The European Commission this week disappointed sustainable investment organisations by ignoring their collective call for mandatory reporting requirements that would force companies to make public core indicators for their non-financial sustainability performance.
Brussels-based group Eurosif, representing a dozen national European sustainable investment organisations including Luxembourg’s LSFI, said the success of the European Sustainability Reporting Standards, or ESRS, now is left entirely in the hands of reporting companies and their advisors, consultants and auditors.
“We regret that the investors’ calls to retain key ESG indicators as mandatory have not been heard,” said Aleksandra Palinska, executive director of Eurosif. “Investors need specific corporate disclosures to allocate capital in line with EU climate law and Green Deal objectives and to prepare their own sustainability-related disclosures.”
‘Another step forward’
The European Commission on Monday adopted the ESRS standards which will phased from 2025. They will apply to all EU companies subject to the Corporate Sustainability Reporting Directive (CSRD) . The commission heralded the adoption as “another step forward in the transition to a sustainable EU economy.”
Mairead McGuinness, EU commissioner for financial services, described the standards as ambitious. “They strike the right balance between limiting the burden on reporting companies while at the same time enabling companies to show the efforts they are making to meet the Green Deal Agenda, and accordingly have access to sustainable finance.”
The ESRS standards, which will be phased in between 2024 and 2027 along with the CSRD, cover a range of environmental, social, and governance issues, including climate change, biodiversity and human rights. They provide information for investors to understand the sustainability impact of the companies in which they invest.
The commission said the new standards also take account of discussions with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) in order to ensure a “very high degree of interoperability between EU and global standards” and to prevent unnecessary double reporting by companies.
‘Subject to materiality’
Efrag, the EU’s accounting standards body, had already proposed to make reporting a number of indicators voluntary, but the European commission decided to give companies even more flexibility by making reporting requirements “subject to materiality”. This lets companies decide for themselves exactly what information is relevant in their particular circumstances. “This will avoid the costs associated with reporting information that may not be relevant,” the EU Commission said.
The Commission also added additional phase-in criteria for companies with fewer than 750 employees, explaining that costs of reporting are relatively higher for such companies compared to larger companies, and they have generally not previously been subject to sustainability requirements. This will “give companies more time to prepare, allow them to spread the initial costs over a number of years and should result in higher quality reporting”.
The Commission finally converted a number of the mandatory data points proposed by Efrag into voluntary data points. The data points concerned are those currently considered most challenging or costly for companies, such as reporting a biodiversity transition plan and certain indicators about self-employed people and agency workers in the undertaking’s own workforce.
Counting on those reporting
Speaking out for the interests of those working with sustainable investments, Eurosift’s Palinska expressed the hope that reporting companies will still consider these disclosures as material. “We are counting on the reporting companies to consider these disclosures… as always material. This is essential for the success of the EU sustainable finance framework.”
The International Sustainability Standards Board (ISSB), the global accounting standards body, in June announced its own inaugural corporate reporting standards for sustainability and climate risk. The Commission said that its ESRS standards are aligned with those set out by ISSB and the Global Reporting Initiative (GRI). “Intensive and constructive discussions between the Commission, Efrag and the ISSB have ensured a very high degree of alignment where the two sets of standards overlap,” it said.
Iosco, the global body of securities regulators, last week endorsed the ISSB standards, known as IFRS S1 and IFRS S2, as a major step towards “consistent, comparable and reliable sustainability information” and has called on its 130 members to consider ways in which they might adopt these standards in their own jurisdictions.
Critical moment for investors
“This is a critical moment in advancing Iosco’s goal of improving climate-risk disclosure for investors,” said Jean-Paul Servais, chair of the board of Iosco and chief of Belgium’s FSMA. “Investors are demanding better information about sustainability risks and opportunities, and the G20, the G7, and the FSB rely on Iosco to assess whether the ISSB Standards are fit for purpose for capital markets.”
“The delivery of high quality standards in due time is of the essence when it comes to sustainability,” Servais said.