Current approach may result in less decision-useful information to investors, standards setter warns.
The deep level of detail required to comply with proposed European Sustainability Reporting Standards (ESRSs) poses risks to the cost and quality of sustainability reporting by corporates, according to the Global Reporting Initiative (GRI) a sustainability standards setter.
GRI, which has a cooperation agreement with the European Financial Reporting Advisory Group (EFRAG), responsible for drafting the European standards, raised its concerns in a response to a consultation which maps the proposals against its existing standards.
“Such a level of detail and granularity means that even the most experienced reporters with sophisticated reporting and data collection systems will struggle to comply with all the requirements stipulated by the draft ESRS,” said GRI.
Not only would the current proposals “considerably increase the cost of reporting”, but they could also undermine its intention of providing decision-useful information to investors, warned GRI.
It said the “ambitious timeline” proposed for by the European Commission for introducing the standards already “leaves insufficient time for organisations to put the necessary reporting and data collection systems in place”.
“GRI is concerned that the level of detail and granularity requested will likely lead to less focused reporting and less decision-useful information for investors and other stakeholders,” it added.
The standards will be used by firms required to report under the planned Corporate Sustainability Reporting Directive (CSRD), which will be used to provide critical information to investors about the sustainability risks and impacts in their portfolios.
The ESRSs were released for consultation in May and the time an scope CSRD is currently subject to trilogue negotiations between the European Commission, Parliament and Council. In March, MEPs proposed delaying compliance with CSRD until 2024, as well as removing SMEs from the initial scope of the directive, partly due to concerns over cost.
The ESRS consultation is open until August 8 and EFRAG is expected to present its final proposals to the Commission for approval in November. Although CSRD will provide investors with more detail on the sustainability performance of corporates than the largely voluntary Non-Financial Reporting Directive, it will not be available in time for investors’ increased requirements under the Sustainable Finance Disclosures Regulation (SFDR), which requires enhanced reporting from January 2023.
Too much, too little
In its submission, GRI traces at least some of the detail required by the proposed European reporting standards to the fact that they make mandatory some disclosure requirements that are only recommended or optional in its own standards. Further, where the ESRSs go beyond the scope of GRI’s reporting requirements, they mandate concepts and adopt terminology “that is not widely adopted”.
GRI recommends that some requirements currently listed as mandatory should be repositioned as recommendations or guidance, and also proposes measures to avoid “existing duplication and inconsistencies”.
The standards setter also suggests that the ESRSs should allow corporates not to provide disclosures “in legitimate cases”, specifically when doing so, for example by approximation, could mislead investors and other stakeholders. It warned that not allowing forms to omit data about their own operation under any circumstances is “impractical”.
“Asking organisations to approximate missing information in cases where data is unavailable for the upstream and downstream value chain goes against the objective of faithful representation” it said. “GRI believes it is not good practice to encourage organisations to approximate data they do not understand.”
Despite GRI’s reservations about the overall level of detail being asked of corporate reporters, it identified some areas where the draft ESRSs would not provide relevant information on reporting entities’ impacts on society and environment. In particular, it said that information around water withdrawal, discharge, and consumption by a firm would not be sufficient to understand its impact on the availability of water for use by ecosystems and local communities without further data.
GRI said it supported the ESRSs’ approach to double materiality, but said the proposed standards could be more closely aligned both to its standards, from an impact materiality perspective, and those of the International Sustainability Standard Board, in terms of enterprise value.