KEY MESSAGES
Eurelectric, the European association representing the electricity industry, supports the aim of European Sustainability Reporting Standards (ESRS) to improve companies’ opportunities for reliable and comparable reporting of sustainability information to financial market participants. The European Sustainability Reporting Standards should aim at helping companies provide information that is proportionate, understandable, verifiable and comparable.
Eurelectric acknowledges that the Commission substantially adapted different aspects of the ESRS: Improved readability and implementation of reporting obligations. Revision of the materiality approach will allow companies to focus their reporting on issues relevant to the company and readers – such as investors – of these ESG data, also noting that the accuracy of the materiality assessment will be ensured through external auditing. Phasing-in of disclosure obligations will help organisations to focus on material topics first, allowing them to stretch their reporting over the following years.
However, we still see room for improvement on the following issues:
Comparability: Certain reporting obligations lack in precision and leave ample room for different ways of reporting. A high level of generality and vague guidelines for metrics should be noted. Tables, units e.g., are missing – contrary to what exists for GRI indicators. The comparability of the materiality assessment could also have been improved by providing references such as percentages of total assets, own funds, income figures or similar, in line with audit techniques for annual accounts. The reporting of e.g., GHG emissions leaves room for interpretation across companies, especially when data is forward-looking. Additional guidance should be taken from global standards already used by companies (e.g., ISSB and GRI).
Alignment with global standards: It is considered essential to ensure interoperability with other standards/frameworks at a global level, not only at a theoretical level but especially at a practical level, in view of the fact that many international groups will still be called upon to comply with the requirements of the European Sustainability Standards (ESRS) but also those developed by the ISSB, especially in view of the push by investors to adopt them. It is therefore extremely important that there is alignment between the requirements and practical tools (e.g., reconciliation tables) that can effectively support companies and, above all, avoid excessive reporting burdens for those who will have to report according to both standards.
The materiality assessments, including thresholds, used in other standards with a long track record (e.g., IFRS Accounting) should be considered more extensively in the development of the ESRS approach. The materiality approach utilised by the ISSB Standards is already applied globally when reporting based on IFRS Accounting Standards to meet the information needs of investors. It is thus well established and understood. Alternatively, if the financial materiality test used in ESRS expressly acknowledged a component that was defined as ‘investor materiality’ (aligned with the ISSB definition), it would more clearly explain the common components of the materiality assessment.
Clarification of key definitions: Some definitions in the ESRS are not sufficiently explained (e.g., “ESRS sectors”, “potential” as compared to “anticipated” financial effects). The definition of an undertaking’s workforce notably remains a source of confusion for reporting market participants. A broad definition of workers (“own workforce”) creates an issue of practical application; it should be restricted to employees only. The additional collection of data on non-employees is a complex process with significant limitations:
- Working time: the company has no influence on the time of work performed and the breaks implemented by non-employees.
- Absenteeism: paid sick leave is not provided by all B2B contractors.
- Non-employees are not affected by the outcomes of negotiations between social partners.
- B2B Contractors are not required to provide companies with data like gender, age, etc.
As a result, data on non-employees will be incomplete. An improvement of data collection on those issues will take time. If data on workforce were to be requested, the disclosure obligation should be subject to a phase-in period.
Consistency with EU law: When ESRS refer to other legislation, the European Commission needs to define the process for updating the ESRS as a result of changes to such regulation. ESRS need to be aligned with other ESG legislation, such as SFDR. Materiality assessments realised in accordance with ESRS should be recognised in SFDR. It is problematic for companies having completed their ESRS reporting to be met with inquiries from financial stakeholders who want data compliant with SFDR. It would be useful to have a reconciliation table between SFDR requirements and ESRS. This was already included in the April 2022 version (Appendix III – SFDR Principle Adverse Impacts Indicators in the ESRS) but would need to be updated. Notions in the text should also be aligned with those from other EU legislation (e.g., high climate impact sectors).
Disclosure of sensitive information: Disclosure obligations around governance and risk management remain very granular (e.g., ESRS 2 SBM3, Paragraph 48). It would have been ideal to have included, where relevant, wording indicating that these disclosures are without prejudice to the protection of business secrets and other commercially sensitive information (e.g., strategic plans) that goes beyond what external stakeholders can reasonably be expected to disclose.
Phasing-in of reporting: We welcome that the European Commission has resorted to a phase-in approach for the disclosure of financial impact effects of climate change risks and other environmental topics. However, even if some companies are already implementing methodologies for the disclosure of financial effects concerning sustainability aspects, there are no commonly used indicators that could also be used at international level, making the comparison between reporting entities difficult. We highly recommend the EC to work on guidelines to assess the financial effects of environmental issues. Such guidelines should be published in advance of the implementation of this requirement to allow companies to prepare appropriately.
Incorporation by reference: The current articulation of ESRS 1/9.1 (Incorporation by reference standard) does not allow for references to documents that are not subject to the same level of assurance as sustainability information, let alone the same digital requirements. Thus, it may not be possible to cross-reference the Management Report and other governance documents (e.g., the Corporate Governance Report and the Remuneration Report). This has a negative impact on the readability and causes an excessive reporting burden for companies that are forced to report the same information on different documents. Furthermore, we suggest introducing the possibility of cross-referencing for certain matters such as policies and similar static information in addition to the information contained in the management report. In conclusion, we agree that there should be easy access to such company policies, but this consideration can more appropriately be observed via a reference (e.g., link to a homepage).