Feedback on the EFRAG exposure drafts on the European Sustainability Reporting Standards

11 August 2022

Consultation response

Finance Watch welcomes the EFRAG proposals for ESRS. However, some changes are needed to ensure comparability of the corporate sustainability disclosures, improve user-friendliness of the standards, prevent green and social washing and improve interoperability between ESRS and international standards.

Well-calibrated, quality, comparable and reliable corporate sustainability-related disclosures are essential to inform capital allocation and accelerate the transition towards an inclusive and sustainable economy.

Therefore, our main recommendations are:

  1. Rebuttable presumption and materiality assessment. We are supportive of how double materiality, a core principle under the Corporate Sustainability Reporting Directive, is defined and the approach taken on double materiality assessment and implementation. Further practical guidance for companies on how to perform materiality assessment based on the double materiality principle, including examples of methodologies and thresholds, would be helpful.Concerns mount over the rebuttable presumption concept, which means that all disclosure requirements are considered mandatory for an undertaking until proven not material. Rebuttable presumption would leave too much flexibility to companies, which could rebut any topical disclosure as long as they come up with elaborate explanations, impairing comparability. Finance Watch suggests a different approach, whereby a core set of indicators is always mandatory / material for all companies to report on.
  2. Governance-related disclosures. Good governance is the basis for sustainable performance of any company. As such, governance-related matters should be mandatory and always material for all companies. We strongly advocate for consolidating the “traditional” and sustainability-related governance disclosures which, in the exposure drafts, are split between ESRS 2 and the topical standards (ESRS G1 and G2). These disclosures must be read together to get a proper understanding of the company’s governance and whether sustainability risks, opportunities and impacts are properly considered and managed by the company’s administrative, management and supervisory bodies. Separating these disclosures would result in incomplete information in each of the sections, missing context and / or unnecessary duplications. We also strongly warn against removing “traditional” corporate governance disclosures from the sustainability standards.
  3. Alignment with international sustainability standards. The EFRAG (European Financial Reporting Advisory Group) and the ISSB (International Sustainability Standards Board) must work closely together to ensure the compatibility and interoperability of the European and international sustainability reporting standards. The close exchanges that have recently started between the EFRAG and the ISSB should continue, with efforts to better align the terminology and the respective structures, being mindful, however, that the standards developed by ISSB are more limited in scope and based on the single, financial materiality logic.
  4. Climate-related disclosures. We are very supportive of the climate-related disclosures in the EFRAG exposure drafts, while providing some minor suggestions for improvements. Robust, comparable and science-based disclosures on corporate climate targets, transition plans and scope 1, 2 and 3 GHG emissions are essential to achieve the ambitious EU climate-neutrality target by 2050. To that end, transition plans must be based on targets which are in absolute value and without permitting carbon offsets, avoided emissions or carbon dioxide removals in the calculation.
  5. Prioritisation and phase-in. All topics addressed by the draft standards are important and therefore ideally should be mandatory to report on as from the main application date. However, if choices must be made, we would suggest prioritising metrics needed by financial market participants to comply with the requirements set by SFDR, climate-related disclosures and information that companies already have, meaning on strategy and business model, governance (including directors’ remuneration, risk management, internal control and business conduct) and their own workforce. Certain disclosures could be moved to sector-specific standards, thus reducing the number of disclosures mandatory for all companies.