The European Commission has adopted the European Sustainability Reporting Standards (ESRS) which will apply to all corporations under the Corporate Sustainability Reporting Directive (CSRD). The authority says that the adoption “marks another step forward in the transition to a sustainable EU economy”.
Described by the Commission as “covering a full range of environmental, social, and governance issues, including climate change, biodiversity, and human rights”, the ESRS aim to help investors understand the sustainability impact of the companies they are investing in.
The standards were drawn up with advice from the European Financial Reporting Advisory Group (EFRAG). The first draft was submitted for feedback on 9 June 2023 and has since been edited following suggestions from member states and various EU bodies, including the European Central Bank (ECB), European Environment Agency (EEA), and the European Union Agency for Fundamental Rights (FRA).
An imperfect system
Changes to the first draft have made more reporting requirements “subject to materiality”, which means that companies are allowed to omit information they consider to be irrelevant. Materiality has been a point of contention for the parties involved. The German Investment Funds Association (BVI) has been vocal about its disapproval, pointing out that allowing reporting to be subjected to materiality assessment goes against the requirements of the Sustainable Finance Disclosure Regulation (SFDR), and calling it a “disservice to sustainability reporting”.
The Commission, however, states that it has tried to “strike the right balance between limiting the burden on reporting companies” while enabling these companies to get access to sustainable finance.
EFRAG has been tasked with developing a set of guidelines on materiality assessment as well as on reporting on value chains.