Expert Paper – Contribution to the ESRS Consultation
The Expert Group on Sustainable Finance of the European Round Table for Industry (ERT) welcomes the opportunity to provide feedback on the draft delegated act on European Sustainability Reporting Standards (ESRS). We acknowledge that the ESRS will be an unequivocally crucial component of corporate sustainability legislation in the EU, and it is therefore a high priority for ERT to contribute to the development of the directive in a way that is most informative to the Commission. This sense of priority is reflected widely across the ERT membership base, demonstrated by the fact that many of our members have chosen to submit their own contributions to this call for evidence while also contributing to ERT’s response. With the endeavour of providing informative and useful feedback to the Commission, we also present a number of recommendations for further improving the ESRS draft delegated act.
Firstly, ERT companies recognise the need for a high standard of sustainability reporting in order to achieve greater interoperability and ambition across sustainability reporting regimes, across EU Member States and internationally. We welcome efforts by the Commission to address concerns and implementation challenges already acknowledged by preparers. The simplifications that have thus far been included in the draft delegated act are very useful and highly important to facilitate and ease the implementation of the ESRS. We also acknowledge the Commission’s efforts to reduce the level of granularity in some areas.
ERT companies appreciate the general approach of applying the materiality concept in determining the reporting boundaries. Now that all topics are now subject to materiality analysis this will enable companies to focus on material datapoints only, hence considering the respective industry sector specifications. This adaptation accounts now for the previously raised concern to disclose only useful information to the market and users of the information. To ensure standardised and harmonised materiality analysis, a more detailed guidance is needed, particularly regarding the materiality assessment.
Furthermore, we strongly support making some disclosure requirement voluntary, for example the metrics on non-employee workers to account for limited data availability and legal uncertainty. Adjustments made on the scope of coverage are also appreciated. Voluntary disclosures that are not yet associated with mature or internationally recognised definitions or methodologies can now be further developed with a view to enhance the quality of these disclosures.
In the spirit of providing formative and useful feedback, we would also outline areas of the draft where we believe the Commission could further improve standards. Implementing the ESRS is a huge challenge for preparers, especially under the backdrop of a very ambitious timeline and various other sustainability reporting initiatives that need to be addressed by preparers at the same time, such as the Taxonomy. Thus, it is even more important that further simplifications like additional phase-ins and more voluntary disclosure requirements are included in the delegated act to make the implementation easier and the ESRS more successful.
The introduction of more than 80 disclosure requirements including more than 1000 potential datapoints from throughout the value chain significantly increases the volume and complexity of regulatory reporting requirements. There are strong concerns reflected across ERT companies that this would result in a disproportionate burden for undertakings and members of their value chains, and substantial further reductions will be needed to meet the Commission’s stated intent to simplify reporting requirements and reduce reporting by 25%, as laid out in the Better Regulations Guidelines. We are very much looking forward to the Commission proposal in September as announced by the Commission President earlier this year. Alongside this, the Commission should also consider measures to protect the competitiveness of the European companies by ensuring that companies may use their judgement on what makes business sensitive information, rather than establishing strict and limiting criteria on this.
Further to this, it is of the upmost importance that the Commission consider further convergence of and interoperability with developing sustainability reporting standards such as the Global Reporting Initiative (GRI) and the newly released standards from the International Sustainability Standards Board (ISSB). This is essential in order to avoid fragmented, overly burdensome, and potentially even contradictory sustainability reporting outcomes. Fulfilling the ESRS requirements should be sufficient for European companies to comply also with the ISSB requirements and there should not be any additional requirements for EU companies based on the ISSB standards. This means going beyond alignment on terminology and equivalence regimes toward true convergence through direct engagement to drive toward a common outcome on a common timeframe. It is also important to note that the balance between value brought by the information and the costs and complexity required by companies must be considered. As reasserted by the ISSB in IFRS S1, balancing costs and efforts to obtain information against the value such information brings to users is a key principle to comply with when disclosing information. This principle should be considered in the ESRS as to the publication of anticipated financial effects or any forward-looking information where the uncertainties are considered too high or the disclosure is not feasible.
Additionally, still many more modifications and provisions will be needed to address significant contradictions with Corporate Sustainability Reporting Directive (CSRD) requirements, as well as to achieve further alignment with the taxonomy. Despite the efforts by Commission to improve the taxonomy framework, some taxonomy criteria are still not operable with the ESRS and CSRD. It is important to note that prior to any further regulatory development, such as sector specific standards or the introduction of a social taxonomy, companies strongly recommend that the current EU sustainability framework should remain stable to allow for further adoption, appropriation and simplification of regimes.
Lastly, more specific and unambiguous definitions are needed in order for disclosed data to be meaningfully comparable between entities. Clearer definitions on “products” are required to make clear to preparers whether regulations refer to single products, components or can these be clustered to product groups. To the same effect, a clearer definition of “value chains” must be established in order for companies to ascertain a universal understanding of boundaries of the value chain in-scope. Further clarity is also needed on the current definition of “financial materiality” under ESRS, as the current definition is broader than the definition provided by the ISSB. We recommend that the Commission seek to further align definitions with the ISSB where possible, particularly regarding “financial materiality” as possible discrepancies between companies and reporting frameworks could be fundamental to the way undertakings carry out their analysis. Further guidance for preparers on how to measure anticipated financial effects to make comparable data among companies is also much needed.
We have compiled our responses of companies led by ERT Members to the main text, standards and annexes of the draft delegated act can be found in our formal response.
Download the paper to read our contribution in full.