Sustainability reporting rules for European companies proposed by the European Commission Friday are raising investor concerns.
The draft standards, which could be finalized as early as July, "mark a significant setback in ambition," Eurosif - The European Sustainable Investment Forum, said in a statement.
The proposed European Sustainability Reporting Standards (ESRS) were issued under the EU's Corporate Sustainability Reporting Directive that requires large companies and companies listed in Europe to regularly report on their social and environmental risks and impacts, and how those affect companies financially.
Recommendations made by the European Financial Reporting Advisory Group last November were "key to solving the corporate sustainability data gaps as well as to improving the quality, reliability and comparability of these disclosures," Eurosif said.
Those recommendations were eased in the new proposal that allows companies to first assess the materiality of reporting. That, plus more flexibility for what and when to report, "would effectively allow companies to leave out entire parts of their sustainability disclosures," Eurosif said.
The group warned that the draft rules could also undermine the EU's sustainable finance framework, including proposed rules on ESG ratings and ESG-related credit ratings expected this week.
Aleksandra Palinska, executive director of Eurosif, in the statement recognized that the new rules will be challenging for companies, but if finalized as proposed, "will hinder the capacity of investors to make informed sustainable investment decisions and risks jeopardising EU commitments to deliver on the EU's Green Deal and Climate Law ambitions."
One particular concern for investors and others is the proposal allowing some climate disclosures on emissions, climate targets and transition plans to be voluntary, "which could result in problematic data availability and comparability issues," said Jurei Yada, program leader for EU sustainable finance with climate change think tank E3G. "Leaving climate reporting to the discretion of companies' own materiality assessment raises the risk of data inconsistencies, messier reporting process and poor climate transparency."
The comment period on the draft rules ends July 7, with final adoption scheduled for midyear. The rules will be phased in for larger EU and EU-listed companies starting in January, and all companies would need to comply by Jan. 1, 2028.