Commission undermines standards for corporate sustainability reporting under industry pressure

Posted on 31 July 2023

The European Commission published today a Delegated Act on the European Sustainability Reporting Standards (ESRS) that puts a significant dent into the hope that investors and other users of information will have access to reliable and comparable sustainability data from companies. This is necessary to steer the economy towards a path that is compatible with our planetary boundaries.

The Act, which is the first part of the standards implementing the Corporate Sustainability Reporting Directive (CSRD), substantially weakens key parts of the proposal put forward in November 2022 by the experts in the European Financial Reporting Advisory Group (EFRAG), of which WWF is a member.

These standards aim to improve transparency in the reporting of sustainability impacts by companies and to promote the adoption of comparable and meaningful reporting practices for sustainability issues.

Philippe Diaz, Senior Manager, Sustainable Finance at WWF Germany said:
“Sustainability reporting is nothing new - the Global Reporting Initiative has existed for decades. Yet the European Commission still caved in to pressure from conservative industry groups and has weakened the Standards to the point that loopholes have become motorways for greenwashing. This is a serious betrayal of trust and undermines Europe’s claim to leadership in building an economy that is socially just and compatible with the planetary boundaries.”

In June the Commission already published a significantly weakened final proposal of the Act. Alongside financial institutions and many other organisations, WWF urged the Commission to reverse some of the most significant loopholes, arguing that the Commission’s claim that it would reduce the reporting burden was highly flawed. Unfortunately, however, the Commission has almost entirely ignored the four key demands WWF raised in the public consultation:

1- Close the loophole which allows companies to choose whether they want to report on their biodiversity transition plans

Against the experts’ advice, the Commission has eliminated an essential measure to reduce risks in the financial system: the requirement for companies to disclose whether they have a transition plan on biodiversity. This is despite the fact that mandatory reporting on nature is supported by hundreds of businesses in the Make it Mandatory Campaign and the Finance for Biodiversity Pledge. The European Central Bank has also found that nearly 75% of EU bank loans go to companies that are highly dependent on nature.

2- Require companies to explain why they assess that a topic is not 'material' to them

The Commission has made most of the reporting dependent on a 'materiality assessment’ - a self-assessment by the company to understand whether a topic, like biodiversity, has a financial impact on the company and the company has an impact on biodiversity. While it has closed a loophole which allowed companies not to explain the conclusions of their materiality assessment on climate change, for all other topics companies are not required even to explain why they arrive at this conclusion.

3- Make mandatory those disclosures which are necessary for other EU regulations

The Commission has required banks, in the Capital Requirement Regulation, and investors, in the Sustainable Finance Disclosure Regulation, to report on the impact of the companies in their portfolio. However, as the Commission has made disclosures subject to a materiality assessment, there is no clear requirement for companies to disclose all the impacts which are relevant to these pieces of legislation: all they are required to do is to create a table where they summarise whether or not they have disclosed the required data points and to state when a data point is considered not material. This means that banks and investors will now struggle to trust these disclosures, as they may be based on incorrect materiality assessments, and therefore to comply properly with the regulations mentioned above - this creates an additional burden for them.

4- Reverse unnecessary reporting delays for companies with fewer than 750 employees

The Commission introduced an additional unnecessary delay that allows companies with fewer than 750 employees to postpone their reports on biodiversity and social standards and, in part, their reporting on key climate criteria such as Scope 3 emissions. The law which underlies the ESRS, known as the CSRD, already introduced phase-ins for SMEs and corporations from non-EU countries. Further phase-ins only delay the day when sustainability data will play the same relevance as financial data.

WWF calls on the Commission to immediately move ahead with mandatory disclosures in sector-specific standards, in order to rectify some of the mistakes which have been made in the sector-agnostic standards published today.

Notes:

1- EFRAG’s recommendations were the result of a multi-stakeholder process, including business, financial market actors and civil society. Business group representatives had approved the criteria as part of the EFRAG process - but the Commission has still decided to weaken them.