European Parliament Backs ESRS

    Stockholm (NordSIP) – Following the adoption of the European Sustainability Reporting Standards (ESRS) by the European Commission on July 31st 2023, the European Parliament and the European Council were given several months to consider and potentially reject the delegated act implementing the Corporate Sustainability Reporting Directive (CSRD).

    To this end, a number of Members of the European Parliament (MEPs) opposing the ESRS tabled an objection to it on October 11th. In a vote in the European Parliament on 18 October, MEPs rejected (359 in opposition against against 261 in support) this objection (p170) calling for limitations to be introduced on the ESRS. The rejection of this proposal paves the way for final adoption.

    The adoption of ESRS is a significant step towards increasing transparency within Europe’s business community and is hoped to be a boon for the bloc’s sustainability agenda and for the work of its sustainable investing community.

    The ESRS and the CSRD

    The ESRS is a Commission delegated act, a type of European legislative instrument created by EU regulations through which the European Parliament and the European Council delegate to the European Commission the power to define the detailed technical aspects of how a regulation is to be implemented. In this instance, the ESRS is a delegated act implementing the Corporate Sustainability Reporting Directive (CSRD).

    The ESRS was originally proposed by the European Financial Reporting Advisory Group (EFRAG) at the end of 2022. The ESRS disclosure requirements cover four main reporting areas: governance;strategy; impact, risk and opportunity management; and metrics and targetsThe ESRS reaffirms that companies must report sustainability aspects based on the double materiality principle (i.e., considering both impact materiality and financial materiality) and reiterates the importance of performing a thorough materiality assessment.

    On October 4th, 2023, EFRAG and the Global Reporting Initiative (GRI) confirmed that they had achieved a high level of interoperability between their respective standards in relation to impact reporting. “Existing GRI reporters will be well prepared to report under the ESRS. Entities reporting under ESRS are considered as reporting with reference to the GRI Standards and will therefore avoid the burden of multiple reporting. Following the requirement of the CSRD to adopt a double materiality approach and to take account of existing standards, ESRS and GRI definitions, concepts and disclosures regarding impacts are fully or, when full alignment was not possible due to the content of the CSRD mandate, closely aligned,” EFRAG and the GRI said in a joint press statement on this occasion.

    Opponnents to the ESRS

    Proponents of the resolution rejecting the EU’s CSRD and its ESRS implementation, made a range of arguments supporting their position, noting that the present economic environment is detrimental to European business and that the European Commission itself admits there is already too much red tape for companies to overcome.

    According to the supporters of the rejected motion, “companies are currently severely challenged by high energy prices, inflation, increasing interest rates, complications in supply chains and logistics and shortage of skilled workers, while the level of administrative burden for companies is increasing,” and “forecasts show that the European economy is under pressure and companies relocate to third countries.” The 261 MEPs noted that ”the Commission has acknowledged that companies in the Union suffer from red tape” and that ”simple reporting standards are needed instead of overburdening companies.”

    In their judgement, the ESRS adds a ”high administrative burden for companies due to the high complexity of sustainability reporting standards, (….) requires significant resources by companies, which is a burden especially to smaller undertakings (…) and jeopardises the Commission’s intention to reduce red tape.” Opponents to the ESRS noted that as it stood, “most ESRS standards fall short of usable Key Performance Indicators (KPIs) and thus do not serve the Commission’s goal of creating measurable and comparable standards, especially across companies, which add value to data providers and data users managing the twin transition.”

    Instead, the anti-ESRS MEPs called on the Commission to “submit a new delegated act that reduces the complexity and quantity of sustainability reporting standards, (…) extends implementation for all companies concerned” while protecting SMEs and amends the criteria defining the size of companies.

    Supporting ESRS

    Both the GRI and the World Wide Fund (WWF) congratulated the European Parliament on the outcome of the vote.

    The GRI described the vote as a “game changer for mandatory reporting”. According to Eelco van der Enden, CEO of GRI, “the endorsement of the ESRS by the European Parliament is welcome because it signals the transition from political debate to practical implementation for these new rules – which are a game changer for corporate accountability, in the EU and globally. The close alignment achieved between the ESRS and the GRI Standards underlines the increasing influence of GRI as the global enabler for transparency on impacts. We will continue to actively engage with EFRAG and other standards setters, at national and international levels, to further increase the momentum behind impact reporting, ensuring companies deliver the sustainability information their stakeholders require while reducing the reporting burden. This reflects our evolving role as a trusted partner for regulators, with GRI reporting underpinning high-quality and increasingly mandatory sustainability reporting.”

    According to the WWF, the present draft of the ESRS is already a considerably watered-down version of the November 2022 proposal by the European Financial Reporting Advisory Group (EFRAG), of which WWF is a member. “MEPs have safeguarded the European Sustainability Reporting Standards, a vital tool for improving transparency on companies’ sustainability performance. By standing firm against this attempt to kill the standards, MEPs have pushed back yet another indirect attack on the Green Deal, ensuring that European companies are not penalised in their critical transition towards a greener future. Backward-looking views against the green transition have once again been defeated,” Sébastien Godinot, Senior Economist at WWF European Policy Office, said.

    Image courtesy of Udo Pohlmann via Pixabay
    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

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