On the 12th of June 2023, there was a substantial announcement by the European Commission that released a series of proposed changes to the European Sustainability Reporting standards which seek to reduce the reporting burden on small companies and those first-time reporters. In this episode, we will cover the additional complexities that these changes will bring for companies to face, with a focus on the subject of materiality assessments as well as the reactions from the market and parties involved about the EC announcement.
To gain additional insights about this subject, be sure to explore the other episodes of the CSRD series available on the Assurance in Action Podcast network.
AIA Podcast S6 E10 CSRD Podcast - Part 2_ EU Commission Eases Sustainability Reporting Rules – what does it mean
10 de agosto de 2023, 2:34p.m.
13 min 20 s
Rowena Curtis Intertek 0:12
Hello and welcome to the second in our series of podcasts dedicated to the new EU corporate Sustainability Reporting Directive CSRD.
I'm Rowena Curtis, UK marketing manager for Intertek Business Assurance.
I'm joined by Catherine Beare, Regional Director, Business Assurance UK and Iberia, who's going to give us an update following the 12th of June announcement from the European Commission on the future of the CSRD reporting requirements.
Catherine’s been in the sustainability world for 20 years, previously working with business in the community.
The leading CSR not-for-profit helping companies implement and improve their internal CSR programs. During her 14 years at Intertek, Catherine has worked with all sectors, helping organizations deliver effective and risk managed responsible supply chains. Having worked globally but with more of a focus on UK and EU, Catherine has grown Intertek's Responsible Supply Chain programmes, supporting regional expansion, bringing to market new innovative sustainability solutions and speaking at many subject matter focused events.
So Catherine, can you firstly explain to the audience what was actually announced in June and what does this mean?
Catherine Beare Intertek 1:26
Sure. Thanks, Rowena.
So yes, on the 12th of June, there was indeed quite a substantial announcement by the European Commission. It released a series of proposed changes to the European Sustainability Reporting standards, so ESRS at the rules and requirements for companies to report on sustainability related impacts, opportunities and risks under the EU's upcoming Corporate Sustainability Reporting Directive, CSRD.
Now the Commission's proposals were released as a draft delegated act, along with a consultation requesting feedback on the new rules, which was open until the 7th of July. The proposals ultimately seeked to reduce the reporting burden on small companies and first time reporters by extending the phase in times for some key sustainability factors.
Smaller companies, which are classified as entities with fewer than 750 employees in the first year that they apply the standards to omit Scope 3 emissions data as well as own workforce disclosures. Now that obviously included topics such as working conditions and equal treatment, and for the first two years to admit disclosures on biodiversity, value chain workers, affected communities and consumers.
For all companies, the draft proposes allowing an extra year to disclose information on anticipated financial effects related to non-climate environmental issues and on some own workforce data points and ultimately rules enabling all companies to focus specifically on material sustainability factors.
Now we finally got the consultation results on the 31st of July, stating that the European Commission had adopted the ESRS, so marking a major step towards the implementation of the law, with reporting set to begin for some companies as soon as the 2024 financial year.
Rowena Curtis Intertek 3:38
So, what does this mean for companies at this stage?
Catherine Beare Intertek 3:43
It's interesting, given the consultation was quite short, I had a strong sense that it would get passed. Now, what does it ultimately mean? So ultimately, these amendments encompass three main aspects.
First, there is a postponement in the implementation of the ESRS creating duplication with EFRAG, which already proposed sequencing of the implementation of the different ESRS sub standards.
Furthermore, the entire ESRS is now subject to corporate level materiality assessment. This means that all the key performance indicators are non-mandatory and instead fully depend on the quality of the materiality assessment. This approach ultimately introduces complexity for companies, leaving them a bit on certain about the specific reporting requirements they need to follow. Would be one argument.
Now, in addition, certain standards, particularly those related to biodiversity transition plans, have been made voluntary. This decision directly contradicts the requirements outlined in the CSRD, which mandates disclosure on all material issues.
It is worth noting that the EU committed through the Target 15 of the Global Biodiversity Framework at COP 15, to require biodiversity reporting for large businesses and financial institutions.
So what does that mean for companies? A key change in the commissions and you know new proposal which was accepted is for all disclosure requirements to be subject to materiality assessments. As I just mentioned, effectively allowing companies to focus reporting on sustainability factors that they consider material to their business. Now one thing to call out is that the Commission said that the measure is expected to lead a significant burden reduction for undertakings and help to ensure that the standards are proportionate, so therefore the Commission said that it anticipated that these new proposals, which have gone through will result in cost reductions during the phase in period of nearly €1.2 billion and €230 million on an annual basis compared to EFRAG’s proposals.
So no small amounts Rowena.
Rowena Curtis Intertek 6:13
And how is the market financial institutions and the rest of the world reacted to this announcement?
Catherine Beare Intertek 6:21
Yeah. Look, I mean, as soon as the proposal went out and then following the announcement that it was accepted, it's been mixed, as you can imagine, sustainable finance groups warned that the new proposals that have now been accepted would negatively impact the effectiveness of the CSRD. European, sustainable and responsible investment association Eurosif released a statement indicating that it was a “very concerned” with the changes, which it called “a significant setback in ambition compared to the final recommendations published by EFRAG”, and particularly criticizing the materiality assessments amendment.
Alexandra Palinska, the Eurosif's Executive Director, said: [quote] “We acknowledge the challenges preparers will face when complying with the ESRS. However, the EU Commission should not prioritise reducing reporting requirements at the expense of the public interest and other stakeholders, including of investors and financial institutions in dire need of sustainability information to comply with their own regulatory requirements. If not amended, this draft Delegated Act will hinder the capacity of investors to make informed sustainable investment decisions and risks jeopardising EU commitments to deliver on the EU’s Green Deal and Climate Law ambitions.” [closed quote].
So obviously you know concerns there as to are we taking a step back on the ambitions we have ultimately up to the EU Green Deal. Now on the NGO side and you know just one example I'll give from WWF. They said: [quote] “The Commission's proposal brushes aside the multi-stakeholder proposal from EFRAG, which was meticulously developed over a three-year process in close collaboration with the Commission itself. Importantly, these alterations would not alleviate the reporting burden for companies; instead, they would create inconsistencies with other EU reporting requirements, increase complexity for companies, lower EU ambition compared to global reporting standards, and open the door to greenwashing”. And that was said by Sebastien Godinot, Senior Economist at WWF European Policy Office, who is also a member of the EFRAG General Assembly.
So look, we can see that there is this concern that the Commission is taking a step backwards in terms of the credibility and the reliability of the deliverables. I mean for businesses, I think this will naturally help. It will allow them to focus what needs delivered first, but it just obviously delays matters, so it doesn't change the fact that they will need to report all and it's just annoying that so mixed messaging for now and not necessarily aligned, but it's gone through.
Rowena Curtis Intertek 9:23
Excellent. So from a practical standpoint, what's next?
Catherine Beare Intertek 9:28
Yeah, I think if we come at it from, you know, the practical standpoint, as you say, we know what, what are we ultimately saying. The most notable change is that all data points and indicators are now voluntary instead of mandatory, whereas EFRAG had suggested that as a minimum, all climate indicators should be mandatory under CSRD. Now the Commission wants to align more closely with the international Sustainability Standards Board (ISSB) by making them voluntary, so at least they are trying to align and I think that is a good thing.
It now means that a firm would make its own assessment of whether a topic materially impacts its business or its business has material impact on the topic.
Of course, the concept known as double materiality before ultimately deciding whether to disclose that is potentially concerning in terms of how companies will make that judgement and use it as a way to delay reporting.
Now when a topic is considered material, but data is perceived to be less mature, such as waste water, biodiversity, resource usage and some workforce figures, the proposal gives companies permission to omit that information in the first year of reporting and which we would argue makes sense, so that we don't get inaccurate and you know, a relevant information we want to make sure it's accurate and relevant, but it does make it more subjective as to how they drew that conclusion.
I think it is key for companies to continue to strive for the optimum reporting requirements as ultimately they will have to do this at some point. And as we know, it's the large ones that go first on their 2024. So hopefully they'll be in a better position to do that.
Rowena Curtis Intertek 11:28
Brilliant. Thank you very much, Catherine, for explaining about what the 12th of June announcement from the European Commission meant on the future this year CSRD reporting requirements.
So how can Intertek help you prepare for the CSR Directive as a reminder of our services?
So to understand your current CSRD readiness, we can help you to undertake a gap analysis to help you have a clear view of your organizations current readiness, and we'll work with you to define clear action plans to address any gaps to prepare you for your first submission.
We also offer Training to ensure everyone understands what's required to prepare for your submission. This can be delivered to a range of different teams and functions across your organization and will be bespoke to best fit your requirements.
We provide Auditing Solutions and, in some markets, will also be able to act as the auditor of your CSR Directive reports as one single provider supporting you from your early preparations through to audit of submission.
And finally, we've partnered with ESG Playbook, a leading SaaS reporting solution provider bringing in one tool all required data collection, aggregation and tracking and reporting for ESG.
For more information, visit www.intertek.com/assurance/eu-csrd/
So this concludes today's podcast. Thank you for listening, and please watch out for further CSRD episodes to help you with your journey to compliance.