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The EU’s Corporate Disclosure Requirements Risk Being Toothless — 3 Things The Commission Must Do

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The ESRS, which are mandated by the Corporate Sustainability Reporting Directive (CSRD), are a central piece of the European Green Deal and the European ambition to move to a carbon neutral economy by 2050. They will allow companies to better communicate to their stakeholders on the environmental and social risks and impacts they face. The European standards are a groundbreaking initiative from the Union, as they are more ambitious in scope and depth compared to similar international standards currently under development.

However, the proposal on the table jeopardizes the European ambition and risks undermining the implementation of the entire disclosure framework and the overall transparency objective at the heart of the CSRD.

T&E carefully analyzed the content changes introduced by the Commission in comparison with the proposal published by the European Financial Reporting Advisory Group (EFRAG) in November 2022. As an environmental organization actively involved in the technical work of EFRAG, we are deeply concerned about several aspects of the Commission’s proposal.

Therefore, we urge the Commission to address the key concerns and recommendations highlighted below:

1. Materiality assessment and mandatory metrics

We oppose the proposal by the European Commission of making all topical disclosures subject to materiality assessment by the undertaking. We find this change particularly problematic for several reasons:

  • The removal of the mandatories of this core set of standards would re-introduce “business as usual” practices and entirely leave it up to companies to decide whether to report or not on critical and universally material information, such as their GHG emissions or the composition of their own workforce. This would be worsened by the newly introduced possibility for the undertaking to omit entire topics without providing any justification.
  • The majority of disclosures identified as always material for all undertakings correspond to mandatory indicators required for financial institutions’ reporting under the Sustainable Finance Disclosure Regulation (SFDR). The new rule would therefore introduce a lack of coherence and alignment with the SFDR and lead to increased complexity for financial institutions to retrieve relevant information in the value chain of their investee companies. This risks nullifying the impact of the SFDR and weakens the entire EU Sustainable Finance architecture.

2. Phase-in

We disagree with the additional phase-ins proposed by the Commission as they would not provide any tangible benefits. In fact, they would only add additional complexity to the application of the Directive and allow the possibility to omit very relevant information on the first years of reporting, for which a large number of companies already received exemption.

In addition, companies under the scope of the Directive and with less than 750 employees must already collect and possess basic information such as data on their own workforce. Therefore it is reasonable, and in line with the spirit of the CSRD, for them to make it transparent and publicly available.

3. Voluntary indicators

We are concerned about the Commission’s proposal to make some disclosure requirements voluntary. This concerns in particular the cross-cutting standard ESRS 2 and the topical standards on biodiversity (ESRS E4) and own workforce (ESRS S1).

In fact, introducing the “voluntary” status to critical disclosure requirements under a legally binding framework just allows companies to be relieved of all responsibilities towards their reporting. Thus meaning, for example, that if companies deliberately omit pieces of information material to their businesses, in particular having significant risks, they cannot, by any means, be held accountable. On the contrary, they could evade any legal repercussions.

We therefore call on the Commission to reconsider these changes and adopt a proposal that fosters true sustainability transparency for companies and puts Europe at the forefront in corporate reporting.

Courtesy of Transport & Environment.

Featured image by NoName_13 from Pixabay

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