Backpedalling on Corporate Sustainability Reporting: Why the Weakened EU Commission Proposal Is Worrying

Transparency in corporate sustainability reporting is pivotal to securing a sustainable future.

August 1, 2023 /3BL/ - Transparency in corporate sustainability reporting is pivotal to securing a sustainable future. However, the recent proposal from the European Commission on the draft Delegated Act on the European Sustainability Reporting Standards (ESRS) has raised significant concerns. This proposal, if implemented, would weaken the impact of the upcoming Corporate Sustainability Reporting Directive (CSRD) regulation (read more about the importance of the CSRD here) and hinder efforts to combat greenwashing . As advocates for the transition to a climate-smart society, South Pole finds this proposal deeply troubling and urges the Commission to reconsider its approach.

The importance of sustainable reporting

Sustainable reporting standards, such as those proposed by the European Financial Reporting Advisory Group (EFRAG), are crucial for enabling companies to capture their impact on the economy, the environment and people. These are the three pillars of corporate sustainability, otherwise known as ESG (environmental, social and governance).

Such standards provide investors with consistent and comparable data, which is essential for achieving the goals outlined in the European Green Deal. By adopting what is known as a double materiality approach (which represents a deeper dive into climate-related impact than just financial materiality), these standards ensure Europe's continued leadership in sustainability reporting. However, the Commission's current approach deviates significantly from EFRAG's original proposal, and could represent a step backwards rather than forwards.

The climate crisis demands urgent action

As COP27 highlighted, now is not the time for diminished ambition, but rather the 'time for impact' – the moment to act decisively to limit average global temperature rises to 1.5°C, and safeguard the lives of future generations. The world's leading scientific authority on climate change, the IPCC, has emphasised that we must halve emissions by 2030 and achieve net zero no later than 2050 to hold global warming below the planetary tipping point. This gives us less than a decade to complete a fundamental systems change at a pace and scale never seen before. Even the smallest delay could have disastrous consequences.

Troubling proposals

In this context, the slowing of the pace suggested by the Commission's draft Delegated Act on ESRS presents several worrisome proposals. According to the proposals, smaller companies with fewer than 750 employees will be given more time to implement key standards and data points, including those related to scope 3 emissions as well as social and biodiversity issues. The proposals also imply a phased-in approach, with full reporting not reached until the year 2028 for fiscal year 2027... And all of this when there is no time to lose and dilatory action could have severe repercussions.

More concerning still is the suggestion that the Climate Change Standard, which was initially proposed as a mandatory disclosure mechanism by the EFRAG, will now become voluntary for all companies, leaving the disclosure of related material impacts, risks, policies and actions subject to a materiality assessment. Topics found to be non-material could therefore be excluded from the reporting (as could the explanation for making the exclusion). The new framework, which promised to help companies better understand their impact (and be held accountable for it), therefore seems to be backsliding by removing mandatory reporting on critical climate and social metrics, which raises concerns about the potential for lowering standards and accountability. The Commission's proposals, if accepted, would allow companies to exclude vital information about their greenhouse gas emissions, biodiversity and workforce. Such exclusions undermine the very purpose of the legislation, whose aim is to prevent greenwashing and enable businesses to disclose accurate, comparable and credible information on all aspects of ESG.

The way forward

South Pole is firm in its belief that the draft Delegated Act must be improved in its ambition and scope if it is to establish a clear, consistent and reliable framework for sustainability reporting and respond effectively to the increasing urgency of climate change. Any business, regardless of size, needs to take significant action to align with a 1.5ºC pathway. This must include the accurate disclosure of essential impacts. The proposed revisions to the Delegated Act on ESRS not only fall short of our needs and expectations, but worse, they could pose a risk to the progress we've made so far.