European Commission adopts ESRS draft despite investor concerns

The EU Commission has adopted the draft text of the European Sustainability Reporting Standards (ESRS), which has fuelled increasing concern about how investors should address their disclosure obligations on topics their investee companies classify as non-material.

Virtually all disclosures mandated by the new regulations will undergo assessments of materiality. However, investors have expressed apprehensions about the difficulties this could pose for them in fulfilling their obligatory disclosure obligations.

In the final proposal, numerous reporting requirements, which were obligatory in earlier drafts, have been transformed into voluntary measures. These encompass reporting aspects such as climate, biodiversity and transition plans. This implies that companies are now empowered to determine whether a requirement is material to their operations, allowing them to judge the impact of their activities on the environment.

Significantly, the initial ESRS proposal had strived to ensure all principal adverse impact indicators from the Sustainable Finance Disclosure Regulation (SFDR) would be covered by the disclosure requirements. However, these indicators are now also subject to materiality assessments.

In March, President Ursula von der Leyen committed to decreasing reporting obligations on businesses by 25%. Subsequent appeals from influential entities like the Institutional Investors Group on Climate Change and the United Nations Environment Programme Finance Initiative, along with 93 asset managers, urging the commission to preserve requirements such as mandatory reporting have been overlooked.

Critics, including civil society organisations and investors, have voiced apprehensions about the potential diminishment of reporting consistency. While reports will still require auditing by private accounting firms, there are concerns this might not suffice to ensure the credibility of reporting standards.

Vincent Vandeloise, a senior policy officer at Finance Watch, expressed disappointment, saying: “Climate change and social standards are not mandatory in the final text, which unfortunately puts more reliance on the quality of assurance work.”

The preservation of the double materiality principle was well received by EDHEC-Risk Climate Impact Institute but with reservations, saying the act “falls short of ensuring that reporting entities produce data that other parties require to comply with the extant EU sustainability regulation”.

Principles for Responsible Investment welcomed the adoption of the ESRS, but EU policy head Elise Attal added: “The European Commission should commit to making key climate disclosure indicators and environmental and social indicators relevant to SFDR mandatory to disclose in the first review of this delegated act in 2026. In the meantime, it should provide clear, comprehensive and robust guidance on materiality assessments so that material sustainability information is not omitted by companies.”

The regulations will now undergo scrutiny by the EU parliament and member states. While they possess the authority to outright reject the rules, they lack the ability to amend them.