Commission’s Proposal Undermines Transparency Rules for Corporate Sustainability Reporting

We welcome the publication and the opportunity to provide feedback on the draft Delegated Act after multiple delays, lengthy debates and public announcements around the intention to simplify the corporate reporting landscape. The full set of standards proposed last November by EFRAG, covering environmental, social and governance topics, is essential for the achievement of the European Green Deal and the provision of consistent, comparable data for investors to make informed decisions. It would ensure that Europe remains a global leader in sustainability reporting  by introducing a broad set of standards under a double materiality approach. Unfortunately, the Commission’s approach represents a significant step back compared to EFRAG’s technical proposal.

Firstly, the Commission introduces a delay before companies below 750 employees will have to implement half of the standards, including all social standards and the biodiversity standard. This unnecessarily adds to the phased-in approach already agreed under the CSRD as well as additional phase-ins included in the ESRS with regard to value chain data. These standards primarily require transparency on whether and how companies identify material impacts or risks in relation to the issues they cover and, if so, what policies and actions they have implemented in order to address them.

Secondly, the proposal makes the application of a number of mandatory disclosure requirements subject to materiality assessment, thus allowing companies to omit entire disclosures or, even worse, specific details within a single disclosure.  This contradicts the agreement reached out within the EFRAG Sustainability Reporting Board to ensure that companies report mandatorily the information needed by investors to report on their investee companies according to the SFDR, such as GHG emissions and certain workforce data.

Thirdly, the Commissions’ proposal turns certain disclosures to voluntary, regardless of their materiality. Companies would not have to report on the use of their non-employee (i.e. primarily agency) workers. The fact that these disclosures were made voluntary, rather than phased-in, shows that the Commission was pressured to exclude this category forever, presumably because transparency would show the differences in social protection and other conditions compared to direct employees.

Similarly, the Commission turns disclosure requirements around biodiversity transition plans into a voluntary disclosure. In EFRAG advice, companies from high-impact sectors would either need to describe their plan according to the criteria listed in the standards or transparently declare they do not have a plan of such quality. The Commission proposes to delete this minimal obligation, as well as the actual criteria for transition plans developed by EFRAG, allowing companies absolute flexibility to frame what transition means and what to disclose. This change does not remove reporting burden, it merely opens doors for greenwashing.

These different changes would drive a race to the bottom where some requirements would be less demanding than both business practices and disclosure obligations for investors. This incoherence will incentivise companies to continue to take a ‘wait and see’ approach, whilst effectively preventing investors from collecting reliable data required by the SFDR and meaningfully integrating ESG into their investment strategies.

Filip Gregor, Head of Responsible Companies section at Frank Bold and member of the EFRAG SRB, said: “The Commission’s proposal opens a loophole by allowing companies to leave out important details of their greenhouse gas emissions, biodiversity and workforce data. This defeats the purpose of the legislation to ensure reliable and comparable information and address greenwashing. Such flexibility does not reduce burden on companies, it merely allows them to be creative. The Commission’s decision to subject disclosure of key data to ‘materiality assessment’ is incomprehensible.”

We call on the European Commission :

1. not to further reduce the ambition of the EFRAG standards proposal to preserve their integrity, and
2. to mitigate the undesired consequences of the proposed removal of the mandatory core of the standards, given the risk of misinterpretation by preparers, supervisory authoritites and consultants.

In order to do so, we believe the Commission shall:

• Mandate companies to report on the process and the outcome of the materiality assessment as proposed by EFRAG. We welcome that the cross-cutting standard on general requirements (ESRS 2), which includes disclosures on the materiality assessment, remains mandatory, which is critical for the consistency of the standards However, in the light of Commission’s consideration to remove some or all mandatory topical disclosures, the Commission should not alter EFRAG technical advice on materiality assessment methodology and transparency. This represents the absolute core of the standards.
• Ensure that key climate (E1) and social (S1) metrics are reported on mandatorily. This concerns primarily GHG emissions, characteristics of own workforce including non-employee workers, collective bargaining coverage and information on whether own workers are paid an adequate wage and are covered by social protection. Allowing a company to consider that climate change is not a material topic and to therefore not report on GHG emissions does not make sense from a scientific, policy or risk-reduction perspective. If reporting on these metrics remains subject to the company’s own materiality assessment, the standards should at least not allow the omission of their data points to ensure reliability and comparability and the completeness of information on material matters.
• Reinstate the rule that companies must always provide the data points needed by investors to meet their SFDR obligations. The ESRS were introduced to close the existing information gaps alongside the investment chain following the introduction of other key European legislation. The Commission’s proposal to remove provisions for mandatory reporting on the indicators already required by the SFDR, represents a major hurdle for asset managers and investors to get the information they need from investee companies. The Commission must not maintain such inconsistency in the EU reporting framework, and respect the CSRD provisions stating sustainability standards should at least include information needed to comply with SFDR disclosure requirements.
• Remove “voluntary” loophole for reporting on use of agency workers and on biodiversity transition plans. These disclosure requirements do not represent a significant reporting burden and are already subject to later phasing-in (for non-employee workers) or allow compliance by a brief statement (for biodiversity transition plan) giving companies extra time to assess their practices. Furthermore, the changes made by the Commission in the disclosure requirement on biodiversity transition plans open the door to greenwashing. This disclosure requirement needs to revert in spirit and content to EFRAG technical advice.
• Remove the phasing in standards on biodiversity and social matters for companies below 750 employees as it does not serve a meaningful purpose. Moreover, phasing in individual standards will risk creating confusion. If it is retained, the Commission should clarify that the delay for application of these standards does not mean that companies are relieved of their obligation to identify and assess their material impacts, risks and opportunities in these areas and report on their actions to address them. This obligation is clearly expressed in the CSRD, and therefore a Delegated Act cannot override the obligation.

We will voice these concerns in our response to the public consultation and hope they can be taken on board in the final Delegated Act.