Sustainability reporting faces challenges

The sustainability reporting clock is ticking as companies across the European Union (EU) and beyond prepare to implement wide-ranging new reporting requirements as part of an EU-driven green initiative.

The move, which comes into force from January 2024, will see thousands of companies increase their sustainability disclosures. However, fears that this could prove too onerous have led to what some describe as a watering down of the intended impact.

At the 11th hour, the European Commission has released amended European Sustainability Reporting Standards (ESRS), with many reporting requirements that were originally set to be mandatory now becoming voluntary. There are also additional phase-in reliefs for all companies relating to disclosures of environmental financial implications, as well as more relief for companies with under 750 employees, including disclosures on social standards and biodiversity.

These revised standards are now subject to a brief four-week consultation ending on 7 July before the final text is agreed and signed off by the European Parliament and Council, most likely by the end of August.

The draft standards follow negotiation with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) to ensure a high degree of interoperability between EU and global standards, and to prevent unnecessary double reporting. The ISSB is publishing IFRS S1 and IFRS S2, the first two Sustainability Disclosure Standards on 25 June.

Call to reconsider

But Eurosif, the European Sustainability Investment Forum, has complained that the latest drafts render all ESRS standards, disclosure requirements and data points subject to a materiality assessment. Combined with the added flexibility authorised by the commission for these assessments, this would effectively allow companies to leave out entire parts of their sustainability disclosures, it says.

Observers also note that there will be little time from when the standards are finally agreed for companies to adapt their systems and understand the requirements before they are expected to report against them.

Aleksandra Palinska, Eurosif’s executive director, said in a statement: ‘We acknowledge the challenges preparers will face when complying with the ESRS. However, the EU Commission should not prioritise reducing reporting requirements at the expense of the public interest and other stakeholders, including of investors and financial institutions in dire need of sustainability information to comply with their own regulatory requirements.’

A spokesperson for Accountancy Europe, a body that represents 50 European professional organisations, said: ‘We continue to support European Sustainability Reporting Standards and insist that standards need to be robust, able to be operationalised to lead to high-quality implementation and ultimately serve the bigger goal of helping companies transit towards more sustainable business models.’

In response, Mairead McGuinness, EU commissioner for financial services, financial stability and capital markets union, said: ‘These draft standards include provisions to limit the burden on reporting companies while at the same time enabling companies to show the efforts they are making to meet the Green Deal Agenda, and accordingly have access to sustainable finance.’

In its briefing notes, the commission calculates that the most recent changes to the draft standards could save preparers up to €1.4bn.

Building on foundations

Back in January this year, the EU enacted its Corporate Sustainability Reporting Directive (CSRD). Part of the European Green Deal, the framework aims to bring sustainability reporting in line with financial reporting, building on the foundations laid out by its predecessor, the Non-Financial Reporting Directive (NFRD).

Unlike the NFRD, the CSRD has a much broader scope, with a larger set of companies now expected to file sustainability reports; according to Deloitte, about 50,000 from within the EU will be covered by the regulations, compared with 11,700 covered under the NFRD. This covers all EU-listed companies and many large companies that exceed two out of three conditions: a balance sheet of €20m, net revenue of €40m and an annual average of more than 250 employees.

The CSRD will be effective from 1 January 2024 for public interest entities with more than 500 employees, with large non-listed companies joining the reporting party from 1 January 2025. From 2026, listed SMEs will be included through simplified reporting standards.

The rules include disclosures on greenhouse gas emissions and plans aligned with the 2015 Paris agreement to reduce those emissions, as well as issues such as pollution entering waterways and gender pay differences. Depending on industry-specific standards that are still being developed, companies will have to report different types of data. They will also need to have a third-party audit their data.

According to KPMG, the ESRS will be ‘significantly more detailed in both the depth of disclosure and the scope of metrics to be reported’.

The draft ESRS introduces the concept of double materiality (financial and impact) and expands a company’s reporting boundary to its whole value chain. This means that companies will not only need to report on their own ESG metrics, but will also need to understand the ESG position of their suppliers, a point that the commission is now seeking to address as it recognises the difficulties in obtaining such data.

And the rules will not only apply to EU companies. Beyond the EU’s borders, thousands more businesses will be expected to comply if they fall under a number of criteria (see box).

Data from corporate analyst Refinitiv indicates that there are nearly 10,400 foreign companies that have an EU stock listing and more than 100 companies that aren’t listed in the EU but have more than €150m in local revenue. Of these, 31% are US, 13% are Canadian and 11% are in the UK .