In its draft ESRS published on June 9, 2023, the Commission proposed that all thematic standards, disclosure requirements, and data points be subject to materiality testing; only ESRS 2 would be mandatory. When EFRAG submitted the draft standards to the Commission in November 2022, it proposed that reporting of the entire ESRS E1 standard on climate change and all disclosure requirements and data points in other standards that are necessary for companies to provide financial institutions with the data they need should also be mandatory. This data is necessary, among other things, to calculate the so-called PAI (Principle Adverse Impacts) indicators required by the SFDR.
The Commission justified the change by arguing that it should lead to a significant reduction in the burden on businesses and ensure the proportionate application of standards to companies of different sizes. Organizations representing companies have repeated these arguments like a mantra throughout the past year. Unfortunately, the effect of the changes will be exactly the opposite: reporting costs for companies will increase, and the standards will be applied disproportionately, placing a greater burden on smaller companies.
The lack of mandatory reporting of data necessary for financial institutions to prepare their disclosures will result in the latter continuing to send questionnaires to companies requesting specific information. After all, one of the main arguments for standardizing ESG reporting was to stem the flood of surveys inundating companies. What is more, the number and volume of questionnaires will increase, as the technical standard for the SFDR will soon be supplemented with a number of new mandatory and optional indicators.
If, despite this, financial institutions are unable to collect the required data, they will purchase it from professional providers. These providers, in turn, will expect companies to provide them with data and will charge them for it. After all, the option of transferring your own data to CDP or Ecovadis is not free, and the fees charged by large organizations that provide data to thousands of investment funds will certainly be higher. It will be difficult for a listed company to decide not to pay, which will likely cause it to fall off the radar of most serious investment firms. Companies will face a dilemma: either they fill out a few questionnaires from the most important data intermediaries and pay them, or they fill out dozens of different surveys sent by individual financial institutions (which also involves a cost, but in terms of labor). It was supposed to be easier, but it will be more difficult and more expensive. At the same time, it will turn out that the ESAP system (a repository of all company reports with easily accessible data), which is planned to be launched in the coming years, is unnecessary, since it will not contain the data necessary for the recipients of the reports.
The materiality test will be the first thing that any auditor examining a sustainability report will focus on. Auditors seek security, so they will want to ensure that they are not accused of issuing a positive opinion on a report that lacks any material information. As a result, they will pressure companies to report as much information and data as possible, thereby killing two birds with one stone: increasing their own security and charging higher fees for auditing a more voluminous report. It will be difficult for companies to resist this pressure, because while it is relatively easy to prove that a particular sustainability issue is important to a company, it is difficult to prove the opposite.
Smaller companies usually learn from larger ones. This may be a rule that usually works in life, but it will have disastrous consequences for the proportionality of the application of standards by smaller large companies, i.e., the vast majority of those covered by the CSRD. The market does not yet have any experience in reporting in accordance with ESRS. In the first years of the new regulations, auditors verifying the results of materiality studies will therefore resort to examples that they can safely use, and most often these will be reliable reports prepared by large international corporations, usually in accordance with GRI standards. Auditors will use these reports as benchmarks, pressuring smaller companies starting to report to consider the same ESG issues disclosed in these best reports as material. If I am a local construction company operating in Poland, why should I model myself on such experienced giants as Strabag, Skanska, Vinci, Ferrovial, or Acciona when conducting my first materiality assessment? And it is precisely these companies' reports that the auditor will compare my first sustainability report for 2024 or 2025 to, prompting me to consider the same issues as material. Proportionality in the application of standards and smaller companies will be the main victims of the Commission's decision.
I hope I am wrong about the issues described above. I really want to be wrong about this. Unfortunately, I have predicted the non-obvious, delayed effects of the introduction of regulations (e.g., the sequence of implementation of Taxonomy criteria in various industries) several times in the past, so I am afraid that these predictions may turn out to be correct. It is ironic that the problems for companies will be caused by a decision taken by the Commission precisely as a result of their, the companies', strenuous efforts.
Polish
English