The European Supervisory Authorities have all now weighed in on the future of the region’s sustainability disclosure requirements, and what it might mean for investors.
Last week, the European Insurance and Pensions Authority (EIOPA), the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) all published their official opinions on plans to overhaul the rules.
The European Commission’s advisory body, European Financial Reporting Advisory Group (EFRAG), has submitted a proposal to pare back the European Sustainability Reporting Standards (ESRS).
The ESRS spells out how companies must disclose information to the market under the EU Corporate Sustainability Reporting Directive (CSRD), the scope of which has itself been hugely reduced over the past year.
All three supervisors express concern about the level of cuts, arguing it risked undermining the CSRD’s overall objective of providing financial market participants and regulators with widespread, standardised information about sustainability-related risks and impacts.
Shared unhappiness about permanent reliefs
One of the most controversial parts of EFRAG’s proposal is the introduction of a number of ‘permanent reliefs’: carve-outs for companies that can demonstrate that particular requirements involve undue cost or effort.
The ESAs broadly agree that more burdensome aspects of the ESRS should be phased in, but there is alarm about the idea that the reliefs have the potential to be indefinite.
“Simplification should not lead to a situation of permanent unavailability of relevant quantitative sustainability data, which would have negative implications to mispricing of risks and financial stability and to the flow of lconcludeing to the real economy,” states the EBA in its opinion.
“This concern applies, in particular, regarding the extension of the ‘undue cost or effort’ relief to metrics for own operations, or the disclosures on anticipated financial effects, and especially given that undertakings within the scope of the revised CSRD – the largest and generally well‑resourced companies – should in principle be fully capable of meeting these requirements.”
Return to estimated data?
In its opinion, EIOPA flags concerns over the proposal to rerelocate “data hierarchy” principles that require companies to prioritise primary data over estimates.
The relocate may result in pension funds and insurers receiving lower quality, less comparable data, warns the supervisor.
Climate benchmarks
There are also concerns about whether the proposed ESRS will build it harder for investors to meet their own regulatory duties – some of which are depconcludeent on having access to certain corporate disclosures.
ESMA states EFRAG’s plans would, on balance, offer “a reasonable level of consistency” with SFDR, the Taxonomy Regulation and the EU’s Benchmarking Rules (BMR).
“In general, ESMA notes that the draft revised ESRS preserve most of the ESRS datapoints linked to the currently in-force SFDR and BMR.”
It added: “Deletions or amconcludements of datapoints have generally been built when the existing ESRS requirements proved to lead to uncertainty in practice or were redundant (for example, requiring disclosure of a calculated amount which was based on information already included in the sustainability statement or in the financial statements).”
But, ESMA continues, there are exceptions.
First, the proposal rerelocates a requirement for companies to disclose whether they’re ineligible for inclusion in Paris-aligned Benchmarks, on the basis that it would be burdensome to calculate.
“However, ESMA notes that it is unlikely that an external party would be in a better (and less burdensome) position than the reporting undertakings themselves to build such an assessment,” states its opinion.
Implications for SFDR compliance
It’s hard for any of the supervisors to opine too strongly on the interplay between the ESRS proposals and the SFDR, becautilize the SFDR is in the early stages of being reviewed itself.
As a result, it’s unclear exactly what information investors will required to comply with the next version of the law.
“As such, ESMA stresses the required to preserve the consistency between the datapoints disclosed by issuers under the ESRS and the data demands on financial market participants based on any future revision of the SFDR,” it writes.
“This consistency implies building, as much as possible, the data demands imposed on investors and other financial market participants on the information available in sustainability statements prepared based on the ESRS.”
Otherwise, ESMA continues, the Commission may simply create a “‘burden shifting’ effect”, from companies to investors. EIOPA is more specific in its feedback.
It raises concerns about Principal Adverse Impacts – investors’ duty to disclose whether the companies within their ‘sustainable’ funds have suitable policies and performance.
The supervisor warns against reducing CSRD and ESRS so much that they no longer yield sufficient corporate-level disclosures for investors to be able to fulfil their PAI requirements.
This would hike up the cost of compliance with SFDR for financial market participants, EIOPA argues, and build it harder to compare undertakings.
To address this, it suggests the Commission should introduce an equivalent to the PAI template – established under the current SFDR, but set to be rerelocated in the next iteration – into the voluntary ESRS, to encourage relevant SFDR-related disclosures from a wide range of companies.
The voluntary reporting standard, which is being developed alongside the mandatory ESRS, is expected to include some PAI indicators, but not all of those considered vital under SFDR.
The final ESRS (and voluntary standard) are set to be adopted by the summer, and the opinions of all three supervisors will be influential in shaping any revisions the Commission builds to EFRAG’s current proposal.
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