The EU’s European Sustainability Reporting Standards (ESRS) for the Corporate Sustainability Reporting Directive (CSRD) were officially finalized on July 31. However, the final draft came with some surprises as the European Commission (EC) scaled back the European Financial Reporting Advisory Group’s (EFRAG) initial vision. A recent article from Responsible Investor discusses the changes and what they mean for investors and companies:
“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 FRAG, 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.”
Initially, the ESRS was to require mandatory reporting on climate matters, regardless of a company’s own materiality assessment on the issue. However, the EC’s version of the standards allows for companies to not report on climate change if they deem the issue not material. Companies choosing this option will have to disclose a detailed explanation of their materiality assessment and explain how they came to this conclusion. This news upset investors as Responsible Investor reports:
“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 move is seen by many to be the product of intense lobbying efforts aimed at reducing the reporting burden under the CSRD. Basing climate reporting on a company’s own designation of materiality appears to be a compromise, as the president of the EC previously stated that the EC would attempt to reduce the reporting requirements present in EFRAG’s initial draft by 25%.