The EU announced plans to postpone the deadline to adopt sector-specific European sustainability reporting standards (ESRS), just as the Parliament fended off an attempt to dilute their requirements.
- The reporting requirements for specific sectors are now expected to be adopted by the Commission by June 2026.
- The sector agnostic standards will still apply to 50,000 companies from January 2024 onwards.
- Investors and stakeholders need companies to be transparent and disclose the data necessary to make informed decisions for a sustainable future.
In its 2024 Commission Work Programme, an annual publication containing the list of actions expected for the following year, the EU said it will postpone the deadline for the adoption of sector-specific ESRS.
What are the ESRS?
The standards are crucial to the Corporate Sustainability Reporting Directive (CSRD). They are aligned with two main frameworks, the Global Reporting Initiative (GRI) and the International Sustainability Standards Board (ISSB).
Under the CSRD, large companies and listed small and medium-sized companies, as well as parent companies of large groups, are required to disclose the information necessary to understand how they impact and how they are impacted by sustainability matters. This data needs to be reported based on the set of ESRS adopted by the Commission in July 2023, which is sector agnostic, and will apply to 50,000 companies from January 2024 onwards.
The second set of standards, which contains reporting requirements for specific sectors, was initially expected to be adopted by the Commission by 20 June 2024, but this date has now been delayed.
Why is the EU delaying the implementation of sector-specific standards?
The bloc said the delay is intended to help achieve the goal of reducing burdens associated with reporting requirements by 25%, while maintaining the policy objectives, as part of a strategy on long-term competitiveness.
This includes initiatives such as simplifying reporting requirements in a range of policy areas, without lowering social, safety, consumer protection, environmental or economic standards. It is hoped to streamline reporting requirements that are “of limited use”, for example by consolidating overlapping obligations, reducing the number of businesses concerned and increasing digitalisation.
The Commission proposed to delay the adoption date of sector-specific ESRS from 2024 to 2026, in order to reduce the reporting burden for financial market participants and in response to demand from the corporate sector.
“Postponing the adoption date by 2 years is relevant for companies in the scope of the CSRD, including listed SMEs, required to carry out sustainability reporting. This will allow these companies to focus on the implementation of the first set of ESRS adopted on 31 July 2023, ensure that EFRAG has time to develop sector specific ESRS that are efficient, and limit the reporting requirements to the minimum necessary,” it said.
In addition, the initial adoption date for the ESRS to be used by certain non-EU companies dealing in the bloc was 30 June 2024, which will also be delayed by two years. According to the Commission, this will allow more resources to be dedicated to the development of effective and proportionate sector-specific ESRS, while still giving enough time for these non-EU companies to prepare ahead of financial year 2028.
Parliament fends off efforts to reject ESRS
The proposal comes on the same day the Parliament voted to reject a motion to replace the ESRS with more diluted measures. Of 631 MEPs, 359 voted against, 261 in favour and 11 abstained.
The motion was brought by a group of German European People’s Party (EPP) and Renew members of the Parliament, and largely supported by the European Conservatives and Reformists and the far-right Identity and Democracy group. Nonetheless, many EPP and Renew members voted against the proposal, which is based on the arguments that reporting translates into an overwhelming burden and that the standards are overly complex and extensive.
Only 0.2% of EU companies, however, fall under the scope of the reporting requirements, and their implementation costs are estimated to range between 0.017% to 0.034% of their turnovers. In comparison to other reference standards, such as the new IFRS sustainability standards, the actual number of disclosure data points is roughly the same, according to law firm Frank Bold.
Eelco van der Enden, chief executive of GRI, said: “The endorsement of the ESRS by the European Parliament is welcome because it signals the transition from political debate to practical implementation for these new rules – which are a game changer for corporate accountability, in the EU and globally. The close alignment achieved between the ESRS and the GRI Standards underlines the increasing influence of GRI as the global enabler for transparency on impacts.”
By requesting the reduction of reporting standards, this initiative failed to consider the ratio of the legal piece, Frank Bold noted. Sustainability reporting is a reality that benefits businesses, and standardisation helps to simplify the process and remove confusion. Without standardisation, companies not disclosing sustainability data would face demands from financial institutions to report it in multiple non-standardised ways, causing more burden and uncertainty.
“The cross-party support confirms how critical role transparency plays in the EU sustainability framework and in enabling sustainable finance to flow to climate transition. It is encouraging to see that MEPs trust the technical, multistakeholder process to develop the standards in EFRAG,” commented Filip Gregor, head of Responsible Companies’ section at Frank Bold.
While the rejection of the motion to change the ESRS is encouraging and shows cohesion across the Parliament, it is disappointing to see that the sector-specific standards are being delayed. Investors and stakeholders need companies to be transparent and disclose the data necessary to make informed decisions for a sustainable future. The EU has demonstrated itself to be a leader in sustainability at a global scale and it needs to keep up with its trailblazing policies.