EC waters down sustainability reporting standards under CSRD

The EC has opened a consultation on the latest draft of its sustainability reporting standards which appears to water down rules in the forthcoming Corporate Sustainability Reporting Directive (CSRD).

This act supplements the Accounting Directive as amended by the CSRD, which requires large and listed companies to publish regular reports on the social and environmental risks they face, and how their activities impact people and the environment.

This first delegated act, which is out for feedback until 7 July, sets out standards for the disclosure of ESG information, said the EC.

Analysts at German bank Berenberg said that the draft act represents a loosening of corporate sustainability reporting under the CSRD but keeps the related Sustainable Finance Disclosure Regulation (SFDR) rules.

“The EC made a decision to significantly water down corporates’ reporting requirements relating to sustainability. However, reporting requirements for funds and investors in Europe remain the same and mandatory,” stated the bank in a response to the draft.

“In our view, the new requirements are a blow to understanding the environmental and social impacts of businesses and investment portfolios and will slow down investor progress on ESG issues. In addition, investors will be more likely to need to continue to rely on estimates, making investor sustainable financial disclosures less accurate and thus less insightful. In our view, this is an unfortunate step by the EC to ease requirements in the eurozone,” added the bank.

The latest draft contains detailed instructions for the CSRD law that was passed in 2022 and requires companies to disclose a range of ESG data.  But one key change is the EC has suggested that CSRD reporting should be mostly voluntary.

In the latest version, the EC has significantly increased the role of materiality assessments and in so doing has cut all mandatory disclosure requirements except “general disclosures” such as the materiality assessment methodology and statement of due diligence, said Berenberg.

The bank said that this represents a serious watering down of the proposed rules.

“Previously, the EC planned to require c50k companies to publish data on climate change, such as on Scope 3 emissions and biodiversity, as well as SFDR-related disclosures. Now, instead, companies will have to perform a materiality assessment to determine which metrics to report and then only disclose those they deem to be material to the business,” it said.

“Further, the ability to phase in material metrics will enable companies to delay publication of metrics like financial effects of non-climate environmental issues and workforce-related data such as work-related ill-health. We think this is a dangerous update, providing companies with an excuse to omit important metrics, by stating that topics like climate change are not material,” added Berenberg.

Berenberg said that sustainability investors will be “marooned” without data.

“Any investor engaging with SFDR will know the struggles accessing the data the EU demands. However, there was light at the end of the tunnel. The CSRD regulation would have required corporates to start publishing the data that fund managers need for SFDR in 2025. However, EU taxonomy disclosures last year set a likelier precedent of what will happen. In 2022, very few companies voluntarily published EU taxonomy-alignment data a year earlier than required (14 of c300 EU companies in our SDG mapping database). In a similar vein, we expect companies will now use the loosened CSRD act to drastically reduce the amount of sustainability data they disclose. Investors will thus be forced to continue using estimates in their own analyses and disclosures, reducing the value of SFDR,” it said.

The bank added that 2023 could have been a “turnaround year”, with rigorous laws that would bring more credibility and added ease for ESG, providing a strong framework and sufficient, reliable data.

“However, H1 2023 has brought some disappointing developments in addition to the CSRD update. Other obstacles include continued delays of SEC’s climate disclosure proposal, while countries’ mandatory take-up of the International Sustainability Standards Board’s framework has been limited. Such developments will slow down progress of rigorous ESG analysis; however, we believe that direction of travel clearly remains towards greater ESG integration in financial analysis,” it said.

Berenberg suggests that the EC has bowed to pressure from corporates and that the financial sector will now step up its efforts to bolster the new rules in response.

“Corporates have strongly lobbied for changes to CSRD among other regulations, culminating in President Ursula von der Leyen’s promise to ease reporting requirements for businesses by 25% in March. By contrast, investors have largely kept quiet on the potential weakening of CSRD. With the release of the draft, we expect greater backlash from the European financial industry to proposed plans,” it said.