Clash in EU Sustainability Reporting Raises Concerns 

Requirements under ESRS need to match SFDR rules for investors, as EU consults on bringing in more disclosure obligations for fund managers but proposes lessening the scope for companies’ reporting.

Industry groups have complained that investors lack the necessary company data to meet reporting requirements under the EU’s Sustainable Finance Disclosure Regulation (SFDR) because companies are not required to report on this data under the European Sustainability Reporting Standards (ESRS). 

This concern was voiced multiple times by respondents to the three European Supervisory Authorities (ESAs) consultation on proposed amendments to the SFDR disclosure framework, including extending the principal adverse impacts’ (PAIs) existing list of universal social indicators to include disclosures such as interference in the formation of trade unions and improvements for disclosures on how sustainable investments ‘do not significantly harm’ the environment and society. 

There have been longstanding concerns that there is a “sequencing” issue as the requirements for investors under SFDR came into force before the ESRS requirements for companies. Now, industry groups are also highlighting that proposed new requirements under SFDR will be difficult to meet as they do not match what companies need to report on under ESRS.  

Alignment needed 

The European Fund and Asset Management Association (EFAMA) in its response said that all disclosure requirements and data points included in SFDR should be mandated under ESRS and that if a data point is voluntary under ESRS, the PAI should be removed from SFDR. It also said that definitions of PAIs should be consistent across SFDR and ESRS.  

EFAMA added that if the Commission proceeded as proposed and disclosures and datapoints under ESRS undergo a materiality assessment, this should be reflected under SFDR with clear guidance on how to handle missing data points resulting from the materiality assessment. 

Today, EFAMA, alongside the UN Principles for Responsible Investment (PRI), United Nations Environment Programme Finance Initiative (UNEP FI) , the Institutional Investors Group on Climate Change (IIGCC), the European Sustainable Investment Forum (Eurosif) and 93 financial sector actors, have jointly called on the Commission to ensure that environmental and social indicators relevant to SFDR and other European sustainable finance regulations are mandatory disclosure requirements under ESRS.  

Eurosif also called for consistency between SFDR and ESRS in its consultation response to the ESAs and said that ESRS must mandate investee companies to disclose the information that is necessary to consider the environmental and social PAI indicators under SFDR.  

Speaking to ESG Investor, Pierre Garrault, Senior Policy Advisor at Eurosif, said: “We are really concerned that from the draft requirements under ESRS, investors will not get the information that they need, both to make informed investment decisions into companies that are truly sustainable and that have sustainable activities, but also to comply with their own regulatory requirements. That’s also a legal risk from their perspective.”  

The European Banking Federation (EBF) raised similar concerns to EFAMA and Eurosif, and added in its consultation response that it had to be recognised that a large part of investable companies were not subject to ESRS.  

“Without clear guidance it may be difficult to obtain meaningful data on new indicators,” it said. “Ideally, SFDR indicators should correspond to the information disclosed under ESRS or other mandatory disclosure requirements for companies.” 

It said it could be difficult to obtain meaningful data on the new proposed social indicators given that investments with a social objective are often linked to investments in developing countries not subject to ESRS.  

The International Capital Markets Association (ICMA) also raised concerns on misalignment between SFDR and ESRS and queried the point of the consultation in general given an upcoming broader review of the SFDR framework.  

“A deep revision of the SFDR including its key issues and concepts could make any changes at this stage redundant while still causing significant but interim implementation efforts and costs ultimately borne by asset owners.” it said.

The EU’s Corporate Sustainability Reporting Directive is underpinned by the ESRS which specify how companies report on sustainability matters and are designed to reflect sustainability report users’ growing needs for comparable, relevant and reliable information.

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