European Commission rejects ISSB compliance with ESRS

Key points

• The European Commission has accepted changes to the European Sustainability Reporting Standards, rejecting compliance with International Sustainability Standards Board rules.
• A core principle of the draft ESRS is the maintenance of the double materiality requirement. Companies in Europe must report on both the financial impact of climate change on their business, and the impact their business has on the environment.
• The latest ESRS guidelines drastically reduce the number of required data points, aiming to make compliance less burdensome for companies. This change has been criticised as potentially making data harder to access for investors and regulators.

Companies will need to abide by the EU’s updated reporting framework and not international standards as had previously been suspected.

The European Commission accepted most of the changes to the European Sustainability Reporting Standards (ESRS), the draft guidelines published on 6 May show.

The changes drastically reduce the number of data points that companies need to report, as specific metrics were removed and consolidated into general disclosures.

The scope was reduced in line with the commission’s broader omnibus objectives of making reporting requirements less burdensome for companies. Many criticised the reductions, as it will make access to data harder for investors and regulators alike, and could curb the bloc’s efforts to make sustainability information more accessible and transparent.

Many had expected the commission to weaken double materiality rules after rumours surfaced that the commission would align with the International Sustainability Standards Board (ISSB). The ISSB had pushed for the EU to adopt its standards or to allow companies to comply with its rules without needing additional reporting.

But some argued that doing so would undermine the EU’s double materiality aspect, Responsible Investor reported.

The ISSB and the EU had reached 95% interoperability when the ESRS was first announced, which likely annoyed the ISSB when the commission decided to revise and simplify it, said Vincent Vandeloise, senior researcher at Finance Watch.

Including double materiality is key because it shows not only the financial impact of climate change on a company, but also the impact they are having on the environment, he added.

“When [companies] show the result of the materiality assessment, when speaking, for example, of pollution, they will say pollution is not so much a matter of financial materiality, but it is still a matter of impact materiality,” he said.

The changes are more reassuring than had been feared, said Tsvetelina Kuzmanova, EU sustainable finance policy lead at the Cambridge Institute for Sustainability Leadership.

“Europe has largely held the line on one of the core principles of the ESRS framework: the draft does not artificially split financial and impact materiality. The “no obscuring of information” requirement applies to material information as a whole and does not separate financial and impact materiality,” said Kuzmanova

Transition plans still reference the 1.5°C objective which she said was a positive outcome, while the treatment of anticipated effects is also proportionate.

Still, it’s just the beginning. The ESRS is now under a four-week consultation period but the commission must sign off by 30 June, in accordance with EU legislation.

“The real test is whether these provisions survive the political pressure that will inevitably come during the consultation process,” said Kuzmanova. “Europe has held the line for now and would ideally keep it there.”

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