Green groups slam EU’s freshly released ESG reporting rules

The EU commission’s ‘watering down’ of its sustainability reporting standards include not making all disclosure requirements compulsory and delaying the reporting of Scope 3 emissions for smaller companies.

The European Commission’s keenly anticipated proposals on sustainability reporting standards have been roundly criticised by environmental groups and sustainable finance experts, after their release on June 9. The EU executive has chosen to ignore the advice of its own advisers, opting not to make all disclosure requirements compulsory and to delay the reporting of downstream Scope 3 emissions for companies with fewer than 750 employees. 

The EU Accounting Directive, as amended by the 2022 EU Corporate Sustainability Reporting Directive, requires the commission to adopt a first set of sustainability reporting standards by June 30 2023. In November 2022, the European Financial Reporting Advisory Group, an EU advisory body, endorsed environmental, social and governance standards that companies would need to disclose.

In an apparent effort to reduce regulatory and reporting burdens, the commission has opted to weaken many of Efrag’s recommendations. The EU executive has deleted the “always-to-be-disclosed” clause from all climate disclosure requirements and made various datapoints voluntary.

Likewise, under the proposal, transition plans, biodiversity, some information on “non-employees”, and the need to explain why sustainability topics are not considered material by a company, would not be mandatory reporting requirements. Instead, companies would be required to conduct a materiality assessment to decide whether or not to disclose climate-related information. 

The commission has also opted to delay the application of disclosure on Scope 3 emissions by one year for companies with fewer than 750 employees. For the first two years, these companies will also not have to apply disclosure requirements related to biodiversity, value-chain workers, affected communities, consumers or end users. 

The European Sustainable Investment Forum said it was “very concerned” about the changes, which “mark a significant setback in ambition”. If adopted as such, the standards risk “undermining the effectiveness of the CSRD, as well as the implementation and coherence of the EU sustainable finance framework”, warned the organisation in a press statement. 

“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, Benchmark Regulation, and Pillar 3 disclosure requirements,” said Eurosif.

Inconsistencies

It also warned that making climate disclosures subject to a materiality assessment was “inconsistent” with the objectives of the European Green Deal and the EU Climate law.

“We are quite disappointed with the watering down of the standards,” Axelle Blanchard, policy and research officer at law firm Frank Bold, told Sustainable Views. “We are especially concerned about the change from mandatory to materiality assessment for climate, especially GHG emissions, and social, notably own workforce data, reporting and the fact biodiversity transition plans have been made voluntary.”

“The proposal creates a lot of loopholes,” Blanchard added. She also highlighted the problems it may create with other EU legislation, such as the Corporate Sustainability Due Diligence Directive.

Members of the European parliament recently agreed that companies and financial institutions in Europe should produce climate transition plans in line with the aims of the Paris Agreement. The ESRS could, however, absolve companies from having to report on these plans. “If reporting does not follow, it is like trying to walk with only one leg,” Blanchard said.

The proposal “brushes aside the multi-stakeholder proposal from Efrag, which was meticulously developed over a three-year process in close collaboration with the commission,” WWF European Policy Office senior economist Sebastien Godinot said in a statement.

He said the alterations would not alleviate the reporting burden for companies, but would create “inconsistencies with other EU reporting requirements, increase complexity for companies, lower EU ambition compared to global reporting standards, and open the door to greenwashing”.

“Leaving climate reporting to the discretion of companies’ own materiality assessment raises the risk of data inconsistencies, messier reporting process and poor climate transparency,” said Jurei Yada, programme leader for EU sustainable finance at climate think-tank E3G.

Deloitte France co-managing partner for sustainability services Julien Rivals offered a more positive spin in a LinkedIn post. He suggested that “rationality and efficiency” had led to the commission’s choices.

“Is this really a pushback? Not sure at all,” he wrote. “The ESRS are still demanding and don’t miss the ambition! Yes, climate is not compulsory any longer… But it doesn’t mean that companies will not have to report!! At first view, I find the compromise quite balanced.”

The proposal is now out for public consultation for four weeks until July 7.