The European Commission has adopted the European Sustainability Reporting Standards (ESRS), but sustainability-focused investor groups expressed concerns about watering down some of the requirements.
The ESRS is a checklist that companies must use to disclose the effects of climate change and other environmental and social factors on their businesses, as well as report their impact in places they operate.
It is being used as a mechanism for implementing the EU’s Corporate Sustainability Reporting Directive, the first initiative globally to take a so-called double materiality approach expands the bloc’s corporate sustainability reporting directive (CSRD).
Large companies will have to apply the directive in annual reports for 2024, with smaller peers following two years later.
However, the Commission recently eased several aspects of the new rules, in particular its removal of the mandatory nature of many of the CSRD’s sustainability disclosures, which remained in the adopted ESRS.
In response, asset managers and investors launched a coordinated — and failed — appeal to the commission to toughen its proposal.
They said, standards apply to both non-financial and financial companies, and are out of step with the stricter reporting requirements for financial firms.
Specifically, companies have been given too much latitude to decide what to disclose in an attempt to cut reporting burdens.
“We regret that the investors’ calls to retain key ESG indicators as mandatory have not been heard,” said Aleksandra Palinska, executive director of the European Sustainable Investment Forum (Eurosif).
She added, “Investors need specific corporate disclosures to allocate capital” in line with EU environmental objectives and to meet finance industry reporting requirements.
Under pressure, the commission has backtracked on mandatory disclosure of climate-related information,”
Tsvetelina Kuzmanova, senior policy adviser at E3G. noted, “This perceived flexibility on disclosure requirements will come at the cost of better data availability and comparability – seriously hindering the creation of a precise, reliable sustainability reporting framework.”
The commission said that while it cut back mandatory reporting, companies will have to conduct materiality assessments to identify what they should report.
Those assessments aren’t voluntary and they must also be audited by a third party. That means companies will have to provide “a detailed explanation” of why, for example, climate change isn’t relevant to its operations when it has “wide-ranging and systemic impacts across the economy.”
“The standards we have adopted today are ambitious and are an important tool underpinning the EU’s sustainable finance agenda,” according to Mairead McGuinness, the commissioner for financial services,
Earlier in July she warned that excessively tough reporting rules could backfire and lead to a “significant pushback.”
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