The overall reception of the simplified ESRS is positive or very positive, if we look at all the responses provided in the public consultation. In particular, the simplification of the language and structure of the documents, the removal of repetitions, the addition of missing definitions, and the overall shortening of the standards are appreciated. However, there are still a few issues on which opinions are divided.
One of them is the anticipated financial impact of risks and opportunities. Already in the spring and summer, this was such a controversial issue that two options were proposed in the drafts submitted for consultation:
- Option 1: The company is to present quantified expected financial effects, i.e., calculate how risks and opportunities will affect its future financial results, balance sheet, and cash flows (with certain concessions in situations where this would be impossible to calculate), or
- Option 2: The company is to present the anticipated financial effects in qualitative terms, i.e., simply describe how significant they will be, without having to disclose specific amounts.
Here, we still see a very clear division. Most companies do not want to calculate and disclose quantified expected financial effects, while representatives of financial institutions strongly demand this. Not doing this would also mean that ESRSs would no longer be consistent with international standards (IFRS S1 and S2), which would expose companies to double reporting. Discussions are still ongoing, but at this stage it looks like some form of compromise, which I have proposed, may be adopted. It would involve quantifying the effects only after a three-year transition period, during which EFRAG would develop a methodology for calculating them, consult on it, and prepare tools to support companies in performing the calculations.
Emphasizing that ESRSs are a system based on fair presentation seems to be a foregone conclusion. The role of company-specific disclosures, which are becoming increasingly important in the absence of sector-specific standards, will also be highlighted.
One of the most hotly debated issues is the context of location in environmental disclosures. Here, too, there is a clear difference of opinion between companies (who do not want it) and other stakeholders (who demand it). In the case of standards E1 (with the exception of assets exposed to physical risks) and E5, references to location are not particularly relevant. However, when it comes to reporting on pollution, water, biodiversity, and ecosystems, individual disclosures do not make much sense if they do not relate to specific locations. Banks and investment funds want to know whether a company is exposed to risk, for example, in connection with exceeding pollution emission standards at a specific production plant. Interestingly, the issue of difficulty in obtaining data does not arise at all in discussions on this topic. Companies have this data because they report it to the relevant authorities anyway, so it is only a matter of concern about disclosing it to the general public.
The strongest resistance from companies is to the G1 standard measure concerning late payments to small and medium-sized suppliers. Interesting, isn't it? And this is one of the few issues explicitly mentioned in the CSRD, so I find it hard to imagine that it would be omitted from the ESRS.
We still have a few weeks of very intense work and heated discussions ahead of us at the Sustainability Reporting TEG and Board level. However, most of the discussions are heading in the right direction, at least for now. There is a good chance that the ESRS will be published at the turn of November and December, which could provide an excellent basis for reporting not only by the largest companies that will be required to do so, but also by many companies that will want to report voluntarily, transparently showing their sustainable transformation to financial institutions, business partners, and customers 😊
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