Brussels-based group Eurosif, representing national sustainable investment organisations including Luxembourg’s LSFI, has raised concerns over the European Commission’s draft proposal for European Sustainability Reporting Standards (ESRS). Eurosif argues that the proposal fails to meet the ambitious standards outlined at the end of last year by the European Financial Reporting Advisory Group (EFRAG).
Eurosif said that the proposed draft undermines the effectiveness of the Corporate Sustainability Reporting Directive (CSRD) and risks compromising the EU’s sustainable finance framework. It is concerned with the European Commission’s latest changes to the draft standards, which mark a significant setback in ambition compared to the final recommendations published by EFRAG in November 2022.
The Commission presented these changes last Friday in the shape of a draft Delegated Act.
“It is regrettable that this Draft Delegated Act disregards the balanced agreement found within EFRAG structures between a representative panel of expert stakeholders and following a lengthy due process,” said Aleksandra Palinska, Eurosif’s Executive Director.
“In its current shape, this draft neglects in particular the concerns expressed for years by investors and financial institutions, calling for improved availability of comparable and reliable corporate sustainability disclosures.”
Inconsistencies
Eurosif has identified a number of potential challenges and inconsistencies in integrating ESRS with other regulatory requirements, such as the Sustainable Finance Disclosure Regulation (SFDR). The organisation urges the European Commission to reconsider its changes and adhere to the more ambitious EFRAG recommendations, emphasising the importance of reliable and comparable corporate sustainability disclosures for investors and financial market participants.
The EC’s text of the draft Delegated Act and both its Annexes are available for public consultation until 7 July.
The development of robust and comprehensive ESRS, based on the double materiality principle and covering environmental, social and governance matters, is strongly supported by Eurosif. These standards are key to solving the corporate sustainability data gaps as well as to improving the quality, reliability and comparability of these disclosures.
However, the proposed draft Delegated Act renders all ESRS standards, disclosure requirements and data points subject to a materiality assessment. Combined with the added flexibility authorised by the Commission for these assessments, this would effectively allow companies to leave out entire parts of their sustainability disclosures.
This goes against EFRAG’s final technical advice recognising the disclosures as always being material, which were agreed upon by representatives of companies (preparers), investors, other financial market participants and civil society. It should also be noted that EFRAG proposals for ESRS Set 1, before they were submitted to the European Commission in November 2022, were nearly halved following the public consultation last year, Eurosif said.
Comparable disclosures needed
Eurosif said investors and other financial market participants need reliable and comparable sustainability-related corporate disclosures to make informed investment decisions and to comply with their own regulatory requirements stemming from the Sustainable Finance Disclosure Regulation (SFDR), Benchmark Regulation, and Pillar 3 disclosure requirements.
Furthermore, making some of the most essential climate disclosures – including indicators on GHG emissions, climate targets and transition plans – subject to a materiality assessment is inconsistent with the EU Commission’s commitment to deliver on the objectives of the European Green Deal and EU Climate law.
Making some disclosures fully voluntary, such as why a sustainability topic would not be deemed material, or those related to biodiversity and own-workforce, can also be questioned.
Overall, Eurosif calls on the European Commission to reconsider its latest changes and to follow the final EFRAG recommendations, which were already the result of a compromise between preparers, financial market participants, including investors, and civil society.
Specifically, it urges the European Commission to:
- Maintain mandatory key climate disclosure indicators and topics, including Scope 1, 2, and 3 GHG emissions, climate targets and transition plans;
- Keep mandatory key environmental and social disclosures necessary to comply with the SFDR, the Benchmark Regulation and Climate Benchmark Delegated Acts, as well as Pillar 3 disclosure requirements;
- Reconsider the voluntary nature of certain disclosures, including on why a specific sustainability topic would not be deemed material, as well as on biodiversity and own workforce.
Related articles on Investment Officer Luxembourg:
- ‘ESG reporting requires clear, consistent EU framework’
- EU places ESG reporting on par with financial data
- Efama calls for sustainability reporting standard alignment