

Market participants have slammed the EU’s plan to make almost all reporting indicators under the incoming European Sustainability Reporting Standards (ESRS) subject to materiality assessments.
The ESRS are the first standards under the EU’s new Corporate Sustainability Reporting Directive (CSRD), which got final approval from member states in November. The rules have been developed to capture “double materiality” – how business activities impact the environment and society as well as how corporate bottom lines could be affected by sustainability issues.
On Friday afternoon, the European Commission published the first set of draft ESRS for a four-week consultation.
As Responsible Investor reported last month, the commission has proposed that almost all disclosure requirements will be subject to materiality assessments. “This measure is expected to lead to a significant burden reduction for undertakings and helps to ensure that the standards are proportionate,” the proposal says.
This is a big departure from the original ESRS proposal by the EU’s 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.
Under the new proposals, a number of reporting metrics will also be phased in over time. All companies can omit reporting related to “anticipated financial effects related to non-climate environmental issues” – such as biodiversity, pollution and water – in the first year of reporting, as well as certain data points related to their own workforce.
Companies with fewer than 750 employees can omit further data points, including Scope 3 emissions reporting, in the first year.
Some disclosures have been made entirely voluntary. These include biodiversity transition plans as well as an explanation of why a company may consider a particular sustainability topic not to be material.
“The proposed draft significantly reduces the burden of reporting for corporates,” Lauma Kalns-Timans, senior equity research analyst focused on ESG and data at Berenberg, told RI. “However, investors, who have urged for consistency in sustainability reporting to better follow their own EU SFDR requirements, will face challenges.
“This draft allows businesses to essentially choose their own metrics and significantly reduce disclosures making sustainability reporting less standardised and more limited than expected. For investors, this challenge means less effective and insightful sustainability reporting of their own portfolios.”
E3G agreed that data comparability could become more complex if entities are allowed to decide “which emissions are relevant, especially Scope 3 emissions, known to be difficult to estimate precisely”. This could lead to “fragmented reporting, even between companies of the same sector”, the NGO said.
Removing mandatory SFDR-related requirements under the CSRD would “only add complexity and incoherence to the EU reporting framework”, it added.
Eurosif said it is “very concerned” about what it described as a “significant setback in ambition” compared with the EFRAG recommendations. If adopted in its current form, the organisation argued that the proposal “risks undermining the effectiveness of the CSRD as well as the implementation and coherence of the EU sustainable finance framework”.
Aleksandra Palinska, Eurosif’s executive director, said: “We acknowledge the challenges prepares will face when complying with the ESRS, however the commission should not prioritise reducing reporting requirements at the expense of public interest and other stakeholders, including investors and financial institutions in dire need of sustainability information to comply with their own regulatory requirements.”
Relatively positive
Others took a more sanguine view. Philippe Zaouati, CEO of asset manager Mirova, told RI the outcome was relatively positive.
He noted that there had been concerns the EU would shift to focus on climate only or climate first, and reduce the number of topics in the ESRS. “Instead, it decided to move forward with all topics,” he said. “That’s a very positive outcome and strong decision.”
The shift away from mandatory indicators “is not really a big problem”, Zaouati added. “Of course, it’s always better with a full scope of reporting – but what we need is information on what is material, and material with the double materiality lens.
“Of course, it could be viewed as weakening but it’s far less problematic than a reduction of number [of reporting topics].”
And not everyone is convinced the shift away from mandatory indicators will make a big difference in practice, particularly on climate. Several corporate reporting experts told RI it will be difficult for a company to claim climate change is not material to them.
In a comment on LinkedIn, Carsten Auel, a director of sustainable finance at Deloitte, pointed to the existing non-financial reporting directive for large listed companies in the EU, which he noted does not have mandatory climate reporting requirements but “almost all companies already identified it as material”.
Perhaps surprisingly, the chair of EFRAG’s sustainability reporting board, Patrick de Cambourg, told Reuters in early June that “the exercise the commission is performing is going in the right direction”. He added: “It’s opening more space for judgement without creating leeway.”
The long-awaited CSRD massively expands the scope of sustainability reporting to around 50,000 listed and private companies. Non-EU companies with substantial activity in the bloc will also have to report against the rules.
The first companies will have to report in financial year 2024, for reports to be published in 2025.
The directive is expected to underpin and improve disclosures under regulatory regimes such as the SFDR and EU taxonomy.
Fierce lobbying has taken place to weaken the directive, particularly in the past few months.
The commission, according to sources, notably changed its narrative on corporate reporting in the past months. President Ursula Von der Leyen said in March that the commission would seek to reduce reporting requirements on companies by 25 percent.