The three European Supervisory Authorities responsible for supervision of the capital market (ESMA), banks (EBA) and insurance undertakings (EIOPA), as well as the central bank (ECB), expressed their views on the drafts of the simplified ESRS. I encourage you to read these opinions (ESMA's opinion, EBA Opinion, EIOPA opinion, ECB opinion), but if you don't have time for that, I summarize the key findings below.
The institutions pointed to a number of positive elements of the simplified standards:
- They are simpler to apply and easier to understand
- There has been further alignment between the ESRS and international standards (IFRS S1 and S2)
- The role of the materiality assessment has been strengthened; the assessment itself has been simplified and streamlined, while at the same time the principle of materiality of information has gained greater significance, which will allow reports to be more closely based on material information.
At the same time, all the institutions are fairly consistent as regards the problems arising from the simplified ESRS:
- The reliefs and exemptions are excessive and unlimited in time, which will result in reduced comparability of reports and data gaps
- In particular, the undue cost or effort exemption and the possibility of reporting metrics relating only to part of a company’s operational boundary will lead to data gaps
- The lack of priority for direct data (the hierarchy of data sources has been removed) will result in lower quality of the information disclosed in reports
- Some of the deleted data points were simple for companies to report and at the same time very important for financial institutions (e.g. the exposure of specific assets of a company to physical climate-related risks).
As a consequence of these problems, the risk of greenwashing increases. Reporting companies will be exposed to it in the first instance, and indirectly also financial institutions using the data contained in reports. The fact that the EU regulator will cease to require companies to report certain matters does not mean that those matters cease to be material. It simply means that the cost of obtaining specific data will increase, as it will be shifted to investors, banks and insurers. And they, as can be expected, will pass that cost back on to companies.
The institutions also have a number of recommendations for the Commission as to what should be done to ensure that the simplified ESRS function better. First and foremost, they propose that the reliefs and simplifications should be time-limited. The Commission should also issue, as soon as possible, an assurance standard for sustainability reporting. In addition, the institutions recommend that the standards should contain safeguards to protect the quality of the information presented in reports. The ECB and ESMA also address the use of the simplified ESRS in voluntary reporting. In their view, the Commission should indicate that in such a case (a voluntary report) the standards should be applied in full, in order to avoid cherry-picking, i.e. selective disclosure of individual information and claims that a report is compliant with the standards. Furthermore, the ECB expressly recommends that the Commission should make the ESRS the recommended standard for voluntary reporting by large undertakings and groups, as VSME is simply not suitable for that purpose.
I consider the opinions of the four European institutions to be balanced and rational. They have looked at the simplified ESRS in a comprehensive manner, analysing the benefits and costs from a systemic perspective. After all, it is not only about how much an individual company saves by applying simpler standards, but whether the cost of financing for all companies will decrease or increase.
At the same time, I see an increasing number of opinions and ideas as to how the emergence of the simplified ESRS affects the reporting cycle currently under way. Some statutory auditors have decided to “turn a blind eye” to the non-disclosure of certain information which is required under the standards currently in force, but which will not be included in the simplified ones. Well, for the company this is certainly a relief, and in any event it will not be the company that will answer questions from the Polish Agency for Audit Oversight.
Sometimes, however, the eagerness to make use of the new standards as quickly as possible goes too far. I am observing one assurance engagement in which the auditor is persuading the company to change the method of consolidating greenhouse gas emissions. In doing so, he is relying not even on the version of the standards issued by EFRAG at the end of 2025, but on the draft from July last year. That has gone a bit too far. Today, the only binding version of the standards is the one issued in the delegated regulation of July 2023. I understand that the new standards fascinate everyone professionally involved in reporting and assurance, but we should remember that these are still only drafts. They will become law only once they are adopted by the European Commission (and in fact only after their publication in the Official Journal of the European Union). Let us read them, comment on them and prepare for their application, but for reports for 2025 let us apply the standards that are in force as law 😊
P.S. A week ago I announced the launch in MATERIALITY ACADEMY of our latest course on the simplified ESRS. The course is now available and anyone interested may enrol at the following address: Simplified ESRS Standards.
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