CSR Europe's Markets Leadership Hub Members Rally EU Commissioner McGuinness to Make the ESRS Work for Business
On 7th July, members of CSR Europe’s Markets Leadership Hub shared with Mairead McGuinness, European Commissioner for Financial Stability, Financial Services and the Capital Markets Union, a set of key recommendations to make the European Sustainability Standards work for business.
In the letter, Hub’s members Enel, Forética, Leonardo, Solvay, TITAN Cement, UnipolSai, technically supported by Knowledge Partners FTI Consulting and World Benchmarking Alliance, highlighted the need for:
The letter has already received the endorsement of other CSR Europe members namely: Impronta Etica, SES Satellites, GRACE - Empresas Responsáveis, Responsible Business Forum/Forum Odpowiedzialnego Biznesu.
1. HARMONISATION AND COHERENCE
First of all, the group supports the constant effort of the EU regulators to enhance the harmonisation across EU policies and the collaboration with other standard setters, such as ISSB and SEC, towards interoperability across sustainability standards worldwide. At the same time, they also observe that a stronger strive towards harmonisation and coherence could be undertaken.
Concerning the first element of alignment within the EU legislative framework, further clarity may be promoted regarding ambition, expectations, and timelines. On this point, the group appreciates the drafting conventions and formal presentation changes aimed at clarifying the content of the ESRS and improving its user-friendly character and readability.
Moving to the international ecosystem, there should be ongoing consideration as to how the development of further global frameworks will interact with the ESRS and how these global standards can support non-EU companies complying with CSRD, due to the CSRD’s extraterritorial impacts. Additionally, the members of CSR Europe’s Leadership Hub would like to reiterate that the final goal for such exchange and progressive alignment should remain the promotion of mutual recognition among such standards.
2. SUPPORT IN THE DEPLOYMENT AND CAPACITY-BUILDING
The members of CSR Europe’s Leadership Hub strongly advocate for sufficient support to companies in the deployment of EU regulations, as well as for adequate interpretation actions. For transparency-related regulations to be effective, businesses need to be accompanied in the implementation of the various requirements. For example, a toolbox with resources and educational supports, would represent a welcomed initiative, also in light to overcome the evident sustainability skills shortage. In this regard, we applaud the intention of the European Commission to establish an interpretation mechanism, as a subsequent step to the publication of implementation guidelines by EFRAG, to provide clear, practical, tailored, and timely guidance, especially in relation to the newest sustainability reporting requirements introduced by the ESRS, among which the financial and non-financial connection and the conducting of the double materiality analysis. This interpretation mechanism would benefit particularly the wide number of first-time prepares targeted by the CSRD and ESRS, who might lack experience and knowledge of these requirements. Concerning this point, we suggest ensuring sufficient and systemic engagement of such body with business representatives, to make sure that practical experiences are taken into consideration and guidance needs are addressed.
Moreover, national contact points may be established for more in-depth local support as, in addition to intelligence and support in understanding, they could provide nationwide perceived vulnerabilities and macro trends information on ESG-related risks and targets, especially useful for suppliers. In this regard, it is considered fundamental to unlock adequate funding and training opportunities for the establishment of local collaborative platforms for SMEs’ capacity-building activities. Preparers are at risk of bearing high costs due to unprepared and unaware partners in the EU and third countries. This should build on the efforts already made in the framework of the CSDDD's accompanying measures (art. 18) as amended by the European Parliament, according to which the Commission should actively participate to the capacity building of companies.
3. MONITORING AND ENFORCEMENT
Another challenging area identified by the group concerning the roll-out of the CSRD and the ESRS is potentially related to the monitoring of compliance by the European Commission and other extra-governmental bodies. Periodic reporting of overall implementation levels by the Commission should be introduced, as well as yearly checks on the qualification and expertise of the national bodies, since at the current stage national public authorities seem to not have the required capacity. In this context, a key role will also be played by accounting enforcers and governmental bodies, which will have to rapidly develop sustainability skills and receive adequate resources to guarantee reliable results and ensure unbiased perspectives on sustainability disclosure. It would also be very important for public authorities to adopt a constructive approach to enforcement, providing guidance while also building their own expertise. In this regard, the adoption of a “best effort perspective” by governments while assessing the use of the ESRS by companies would be welcome. This would safeguard companies whenever they are not able to fully comply with certain disclosure requirements simply because the data was not available. Indeed, this could support companies’ preparation for the subsequent years, which will be characterised by more stringent supervision.
4. RATIONALISATION
The members of the group recognise the rationalisation efforts, as well as the attempt to take actions towards a simpler framework to address companies’ challenges in complying with ESRS requirements. Yet, they also invite the European Commission to make sure the introduced modifications inform and remain functional to the EU commitments to deliver on the EU’s Green Deal and the Sustainable Finance Agenda’s ambitions.
In principle, we welcome the introduction of the phasing-in mechanism for particularly complex and not yet mature topics (e.g. financial effects of environmental topics), as it may provide greater flexibility for preparers and supports the establishment of mainstreamed reporting practices. Indeed, the time delay will allow the development and consolidation of solid calculation methodologies and enable companies to design appropriate business processes and procedures for reporting on such topics. At the same time, the group would like to highlight that the inclusion of a phase-in approach to entire sets of standards, regardless of them being considered material topics by companies, might bear the risk of disincentivising companies’ efforts, as well as create a mismatch with other EU existing requirements and ambitions, among which those introduced by the Sustainable Finance Disclosure Regulation (SFDR) and the CSDDD.
Additionally, the progressive publication of FAQs and the maintenance of a constant regulatory dialogue with business representatives may represent suitable tools to gather feedback about the feasibility and effective implementability of the obligations. Indeed, the great amount of information requested to first-time preparers will likely lead to an initial low level of quality and reliability, which will be gradually improved by a continuous engagement with companies.
5. FINANCIAL AND NON-FINANCIAL RECONCILIATION
Finally, concerning financial and non-financial harmonisation, this group identifies great challenges in monetising certain sustainability impacts, as well as in reconciling the two different disclosures. It is believed that the European Commission has taken this point into consideration, by phasing-in disclosure on financial effects of non-climate related themes. In this regard, qualitative criteria and more extensive and clearer guidance from the EU Commission would be appreciated, to support financial reporting officers and statutory auditors in understanding how to calculate the monetary and financial impacts of sustainability factors. Indeed, the monetisation of ESG impact is often discussed, however, structures and methodologies in this regard are still limited.
WHAT HAPPENS NEXT?
The Markets Leadership Hub will continue the discussion on capacity building, with a specific focus on training SMEs and the value chain in sustainability reporting.
WANT TO LEARN MORE?
About the Markets Leadership Hub
Contact Ilaria Orsi, CSR Europe Project Manager