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26th Feb 2024

Investors baffled by watering-down of EU sustainable reporting plan

  • The EU Commission has backtracked on its initial corporate reporting ambitions (Photo: Johannes Plenio)
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European investors are sounding the alarm over sustainable reporting rules, which they say have been drastically weakened by the European Commission.

In June, the commission published a draft set of environmental, social and governance (ESG) reporting rules that will cover 50,000 EU companies and are meant to improve their disclosures on twelve standards — which also cover workforce-related issues such as collective bargaining and adequate pay.

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Since then civil society organisations, investors and businesses had time to respond to the proposal, which will be presented in its final form in August. But the response has not been kind.

Many reporting requirements that were mandatory in an earlier draft have been made voluntary. These include climate, biodiversity and transition plan reporting.

This means companies can decide for themselves whether a requirement is "material" to them, which means they decide whether their activities are impactful to nature.

But investors fear this could reduce the "consistency" of the reporting, Johan Barnard, the head of international public affairs at APG, one of the world's largest pension investors, told EUobserver.

If "one bike manufacturer decides biodiversity is non-material to them, and another does report on it," he said, "financial institutions would have to rely on their own estimates."

"Well, lo and behold, you don't get the same results," he said.

Counter move

One of the problems facing investors may be that the EU's sustainable reporting drive is actually working.

Investors and asset managers are already bound by the 2022 Sustainable Finance Disclosure Regulation (SFDR), which means they have to report on biodiversity and environmental impact of their investments even if companies do not.

The Dutch Federation of Pension Funds and other influential groups, including the European Fund and Asset Management Association (Efama), the United Nations Environment Programme Finance Initiative (UNEP FI), as well as 93 asset managers, have called on the commission to "uphold the integrity" of the standards.

"We simply can't invest sustainably if we don't know how sustainable a company is," Ger Jaarsma, chairman of the Dutch Pension Federation, told EUobserver.

"I would like to move to a system where we can simply rely on company reporting," said Barnard.

Is it asking too much?

When asked, the commission sounded convinced that it was necessary to reduce the reporting burden.

There needs to be "flexibility, in particular for smaller companies in the beginning," Sven Gentner, a top civil servant at the commission chiefly responsible for European Sustainability Reporting Standards (ESRS), told EUobserver in June. "Many told us it is challenging, and it is important that businesses can cope with the requirements."

But corporate lobbying to weaken the rules has been intense, especially from German companies, including BMW, chemical giant BASF, as detailed by Philippe Diaz who is a member of EFRAG, an official advisory body of the commission.

And not all agree with commission thinking: "It is true that reporting on natural impacts requires effort, but the burden will come down significantly once it's integrated into the normal reporting cycle," Jaarsma told EUobserver.

"I think the commission has been overly cautious about wanting to reduce the reporting burden," Mirjam Wolfrum, who is a director at the CDP, a non-profit running the world's largest environmental disclosure system, told EUobserver.

Many companies already report on transition plans and biodiversity and environmental impact, which Wolfrum says are often seen as beneficial.

"You know, 69 percent of the companies that do sustainability reporting tell us it improves their reputation, 54 percent say it gives them a competitive advantage and 78 percent say it helps them identify business opportunities," she said.

According to Wolfrum biodiversity and emissions reporting should be mandatory, including scope three emissions, which are the emissions produced by consumers using company products (like burning gasoline in cars).

"If scope three emissions are not mandatory, we are flying blind," she said. "There would be no way to track progress against the global carbon budget."

The commission now plans to publish the final proposal at the end of August.

Since the European Sustainability Reporting Standards (ESRS) is a delegated act, it cannot be amended by the EU Council or the European Parliament once the commission puts it forward.

It can only be approved as it is or outright rejected by a majority in parliament or a qualified majority in the EU Council.

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