‘Detailed explanation’ required if climate change deemed non-material in EU corporate sustainability reporting

European Commission confirms disclosures under new sustainability reporting rules will be subject to materiality assessments in text adopted on Monday.

Companies claiming climate change is not material to them under the EU’s new sustainability reporting rules will have to disclose a detailed explanation of their materiality assessments, the European Commission has said.

The commission on Monday adopted the final delegated act setting out the first set of sector-agnostic European Sustainability Reporting Standards (ESRS).

As expected and outlined in draft rules published in early June, almost all disclosure requirements will be subject to materiality assessments.

This is a significant change from the original ESRS proposal by EU standards body EFRAG, which said that all climate-related reporting as well as reporting that stems from other EU legislation – such as the indicators relevant to reporting under the Sustainable Finance Disclosure Regulation (SFDR) – would be mandatory.

Investors and other stakeholders slammed the changes when they were announced in June.

A letter by the PRI, the European Fund and Asset Management Association (EFAMA) and Eurosif, signed by almost 100 investors, said it would “reduce financial markets participants’ ability to meet their own mandatory reporting obligations”, including those under the Sustainable Finance Disclosure Regulation (SFDR).

The rules, which will be subject to a two-month scrutiny period by the European Parliament and Council of member states, confirm that materiality “is the starting point for sustainability reporting under the ESRS” and that companies will not need to disclose “any information” on topics they assess as non material.

However, the text adds: “If the undertaking concludes that climate change is not material and therefore omits all [such disclosure requirements], it shall disclose a detailed explanation of the conclusions of its materiality assessment with regard to climate change.”

This would include a forward-looking analysis of “the conditions that could lead the undertaking to conclude that climate change is material in the future”.

For topics other than climate change, companies can omit disclosures deemed not material and “briefly explain the conclusions of [their] materiality assessment for that topic”.

Richard Gardiner, head of EU policy at the World Benchmarking Alliance, told
Responsible Investor: “It’s a welcome improvement that the final ESRS have a greater emphasis for companies to explain why they consider that climate is not material for them.  They should explain and justify why they have taken this decision. In this way we can hopefully avoid undermining or undercutting of the intended application of the law.”

Eurosif said it welcomed the coverage of “the entire ESG “spectrum in the standards but was “disappointed” that the EC has decided to move away from mandatory core sustainability disclosures.

“We regret that investors’ calls to retain key ESG indicators as mandatory have not been heard,” said executive director Aleksandra Palinska.

RI revealed in May that the Commission was considering dropping mandatory indicators under the ESRS.

The change followed fierce lobbying to weaken the CSRD, which was approved by member states in November, and the accompanying ESRS standards.  

Amid this pushback from corporates, president Ursula Von der Leyen said in March that the commission would seek to reduce reporting requirements on companies by 25 percent. 

Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union, said on Monday that the standards “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”.