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12 Jun 2023

Alliance for Corporate Transparency

EU: Commission publishes first set of European Sustainability Reporting Standards; CSOs criticise "significant reduction of ambition"

"Commission’s proposal undermines transparency rules for corporate sustainability reporting", 12 June 2023

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.

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...

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.