European Sustainability Reporting Standards Adopted

    Stockholm (NordSIP) – As a four-week-long consultation period came to a close, on 31 July, the European Commission officially adopted the first set of European Sustainability Reporting Standards (ESRS) essential to the Corporate Sustainability Reporting Directive (CSRD). The reporting rules and requirements, covering the full range of environmental, social, and governance issues, including climate change, biodiversity, and human rights, aim to inform investors and help them understand the sustainability impact of the companies they invest in.

    “The standards we have adopted today are ambitious and are an important tool underpinning the EU’s sustainable finance agenda,” declares Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union. “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.”

    A modified version of ESRS

    However, not everyone seems to agree with the Commissioner’s upbeat view regarding the final version of the reporting standards. Following closely the June draft of the document, the Commission has eased the ESRS significantly compared to the original proposal from its advisory body on accounting rules, EFRAG, introducing three main modifications.

    Firstly, some additional phase-ins applying to companies with fewer than 750 employees allow those companies more time to prepare and spread the initial costs over several years.

    Secondly, the Commission has decided that all the reporting requirements, except for ESRS2 (general disclosures), should be subject to materiality assessment, allowing companies to omit information if it is not relevant to their particular circumstances.

    Thirdly, the Commission has converted a number of the mandatory data points proposed by EFRAG into voluntary disclosures as these are deemed too challenging or costly for companies.

    The uptake

    While broadly welcoming the adoption of the sector-agnostic and cross-cutting ESRS, some critics view the latest amendments to the standards as watering down. The move away from mandatory core sustainability disclosures, alongside the decision to subject most disclosure requirements to a materiality assessment performed by the reporting companies themselves, has elicited strong reactions.

    Now that the modified standards have been adopted, however, it is time to look forward at how best to work with them. “Investors will expect companies to perform robust materiality assessments that integrate the double materiality principle,” writes Eurosif in a press release concerning the ESRS adoption. “Eurosif is delighted to be able to contribute to EFRAG’s work in developing guidance on undertaking materiality assessments,” the sustainability forum adds.

    According to Elise Attal, Head of EU and UK Policy at PRI, as quoted by IPE, providing clear, comprehensive and robust guidance on materiality assessment should be a priority for the European Commission, given the adopted standards.

    Aligning standards

    The Commission states that the ESRS have been formulated after intense discussions with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI). The aim is to ensure a high degree of interoperability between European and global standards and to prevent unnecessary double reporting by companies.

    Some crucial differences remain, however. Whereas the ESRS cover the full range of environmental, social and governance issues, the ISSB has so far published a detailed topical standard on climate only. In addition, and as required by the CSRD, ESRS consistently applies a double materiality approach, requiring companies to report their impacts on people and the environment as well as reporting on how social and environmental issues create financial risks and opportunities for them. The ISSB standards, in contrast, have adopted a single materiality financial lens.

    What’s next?

    The ESRS delegated act adopted by the Commission will be formally transmitted to the European Parliament and the Council for scrutiny in the second half of August. The scrutiny period runs for two months, extendable by another two months. The European Parliament or the Council may reject the delegated act, but they may not amend it.

    Image courtesy of Guillaume Perigois on Unsplash
    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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