Source: GettyRepresentatives from the European Central Bank (ECB) and European Securities and Markets Authority (ESMA) have warned the bloc’s standards body against deviating from the International Sustainability Standards Board’s (ISSB) framework in the simplification of the European Sustainability Reporting Standards (ESRS).
The two actors sit as observers on EFRAG’s sustainability reporting board (SRB), which is responsible for the body’s final reporting positions, have expressed “concern” over interoperability with ISSB, due to the amendments proposed in the draft simplified standards.
The comments were included in EFRAG’s release of the draft simplified ESRS, which it is consulting on until end-September.
EFRAG has been charged with revising and simplifying the EU’s corporate sustainability reporting standards, to reduce reporting burden and make the framework more usable.
The body is currently consulting on the simplified framework, which has been cut by around two-thirds, as part of the broader simplification of the Corporate Sustainability Reporting Directive (CSRD) under the sustainability Omnibus.
As part of the simplification mandate, EFRAG was asked by the European Commission to further align with global sustainability reporting standards, particularly ISSB.
EFRAG said it had “considered all opportunities” to align with ISSB and avoid “unnecessary differences” between the two sets of standards. It acknowledged, however, that while some of the amendments “go in the direction of enhancing interoperability, others negatively affect it”.
The ECB representative noted that the “extensive” list of reliefs that go beyond ISSB “raised concerns as it risks undermining the overall quality of the information provided and could create an unlevel playing field”.
EFRAG has proposed several reporting reliefs beyond the ones in ISSB’s standards, which would result in new interoperability differences.
“If these reliefs are permanent, they take away the incentive to increase the necessary availability and quality of data that is needed to manage the issues and achieve the transition’s objectives,” the ECB representative added.
The ECB put out an official position on the proposed amendments to the EU’s corporate sustainability reporting and due diligence requirements in May, where it recommended that any simplification of the sustainability reporting framework “should not lead to a reduced level of interoperability”.
“Any review of the ESRS should aim to preserve or improve the level of interoperability between Union and international standards, without prejudice to the objectives of the European Green Deal and Sustainable Finance Action Plan,” it said at the time.
The central bank has separately been vocal in its opposition to the watering down of the scope of CSRD, raising a series of concerns over potential data shortages, and also asked the Commission to retain most climate-focused datapoints and more important datapoints for biodiversity under CSRD.
The ESMA representative also flagged the importance of preserving interoperability with international standards – notably ISSB – particularly for qualitative disclosures on financial effects.
A spokesperson for the EU financial watchdog told Responsible Investor that the concerns expressed are “technical tentative” views that the ESMA representative expressed based on internal discussions, including with technical experts from national authorities.
“These views are expressed on the basis of interim draft documents presented by EFRAG prior to the finalisation of the exposure draft. As such, they should not be depicted as ESMA’s official views on the final exposure draft, which will typically be provided through a formal comment letter to the EFRAG consultation,” they said.
Ahead of the release of the sustainability Omnibus package, the EU watchdog also warned that the bloc’s push to cut red tape could delay the green transition.
Anticipated financial effects
The point of anticipated financial effects is key for interoperability with ISSB. Board chair Emmanuel Faber in June called the ISSB’s requirement to describe the current and anticipated financial effects of sustainability-related risk and opportunities “crucial and essential”.
“If the financial statements of a company do not reflect the impacts of sustainability, it will be impossible for financial markets to assess them,” he said, adding that a consequence of this will be that the economy will not be able to activate the financial mechanisms needed for its climate resilience.
However, EFRAG said stakeholders had expressed concerns about the complexity and sensitivity of quantitative information about these disclosures. It added that feedback suggested either adopting the IFRS reliefs, deleting this information, or making it voluntary.
The standards body has offered stakeholders two options in the consultation.
The first would be to focus on quantitative disclosures, with the addition of a relief to give more flexibility. This option would allow undertakings which cannot quantify the financial effects to provide only qualitative disclosures, which better supports ISSB interoperability, EFRAG said.
The relief available in the ISSB’s climate standard allows for the reporting of qualitative information only when the level of estimation uncertainty is so high that the information would not be useful.
The second option is to focus on qualitative disclosure, with the option on a voluntary basis to quantify the anticipated financial effects. EFRAG acknowledged that this would be less interoperable with the ISSB standards, but said it responded to preparers’ concerns regarding the disclosure of sensitive information associated with quantification.
The ECB representative expressed concern over option two, commenting that this information is “critical” for investors for informed decision-making, as well as essential for the financial materiality angle, which is a “core part of CSRD”.
They added that this goes against the Commission’s emphasis on prioritising quantitative information, and the call for greater transparency and accountability, and that it is not aligned with global standards (ISSB), and a voluntary disclosure risks leading to “insufficient and not comparable information”.