EU aligns sustainability reporting with global standards, but slammed for ‘watering down’ requirements

The European Commission has adopted the European Sustainability Reporting Standards (ESRS), ensuring better alignment with global standard-setting initiatives and some European Union (EU) regulations, and easing the burden on companies required to report under the EU’s Corporate Sustainability Reporting Directive (CSRD). However, the new rules have drawn criticism for “watering down” the sustainability reporting requirements and smoothing the way for greenwashing.

The adopted ESRS, among other things, make certain disclosures voluntary, instead of mandatory, allow reporting companies to decide what sustainability topics are “material,” or relevant, and delay the reporting requirement on value-chain (scope 3) emissions for companies with fewer than 750 employees.

ESRS make a number of sustainability disclosures voluntary, instead of mandatory

Mairead McGuinness, the European Commissioner for Financial Stability, Financial Services and the Capital Markets Union, said that the standards “strike the right balance between limiting 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.”

A proposal submitted in November 2022 by EFRAG (previously called the European Financial Reporting Advisory Group) included many voluntary datapoints, but the commission “has further converted a number of the mandatory datapoints proposed by EFRAG into voluntary datapoints,” the EU’s executive body said.

This includes biodiversity transition plans, certain indicators about “non-employees” in a company’s own workforce, and an explanation of why a particular sustainability topic is not considered to be material.

Companies are not required to explain why they consider certain topics irrelevant

For its part, the Global Reporting Initiative (GRI) welcomed the move, saying that it ensures interoperability between the ESRS and GRI and allows companies to avoid double reporting.

WWF: Loopholes in reporting standards are motorways for greenwashing

However, Philippe Diaz, senior manager for sustainable finance at WWF Germany, said that the European Commission has “caved in to pressure from conservative industry groups and weakened the standards to the point that loopholes have become motorways for greenwashing.”

The WWF warned the ESRS limit the ability of investors and other users of information to obtain reliable and comparable sustainability data from companies.

The nature conservancy organization also called on the EU executive to require companies to explain why they assess that a topic is not “material” and to reverse the reporting delay for companies with fewer than 750 employees.

The European Sustainable Investment Forum (Eurosif) has also criticized the ESRS. Eurosif regrets that the European Commission had ignored the investors’ calls to retain key ESG (environmental, social, and governance) indicators as mandatory, according to its executive director, Aleksandra Palinska.

The phase-in of scope 3 emissions reporting could enable savings of EUR 1.17 billion

The commission, for its part, believes that the phase-in of the scope 3 reporting requirements would allow savings of some EUR 1.17 billion, compared to the draft standards proposed by EFRAG, while the modifications regarding materiality, combined with making certain disclosures voluntary, should reduce costs by EUR 230 million annually compared to EFRAG’s proposal.

Under the ESRS, large listed EU companies with over 500 employees are required to report all emissions – direct (scope 1), indirect (scope 2), and value-chain (scope 3) – from 2024, while large unlisted companies will have to do so from 2025. Small and medium-sized enterprises will have to report all emissions from 2026 and non-EU companies with specific threshold from 2028. Companies with less than 750 employees will have the option to omit reporting scope 3 emissions in the first year.