Investor groups push back against EU’s ‘ambition rollback’ on corporate sustainability reporting

PRI, EFAMA and Eurosif warn shift away from mandatory ESRS reporting will harm investors’ ability to meet their own reporting requirements under SFDR.

EU flags in front of European Commission building in Brussels

Influential investor groups, including the Principles for Responsible Investment (PRI) and the European Fund and Asset Management Association (EFAMA), have voiced concerns that changes to the EU’s proposed corporate sustainability reporting regime represent a “significant rollback of ambition”. 

The key issue raised in the joint letter, published today (Friday), was the announcement by the European Commission last month that almost all the disclosure requirements under its draft European Sustainability Reporting Standards (ESRS) would be subject to materiality assessments.  

That decision marked a significant departure 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 its anti-greenwashing law Sustainable Finance Disclosure Regulation (SFDR) – would be mandatory.    

Addressing this, the letter stated that this planned shift would crucially “reduce financial markets participants’ ability to meet their own mandatory reporting obligations”, including those under SFDR.

The missive, which was also penned by Eurosif and the Institutional Investors Group on Climate Change (IIGCC) and the UN Environment Programme Finance Initiative (UNEP FI), also pointed out that the EU’s overarching disclosure legislation, the Corporate Sustainability Reporting Directive (CSRD), “sets out explicit provisions for the ESRS to capture this information”. 

While the groups acknowledged that under the proposal materiality assessments would be mandatory, they added that this is undermined by the fact that accompanying explanations as to why a factor is or is not material are now voluntary.  

“Ultimately it would be up to corporates, supported by their consultants and advisers, to determine what is, and isn’t, material to report,” the letter stated.  

The groups have called on the commission to keep key climate disclosure indicators mandatory, including Scope 1, 2 and 3 emissions and “disclosures enabling investors to assess the credibility of corporate transition plans”. 

Moreover, they requested that environmental and social indicators relevant to other sections of the bloc’s sustainable finance legislation also be mandatory. This includes those pertaining to SFDR, the EU Climate Benchmark Regulation, Climate Benchmarks Delegated Acts and Pillar 3 disclosures. 

The commission’s consultation on the proposed changes ended today after just a month – a timeframe that raised eyebrows among some stakeholders. 

Those revisions 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, in March, president Ursula Von der Leyen stated the commission would seek to reduce reporting requirements on companies by 25 percent. 

Speaking virtually at RI Europe last month, Martin Spolc, the sustainable finance head at the commission’s financial services arm, stressed that the consultation on the ESRS was a “genuine one” and that it would review all responses before the ESRS are adopted later this year.

“We have added to the excellent proposals by EFRAG and tried to be a bit more proportionate in view of the fact that not all companies should have to disclose every KPI which may not necessarily be super-relevant for their business,” he added at the time. 

“But does it mean that the standards are no longer mandatory? Well, they are mandatory subject to a materiality assessment concluding [that] these aspects are material for the operations of the company in question. I have seen some headlines saying that these standards will be voluntary. That’s not correct.”  

The implementation challenge for corporates in adopting the ESRS is noted in the letter from the investor groups. But the authors highlighted that the final draft published by EFRAG in November “was already the result of a compromise between all stakeholders”. 

They noted that following that consultation the number of reporting requirements was nearly halved compared to the initial EFRAG proposals.  

“Moving away from mandatory reporting of certain indicators risks undermining the EU’s status as a global leader on sustainable finance and its ability to attract capital at a time when other nations and regions are making significant progress in establishing their own sustainability frameworks,” the letter stated.  

The bodies also requested that the commission “reconsider” the optional reporting requirements when it comes to biodiversity transition plans and workforce disclosures on non-employees.  

Criticisms have also been raised by the German fund association BVI, which stated that the Commission is “doing a disservice to sustainability reporting”. 

It called on the EC to “follow the recommendations of its expert commission EFRAG”. “Companies should be required to report on key environmental and social indicators so that asset managers can assess the credibility of companies’ transition plans.”