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EU Adopts ESRS, Industry Disappointed by Materiality Stance

The European Commission has finalised and formally adopted the sector-agnostic European Sustainability Reporting Standards (ESRS), but critics argue its amendments to already weakened disclosure rules still don’t go far enough. The delegated act moves away from key disclosure indicators being reported on a mandatory basis under the Corporate Sustainability Reporting Directive (CSRD), as the original 2022 proposal outlined, to instead allow companies to conduct materiality assessments. In an accompanying Q&A document, the Commission said that a company “will only report relevant information”, with datapoints considered the most challenging or costly for companies, such as reporting a biodiversity transition plan, changed from mandatory to voluntary. Further, if a company concludes that a datapoint deriving from the Sustainable Finance Disclosure Regulation (SFDR), the Benchmarks Regulation (BMR) or Capital Requirements Regulation (CRR) is not material, it must explicitly state this is the case, rather than providing no information at all. Firms’ materiality assessment are also subject to external assurance to ensure that all sustainability information is suitably robust. Those that conclude climate change is not material, must provide a detailed explanation due to its “wide-ranging and systemic impacts across the economy”. Phillipe Diaz, Senior Manager of Sustainable Finance at WWF Germany, said: “The European Commission caved into pressure from conservative industry groups and has weakened the standards to the point that loopholes have become motorways for greenwashing. This is a serious betrayal of trust and undermines Europe’s claim to leadership in building an economy that is socially just and compatible with the planetary boundaries.” Coinciding with the announcement, the Commission, European Financial Reporting Advisory Group (EFRAG), and International Sustainability Standards Board (ISSB) provided an update on their discussions about aligning ESRS with the ISSB Standards for better interoperability. They noted they have achieved a higher degree of alignment and reduced complexity and duplication and will develop interoperability guidance material to assist entities navigating between their standards.  

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