (ESRS) as a matter of top priority, according to the European Central Bank (ECB).

The ESRS currently comprises sector-agnostic standards, with plans by drafting body the European Financial Reporting Advisory Group (EFRAG) to complement them over time with sectoral language and measures.

However, In a late-January opinion on the first set of ESRS, the ECB argues that standards applicable to financial institutions “should be prioritised and ideally adopted before the first reporting cycle”, bearing in mind the key role of financial intermediaries in the transition to a sustainable economy. It also argues that from a pragmatic viewpoint, this would bring clarity to the financial industry on what and how to report.

Such prioritisation, the ECB notes, is justified by the key role of financial intermediaries in the transition to a sustainable economy and – from a pragmatic viewpoint – by the need to bring clarity to the financial industry on what and how to report.

As such, it believes that introducing sectoral standards sooner rather than later will ensure coherence across the “multiple reporting obligations under EU sustainable finance legislation, including the interactions with prudential disclosure requirements”.

Clear delineation

The opinion also cites an “urgent need” for sector-specific guidance on the definition of financial institutions’ value chains.

While it acknowledges that principles for defining value chains appear in Chapter 5 of ESRS 1, it says that the “specific nature of financial institutions and the peculiar characteristics of their business relationships” require further guidance – and stakeholders should be presented with a “clear delineation” of reporting boundaries ‘well before financial institutions begin using the first set of ESRS’.

In parallel, the ECB stresses the need for interpretative support and proper maintenance of the standards as time goes on, “including revisions of the first set of ESRS based on experience gained by preparers, auditors and users”.

Further to those points, the opinion highlights a limited number of areas for adjustment. For example, it says, the ESRS rules for materiality assessment would benefit from clearer and more granular guidance on the process that compilers should follow – while the use of estimates and the calculation of greenhouse gas emissions merit further specification.

Technical issues

The ECB opinion emerged amid a set of further views on the draft ESRS from the three European Supervisory Authorities (ESAs), providing their own assessments of how effective the legislation looks on the cusp of becoming law. In summary, the ESAs’ responses are broadly positive – with some caveats:

European Banking Authority (EBA) welcomes the consistency of ESRS with international standards and relevant EU laws – plus the package’s alignment with disclosure requirements under the EBA’s Pillar 3 framework. In terms of proportionality, the EBA believes the draft standards offer a well-balanced approach, including in their phasing-in provisions. Among areas that the EBA judged worthy of further consideration is the timeframe for EFRAG’s development of sector-specific standards for credit institutions – a similar concern to the ECB’s point on sectoral measures for finance firms.

European Securities and Markets Authority (ESMA) finds that ESRS ‘broadly’ meets the thresholds for investor protection and does not undermine financial stability. However, ESMA advises, to bring the package from broadly to fully capable of meeting those objectives, the European Commission must address technical issues around potential improvements in consistency with the requirements of the Corporate Sustainability Reporting Directive (CSRD) and other EU laws. It also calls for ‘important clarifications of definitions and terminology’ and further guidance on the materiality assessment process.

European Insurance and Occupational Pensions Authority (EIOPA) welcomes the standards’ approach towards assessment of materiality – plus the mandatory disclosure requirements so crucial for market participants to calculate and report principal adverse impact indicators under the Sustainable Finance Disclosure Regulation (SFDR). “Nonetheless,” it says, “EIOPA is of the opinion that more clarity is needed on the boundaries of the value chain for insurers and pension funds so that relevant material sustainability impacts may be reported in a proportionate and risk-based manner.”

Reflecting on the spate of official verdicts, ICAEW Head of European Policy Susanna Di Feliciantonio says: “The opinions from the ECB and ESAs will provide the Commission with further food for thought during the secondary legislation process – although given the very tight timeline for adoption, it is unclear to what extent substantive changes can be made at this stage. 

“The Commission is expected to engage in a short consultation process that may generate further input. Meanwhile, EFRAG is already at work on the drafting of sectoral standards, as referred to by the ECB.”

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