For those interested in the process of simplifying standards, I recommend reading the document published by EFRAG on Friday, June 20, 2025. report summarizing the current status of work. It presents the stages to date in considerable detail. It also gives an indication of the most serious points of discussion, although these are presented in a very balanced manner in the report.
In this newsletter, I would like to give you a little more insight into the work process and the main discussions. The SR TEG meeting in Brussels, scheduled for June 17 and 18, did not allow for all topics to be discussed, as it turned out that on the first day we only got through about two-thirds of ESRS 1. This standard requires the most attention, as it sets out the main principles of the entire reporting system. The following topics were the most controversial:
- Gross or net approach to assessing material impacts. Can, and if so, to what extent, can or should mitigation and remediation measures that have been or are planned in relation to individual impacts be taken into account when assessing materiality?
- Exemptions, simplifications, and transitional provisions. There are so many of them in the draft that, at my request and that of the representative of the European Central Bank, a special additional meeting of the SR TEG was convened for June 26, at which we will conduct a comprehensive assessment of this issue. Certain combinations of provisions in the draft would allow a company acting in bad faith to report no data on anything for an unlimited period of time. Surely that is not the point of reporting standards.
- New provisions in ESRS derived directly from IFRS standards. Achieving the highest possible level of compliance with international standards is a goal we strive for, but there are some caveats. Firstly, it is impossible to achieve full compliance because ESRS is based on double materiality, while IFRS is based only on financial materiality, so compliance can only be one-sided (a report compliant with ESRS may automatically be compliant with IFRS, but the reverse will not be true). Secondly, IFRS standards contain a number of terms that do not appear in ESRS and are not even defined. Pasting provisions containing them into ESRS will not only not make anyone's life easier, but will actually complicate it (remember „biological and technical materials” undefined in ESRS?). It is not possible to rely on practice, as there are no published reports compliant with IFRS yet, and the standards themselves are only just being adopted for use in various jurisdictions.
None of the above issues have been resolved yet. However, we have reached a broad consensus on how to deal with voluntary data points. We have tried to remove them from the standards as much as possible.
On the second day of the meeting in Brussels and during additional online meetings on June 19 and 20, we discussed individual thematic standards, in particular the metrics contained therein. We agreed that the approach to policies, actions, and targets (PAT) should be harmonized. They will be reported on the basis of the revised minimum disclosure requirements (MDR), without the need to combine them with additional specifications contained in the thematic standards.
However, my greatest concern in the entire process of simplifying standards is the pace of work. As I have said many times before, it is too fast. This may result in errors that no one will notice. It is impossible to comment in detail on several documents, each several dozen pages long, if we are given only one day to do so. It is even more impossible to analyze in detail the effects that a seemingly minor change in the content of a specific provision may have. And there are many such changes, some at the request of individual SR Board or SR TEG members, others coming from comments submitted during the consultation process by various individuals and organizations.
An example of such a change with adverse effects was the draft provision included in ESRS E5-5. Resources drained from the organization. Today, as part of this measure, we must disclose, among other things, the percentage of recyclable materials in products and packaging. So there are two separate figures, one for products and one for packaging. This makes sense, because if I sell refrigerators, I will disclose separately what proportion (by weight) of the materials contained in the refrigerator itself are recyclable, as well as what proportion of its packaging (cardboard and other materials) is recyclable. The draft proposes not to repeat the phrase „products and packaging” in many places in ESRS E5, but to leave only „products” and add a provision in the guidelines that a product should be understood as a product together with its packaging. Such a provision would mean that I would have to add the weight of the refrigerator and its packaging and provide a single indicator, which would not really tell us anything. While for a refrigerator and its packaging, the indicator would mainly refer to the refrigerator itself (it weighs much more than the cardboard box in which it is packaged), what about food products? After all, in the case of food products, calculating the recyclable material index for the products themselves is pointless; only the packaging is important, because the product itself is consumed. The new provision would require, for example, chips and the cardboard and plastic tube in which they are packaged to be weighed and the resulting value to be reported, which would make no sense. I discovered this particular error in the draft just before midnight on the day the deadline for comments passed. How many similar errors and their unintended consequences did neither I nor other SR TEG members manage to detect?
Good quality standards require time, which experts can devote to analyzing projects and discussing changes. There is no way to speed this up, nor can the many years of experience of practitioners from various institutions who participate in the work be replaced by artificial intelligence or the hiring of more trainees. Quality cannot be decreed by a political decision of the European Commission, Parliament, or Council. A very important element of the process of changing standards will be public consultations, which, unfortunately, under pressure from the Commission, have been limited to approximately 40-45 days, falling during the holiday period. Repeating my appeal from last week, I encourage you to actively participate in these consultations 😊
P.S. Due to the start of the summer holidays, the next newsletter is scheduled for July 14.
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