Controversial last-minute changes by Commission undermine draft standards for corporate sustainability reporting

Posted on June, 12 2023

Last Friday, the European Commission released a draft Delegated Act on the European Sustainability Reporting Standards (ESRS), which is the first part of the standards implementing the Corporate Sustainability Reporting Directive (CSRD).
These standards aim to improve transparency in the reporting of sustainability impacts by companies and to promote the adoption of comparable and meaningful reporting practices for sustainability issues.

However, as previously feared by NGOs, the Commission has made significant alterations to the draft ESRS proposed by the European Financial Reporting Advisory Group (EFRAG) in November 2022 (1). 

"The Commission's proposal brushes aside the multi-stakeholder proposal from EFRAG, which was meticulously developed over a three-year process in close collaboration with the Commission itself. Importantly, these alterations would not alleviate the reporting burden for companies; instead, they 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. The quality and comparability of information may no longer be ensured, which is a major concern for EU supervisors and investors,” said Sebastien Godinot, Senior Economist at the WWF European Policy Office and member of the EFRAG General Assembly.

These alterations encompass three main aspects. First, there is a postponement in the implementation of the ESRS - creating duplication with EFRAG, which already proposed sequencing for the implementation of the different ESRS sub-standards. 

Furthermore, the entire ESRS is now subject to corporate-level materiality assessment. This means that all the key performance indicators (KPIs) are non-mandatory and instead fully depend on the quality of the materiality assessment. This approach introduces complexity for companies, leaving them uncertain about the specific reporting requirements they need to follow.

In addition, certain standards, particularly those related to biodiversity transition plans, have been made voluntary. This decision directly contradicts the requirements outlined in the Corporate Sustainability Reporting Directive, which mandates disclosure on all material issues. It is worth noting that the EU committed, through the Target 15 of the Global Biodiversity Framework at COP 15, to require biodiversity reporting for large businesses and financial institutions. The Commission backtracked on this issue in less than six months, despite receiving calls from 38 companies to maintain material biodiversity reporting in the ESRS.

WWF offers the following recommendations to the Commission regarding the European Sustainability Reporting Standards (ESRS):
  • Eliminate the "voluntary" loophole for reporting on biodiversity transition plans
  • Ensure that key climate (E1) and social (S1) metrics are mandatorily reported.
  • Maintain the mandatory inclusion in ESRS of data points required in the Sustainable Finance Disclosure Regulation (SFDR) (2) to ensure consistency
  • Remove the phasing-in of standards on biodiversity and social matters for companies with fewer than 750 employees.
WWF intends to address these points in its response to the public consultation. 

Notes:

WWF contributed to the joint CSO reactive statement on the draft ESRS, which provides more details. 

(1) European Financial Reporting Advisory Group (EFRAG) proposal: https://www.efrag.org/lab6. WWF is a member of the EFRAG.
(2) The Sustainable Finance Disclosure Regulation (SFDR) already requires investors to disclose sustainability information on several data points. The EFRAG proposal made these SFDR points mandatory in ESRS to ensure consistency. But the Commission removed it, creating an obvious, significant inconsistency by assuming in a simplistic way that the materiality assessment in ESRS would be enough to ensure full consistency with SFDR.
Controversial last-minute changes by Commission undermine draft standards for corporate sustainability reporting
© Sara Kurfeß