Demands of new EU framework could challenge companies’ ability to deliver sustainability data if it is not implemented carefully
- Far-reaching reporting requirements set to affect companies from 2023
- Industry bodies warn of potential data overload
- Calls for greater harmonisation on global reporting standards
Fast-track efforts to finalise EU Sustainability Reporting Standards (ESRS), which will determine how companies must report the sustainability of their activities, passed another staging post last week with the end of public consultations on draft proposals.
The European Financial Reporting Advisory Group (EFRAG) has been requested by the European Commission to deliver final draft ESRS proposals by November 2022. The ESRS, which are covered by 13 so-called ‘exposure drafts’ dealing with a number of themes, are a key part of the EU’s Corporate Sustainability Reporting Directive (CSRD).
The CSRD is a new framework for corporate reporting, designed to standardise, expand and improve the usefulness of sustainability data for investors, and reduce the potential for greenwashing.
It will require almost 50,000 of the largest companies with sizeable EU operations to provide detailed reporting on the sustainability of their activities – a big increase on the 11,000 firms covered by the existing requirements. If the current timetable is maintained, it would apply to reports published in 2024 covering the 2023 financial year.
Industry bodies have been quick to provide their take on progress, as the ESRS review heads down the home straight, highlighting areas where they think focus should be concentrated.
The European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, said it supported the drive to develop a “rigorous materiality assessment” – more thorough impact data compilation and analysis – as well as the application of double materiality, which means companies would be required to report not only how sustainability issues affect their business, but also how their activities impact people and the environment.
But ESMA said in an August 8 letter to EFRAG that there was a risk that the most valuable information could end up being “obscured by an overload of disclosure points and consequent voluminous reports”. The authority said it was “particularly important that EFRAG carefully assesses whether, due to their granularity, some of the proposed topical requirements are relevant mainly for certain sectors”.
The Net-Zero Asset Owner Alliance (NZAOA), a UN-convened group of over 70 international institutional investors, also said companies would struggle to comply with the ESRS if they became overloaded with requests for information, unless those requests were carefully targeted. It asked for measures to be phased in over time rather than all at once.
“A key issue is the feasibility of implementing 13 exposure drafts, of which climate change is one, simultaneously. There are limits to corporate and investor bandwidth, and if all exposure drafts were to come in at the same time, in the current level of granularity, there is a risk of low-quality implementation and/or non-compliance and unintentionally becoming a barrier to getting the disclosures that investors need on climate change,” an NZAOA spokesperson told Impact Investor.
Both organisations said they opposed the use of the concept of ‘rebuttable presumption’ to underpin the ESRS disclosure process, which effectively means issuers can only avoid disclosing information on their activities if they provide supporting evidence to show it is immaterial to the sustainability regulations.
Among objections to this approach is that it will add to bureaucracy and costs, and could even make it more likely that issuers would decide not to disclose certain information. ESMA said it would be better to replace rebuttable presumption with the simple requirement used in financial reporting for entities not to disclose immaterial information.
However, NZAOA said the standards would benefit from a tight focus on sector-specific metrics for 12 energy intensive sectors responsible for 80% of portfolio emissions, including oil and gas, various aspects of transport, cement and chemicals among others.
“This is where getting more detailed disclosures could have the most impact. Sector-specific metrics also enable peer comparison, an important component in stewardship and capital allocation decisions,” the spokesperson said. “We understand that EFRAG will be consulting separately on sector metrics, but given the NZAOA’s existing work in this area we wanted to highlight these points.”
Industry bodies also stressed that to be effective, the final standards need to be compatible with international standards being developed outside the EU, by bodies such as the International Sustainability Standards Board (ISSB), which was established at the COP26 climate conference, and the Global Reporting Initiative (GRI).
The NZAOA said technical differences between the ESRS and the ISSB framework needed to be ironed out. “The goal should clearly be that complying with ESRS automatically means complying with ISSB,” it said.