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    Rallying the Troops

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    It is getting hot out there! And I don’t mean just the unseasonably high temperatures courtesy of global warming aided by El Niño. The EU corridors of power seem to be heating up, too. The final draft of the European Sustainability Reporting Standards (ESRS) is yet to be published. As per the usual Brussels-esque procedure, though, the news is already out, and it certainly sounds bad. No wonder those in the know are duly concerned. Sustainability warriors are preparing for battle and starting to rally the troops.

    So, what is all the fuss about?

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    I regret to say that your humble columnist does not have direct access to the leaked ESRS draft. Moreover, comments received from those who have seen the document in question have all been strictly off the record. Consider yourselves hereby duly warned that most of the below are still unconfirmed rumours and a medley of comments encountered while browsing (professional) social media.

    Disclaimers aside, it would appear that the original proposal, submitted by EFRAG late last year, has been considerably altered by the European Commission ahead of its official release next month. Corporates with powerful muscles have been lobbying hard, and rather efficiently as it seems, to water down the proposal they view as too onerous. And so, both the content of the new reporting standards and the timeline for their implementation are now expected to be much less ambitious than initially intended.

    From what I gather, the hot topic du jour is that the ESRS is about to take a step (or a leap) back from requesting mandatory indicators and data points from companies. Instead, standards and disclosure requirements are to be either voluntary or subjected to a double materiality test by the companies themselves.

    Rather unfortunate, as most sustainable regulation experts would agree. “We need a certain set of disclosures to be mandatory until the market is capable of conducting fair and mature double materiality assessments,” explains one of these experts, Marie Baumgarts, partner at KPMG, in a comment on LinkedIn. “Perhaps not even then would it be a good idea to remove the mandatory requirement on certain core indicators,” she adds.

    If choosing companies’ own materiality assessment rather than mandatory disclosures is indeed the path the EC decides to take, it would spell trouble for asset owners and asset managers who desperately need the data to plug into their reporting obligations.

    The alleged revision of the timeline for implementing the ESRS is also problematic. Generously postponing the phase-in by a year, with an additional leeway for smaller companies, begs the question of how those dependent on the data are to cope with their regulatory requirements.

    No wonder sustainably-minded investors sound unhappy with the latest twist in the plot. “For asset managers that counted on the CSRD/ESRS to solve the lacking PAI[1] data problem, it will be a disappointment if it ends up like this,” comments Dag Messelt, Senior Sustainability Consultant at sustainAX, also on LinkedIn, where this unofficial debate based on rumours is unfolding.

    Perhaps it is not too late to act yet, though. Hence the call to arms reverberating across the community. “To all Asset Owners and Asset Managers, this is the time to make your views heard!” writes Professor Andreas Hoepner, a veteran of the Platform on Sustainable Finance (both the first and the second one). “Without mandatory climate disclosure, the EU’s Net Zero and Fit For 55 targets are in real danger,” he adds, urging like-minded sustainability professionals to act fast.

    Let the battle (almost) begin!

    [1] Most of you know are, of course, familiar with the acronym by now. Just in case, the Principal Adverse Impacts (PAIs) are a set of mandatory ESG disclosures that, according to the  Sustainable Finance Disclosure Regulation (SFDR), investors must report on.

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