The chair of the International Sustainability Standards Board (ISSB), Emmanuel Faber, has said the sustainability Omnibus presents an opportunity for the EU to “better articulate” materiality for investors and other stakeholders under the Corporate Sustainability Reporting Directive (CSRD).
Faber said on Monday that “only the information necessary for stakeholders’ decision-making” should be retained in the standards underpinning the directive.
He stressed that one of the key objectives of the simplification, as set out by the European Commission, is to strengthen alignment with international standards which “focus on financing the economy’s transformation”.
The EU’s corporate sustainability disclosure rules, which came into force this year, are in the process of being revised. The scope of the regulation is up for debate and EU standards body EFRAG has been tasked with simplifying and cutting down the European Sustainability Reporting Standards (ESRS) by the end of October.
The body is expected to deliver the first ESRS simplification update to the European Commission by 20 June.
EFRAG has said it will aim to align the language of the ESRS “as much as possible” with ISSB for “common” disclosures.
Faber has previously been critical of the EU’s “simplistic” push for double materiality. The ISSB focuses on financial materiality in its standards.
In 2023, Faber called double materiality “unrealistic” and said there are “dangerous” blind spots related to this “materiality lens”. He went on to warn that a push for double materiality alone is “incompatible” with the urgency of the transition.
But this year, prior to the release of the Omnibus proposal, the ISSB chair seemingly revised his stance, commenting that there was “no reason” for the EU to abandon the double materiality aspect of CSRD.
Responsible Investor understands that at least two drafts of the Omnibus were circulated within the European Commission ahead of its release in February, one of which proposed abandoning the double materiality principle in CSRD.
But when the package was announced, Commissioner Maria Luís Albuquerque – whose department leads the work on the CSRD – said the Commission was preserving this, calling it the “core element of the Green Deal”.
Missing information
In his latest remarks, Faber also weighed in on the first wave of CSRD reports, which have been published this year.
He said that, while much of the criticism aimed at the regulation stems from the burden it places on smaller companies, he has seen “a tendency” among some larger companies to not disclose “essential” information “on the grounds that it is too difficult to report”.
An example of this, he said, is the requirement to describe the current or anticipated financial effects of sustainability-related risks and opportunities.
“This is a crucial issue: 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 wrote, 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.
Faber said it is “essential” to maintain this requirement.
“Without transparency on the financial impacts of physical and transition climate risks, there can be no competitiveness – particularly in access to capital.”
The urgency is therefore not to remain vague, but for corporate accountants and finance professionals to “fully engage with the issue”, Faber said.
According to initial analysis of some of the first CSRD reports, disclosures are substantially longer than previous sustainability reports and investors have raised concerns about this.
Speaking at Responsible Investor’s flagship event RI Europe in London last week, Lloyd McAllister, head of sustainable investment at ESG boutique Carmignac, said the reports are “too long” and welcomed the EU’s moves to cut down the disclosures.
“There’s a lot of data in text now, so it’s difficult to see and use the tables. Now it’s just pages and pages of text, sometimes with numbers embedded into the text,” he said.
McAllister also said he had observed a “decline in reporting” in some areas, where crucial information which was previously included in corporate reports was missing in the first round of CSRD disclosures.
“Time series just seem to have gone in these first round of reports, and we’ve also found that there are some missing metrics which used to be disclosed,” he said.
McAllister added that some corporates have taken a “backwards step” on supply chain audit data, which previously included details on the number of audits conducted in a supply chain, the findings and the actions taken, which is “crucial information” for investors.