EC considers ditching mandatory indicators in first set of EU sustainability reporting rules

All disclosure requirements expected to be subject to materiality assessments, in a major change from EFRAG’s proposal, according to sources.

EU flags in front of European Commission building in Brussels

Companies may not be obliged to report on their greenhouse gas emissions and a raft of other metrics that had previously been expected to be mandatory under the incoming European sustainability reporting standards (ESRS), sources have told Responsible Investor.

The ESRS are the first standards under the EU’s new corporate sustainability reporting directive (CSRD), which got final approval from EU member states in November.

The European Commission is expected to start a four-week public consultation on the draft standards shortly, with the plan to adopt them in a delegated act by 30 June.

The European Financial Reporting Advisory Group (EFRAG), the group tasked with developing the standards, published its proposed ESRS outlining sector-agnostic standards 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.

The ESRS published in November includes over 80 disclosure requirements – effectively reporting categories – incorporating more than 1,000 data points. Some were due to be mandatory, for example all climate change-related reporting. Other disclosures would be subject to a materiality assessment.

However, several sources closely following the process have told RI that the commission is considering scrapping all mandatory indicators.

All disclosure requirements, apart from potentially those that require a company to disclose how it prepared its sustainability statement and the considerations involved, would instead be subject to materiality assessments.

This would mark a major change to EFRAG’s proposal to make disclosure requirements related to climate change mandatory. These would include disclosing Scope 1, 2 and 3 greenhouse gas emissions.

EFRAG had also suggested that disclosures on a company’s own workforce, such as indicators on worker conditions and equal opportunities, would be mandatory.

Importantly for investors, EFRAG had proposed that reporting that stems from other EU legislation, such as indicators relevant to reporting under the Sustainable Finance Disclosure Regulation (SFDR), was “to be reported on irrespective of the outcome of the materiality assessment”.

This is also expected to be scrapped in the EC’s proposal.

In addition, it is expected that the commission will propose further implementation phase-ins and reduced scopes for some disclosure requirements.

The commission and EFRAG declined to comment.

Axelle Blanchard, policy and research officer at NGO Frank Bold, which has a representative on the EFRAG sustainability reporting board, said the expected changes are “disappointing”. 

“From our perspective, the ambition isn’t really there anymore,” she told RI. “It’s very different from what was expected initially. I don’t think abandoning mandatory indicators is a scenario people were even considering.

“To leave room for a company to say that climate change is not material to them does not serve a clear purpose other than creating a loophole. The commission is even pressured to make topics such as human rights and biodiversity completely voluntary.”  

She added that, because SFDR-related indicators are also likely to be subject to a materiality assessment, “investors might not get the information they actually need to report”.  

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 EU market will also have to report against the rules.

The first companies will have to report in the 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.

But sources have told RI that corporates have doubled down on their efforts to weaken and delay the CSRD in recent months.

The most recent sign of this is an American Chamber of Commerce to the EU (AmCham EU) position paper published on 8 May. It said the commission should use the opportunity – referring to the upcoming publication of the delegated act – to “alleviate the ESRS reporting burden now by further limiting mandatory requirements, reducing granularity and extending phase-ins”.

AmCham also welcomed “in the context of the development of the ESRS” the speech by commission president Ursula Von der Leyen in March, in which she said the commission would seek to reduce reporting requirements on companies by 25 percent.

“The commission has a unique opportunity to act on this announcement now in the area of sustainability reporting and should do so without delay,” AmCham said.

A commission spokesperson told RI last month that the announcement refers to all types of company reporting, not just sustainability disclosures.