29th Sep 2023

EU to let companies self-police on green and social rules

  • Ursula von der Leyen committed to reducing reporting requirements on businesses by 25 percent to boost competitiveness in the face of the US competition (Photo: European Commission)
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Last Friday (9 June), the European Commission published a draft set of environmental, social and governance (ESG) reporting rules.

The European Sustainability Reporting Standards (ESRS) will cover 50.000 EU companies and are meant to improve their disclosures on twelve standards.

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These include workforce-related issues such as collective bargaining and adequate pay, the impact on the environment, water, local communities and biodiversity transition plans.

"We intend to adopt the delegated act in July and have the legal act in place in the autumn," Sven Gentner, who is a top civil servant at the commission chiefly responsible for ESRS, told public and private stakeholders on Wednesday.

Since it is a delegated act, it is not subject to parliamentary approval. Instead, it goes through public consultation with civil society organisations and businesses, who now have until 7 July to weigh in on the details, spot problems and suggest possible tweaks and changes.

One of the key battlegrounds will be the level of flexibility allowed to businesses. NGOs and investor groups have warned that the commission has backtracked on ambition too much.

Many of the reporting requirements, including those for climate, biodiversity and workplace standards that were mandatory in a previous version of the rules, have been made voluntary. This means a company can decide whether a standard applies to them.

"What we have done is move those disclosures from 'you shall disclose' to 'you may disclose'," said commission policy officer for non-financial reporting Tom Dodd, adding that topics like biodiversity reporting are made voluntary because they are "so complex."

Additionally, the commission has extended the so-called phase-ins, allowing businesses one to three years to omit to provide information after applying the standards, with added flexibility for the 30.000 companies with less than 750 employees.

There needs to be "flexibility, in particular for smaller companies in the beginning," said Gentner. "Many told us it is challenging, and it is important that businesses can cope with the requirements."


"We acknowledge the challenges preparers will face when complying with the ESRS," said Alexandra Palinska, executive director of Eurosif, an investor group representing a diverse group of asset managers and institutional investors.

"However," she added "the EU Commission should not prioritise reducing reporting requirements at the expense of the public interest and other stakeholders, including investors and financial institutions in dire need of sustainability information to comply with their own regulatory requirements."

But "voluntary" does not mean a company is "entirely free" to decide whether a standard applies to them," said Dodd when explaining the decision to move away from mandatory reporting. "That is categorically not the case. Company assessments must be audited."

These audits will be done by private accounting firms such as KPMG and Deloitte. But Pierre Garrault, a policy adviser at Eurosif, told EUobserver that the "application of voluntary assessments for almost every ESRS disclosure would put a lot of weight on external auditors to look at the process of the company assessments."

"Additionally, voluntary disclosures when a topic is considered non-material could allow companies to omit entire parts of their sustainability reporting," he said.


The broader "context in which we made these changes," said Gentner, was a commitment made in March by commission president Ursula Von Der Leyen to reduce reporting requirements on businesses by 25 percent to boost competitiveness in the face of the US and Chinese clean tech competition.

"Watering down the ESRS will be counter-productive for the EU's competitiveness in the long run," Jurei Yada, who is a programme lead for sustainable finance at the global think tank E3G told EUobserver.

"What we really need is comparable information and not more fragmentation. Investors and businesses need coherence across the sustainable finance framework to better plan for and invest in the economy of tomorrow."

The delegated act will apply from 1 January 2024.


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