By the end of July, the European Commission is expected to adopt its first set of sustainability reporting standards (ESRS). The standards will impact 50,000 European companies and thousands international corporate groups. As part of the EU Corporate Sustainability Directive (CSRD) ecosystem, they will require large companies to report information on their sustainability impacts on people and planet as well as their sustainability-related risks and opportunities.
The standards are crucial, and the Commission should be lauded for preserving the all-important objective of delivering a single coherent system for disclosure on all key and interrelated sustainability topics from climate change to biodiversity to circularity to human rights.
However, the Commission reflected the pressure from business and industry lobbies and weakened the original technical advice for standards developed and approved by a multistakeholder expert process in EFRAG. Some of the changes made by the Commission are rational. However, there are some that compromise the reliability of key sustainability disclosures. They will place companies that report accurately at a competitive disadvantage. These changes have also drawn criticism for undermining the objectives and commitments outlined in the EU Green Deal.
Contrary to the advice of the EFRAG, the Commission proposes that companies could avoid disclosing even the most fundamental sustainability metrics, including GHG emissions, if they assess them as immaterial.
This makes no sense.
It is needless to say that the latest IPCC reports emphasise the necessity of cutting GHG emissions by half by 2030 to limit global warming to 1.5°C. GHG emissions serve as vital indicators for stakeholders, enabling them to assess a company's impacts on people and the planet.
Commission officials defend this change by stating that they anticipate all companies to conclude that GHG emissions indeed represent material information that must be disclosed, and that the auditors will ensure that no company makes a mistake. Which begs a question: If it is so simple then why make it so complicated?
In the same manner, the Commission's proposal gives an option to consider as immaterial any and all information on the workforce. This includes, for example, information on Gender Pay gaps, that the EFRAG advised the Commission to make mandatory for companies with more than 250 employees.
But the biggest problem is that the Commission declared that metrics on biodiversity impacts and information on conditions of non-employee workers are voluntary. This implies that companies don’t have to report even if they conclude that they material, that is, severe impacts in these areas. Biodiversity impacts include deforestation, which according to the IPCC must be stopped by 2030. Non-employee workers are those that are most vulnerable and already deprived of the same level of protection as regular employees, e.g. agency and self-employed workers.
Effectively, the Commission proposes that instead of specifying what needs to be disclosed, the standards should specify legal exemptions from the transparency requirements.
The EU has emerged as a global leader in sustainable finance and corporate transparency, setting an aspiring high bar for other jurisdictions to follow. These standards would provide a vital framework for transparency in climate and circular economy transition, human rights, and biodiversity.
The EU standards will be directly applicable to all multinational corporations with EU subsidiaries. They will also set a basis that other countries around the globe will have to reflect in developing their own initiatives, solidifying Europe’s global sustainability leadership and increasing its influence. Will Ursula von der Leyen’s Commission seize this opportunity? Or will it resign on this vision, hoping another country would do a better job?
We urge the European Commission to stick to facts, science and its own plans, heeding the advice of its technical multistakeholder advisory body, EFRAG. Establishing the European Sustainability Reporting Standards presents a unique opportunity to validate the EU's sustainability leadership and lead the way for sustainable finance globally.
It has proven to be quite successful so far.
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Last Friday, the European Commission published for public consultation a draft Delegated Act on the first set of European Sustainability Reporting Standards. NGOs, civil society groups and investors associations are very concerned with the significant reduction of the ambition compared to EFRAG’s technical advice and urge the Commission to introduce a robust, mandatory and consistent reporting framework and to not allow greenwashing.
