Standardization is simplification

During a press conference following an informal summit of European Union member state leaders in Budapest on November 11, 2024. European Commission President Ursula von der Leyen announced the submission of a draft omnibus regulation that may concern changes to, among others, the CSRD Directive, the CSDDD Directive, and the Taxonomy Regulation (a recording of the conference is here, (the section on the omnibus bill begins at around the 28-minute mark). Von der Leyen clearly emphasized that the scope of the aforementioned regulations is appropriate and will not be subject to change; the only modifications may concern the form in which companies are expected to provide information. The aim of the changes is to reduce the administrative burden associated with reporting.

And that is basically all that is currently known for certain about the future omnibus regulation. In recent weeks, there have been many theories about the details of the planned changes. The truth is, however, that these theories are not based on facts. Until last week, European Commission representatives refused to comment, as the new EC had not yet taken office. This week, I will have the opportunity to learn more during the EFRAG Sustainability Reporting TEG meeting, and I hope to share the latest information with you next week.

In connection with the planned work on the omnibus regulation, some business associations are calling for the ESRS sectoral standards to be postponed or limited in scope. However, this is a very bad idea. The lack of sectoral standards today makes reporting difficult for companies and increases costs. Therefore, if we want to reduce the administrative burden, we need to implement sectoral ESRSs as soon as possible. There are at least three reasons for this:

1. Sector standards will drastically reduce the effort involved in conducting materiality assessments. Each standard will identify the sustainability issues that are most relevant to companies in a given industry, eliminating the need to research, evaluate, and prove (to oneself, the auditor, or the report's recipients) why these specific issues are material to our company. Until sector standards are in place, materiality assessments will remain a difficult and complicated task.
2. Sector standards will contain precise disclosure requirements relating to issues relevant to companies in a given industry. Today, in the absence of sector-specific standards, these issues are still relevant, but companies are burdened with the need to create entity-specific disclosures. In the case of standardized disclosure metrics, tools are being developed to support their calculation. If I have to deal with entity-specific disclosures, I either calculate the metrics „by hand” or order a dedicated solution, the creation, development, and implementation of which is always much more expensive than purchasing a ready-made tool.
3. Auditing measures included in entity-specific disclosures will always be more expensive and more troublesome than certifying disclosures prepared on the basis of standardized disclosure requirements. In the case of entity-specific disclosures, the auditor must first determine whether the methodology of the disclosure is well designed (i.e., whether it captures the essence of the specific issue) and then whether the disclosure was made on the basis of good source data that was calculated correctly. In the case of standardized disclosures, the auditor does not spend time analyzing the methodology—it is a given, derived from the standard.

The implementation of ESRS sector standards simplifies the entire system. Today, this system is incomplete and therefore complicated. Can we imagine financial reporting based solely on IAS 1? Presentation of financial statementsWhen preparing the report, we would come to, for example, point 54 g), which requires the value of inventories to be presented in the statement of financial position. And how are we supposed to calculate it if we don't have IAS 2? SuppliesMost IASs and IFRSs deepen and standardize financial reporting, the foundations of which are laid down in the first standard. The same applies to ESRSs. Sector standards will simplify the reporting of all those issues that are already included in the first set of ESRSs and about which we ask ourselves questions such as „How do we calculate this in our company? What specifically do I have to disclose in this situation, given that this is my business model and I operate in this particular industry?”

We have several weeks ahead of us in which we will be exposed to various rumors about the omnibus regulation. It is worth approaching them calmly. The Commission is working at its own pace, and I do not expect a draft regulation before late spring 2025. Instead of focusing on rumors, it is worth using the time to work on reports for 2024 and to prepare reports for 2025. And most importantly, to focus on the real transformation of business models so that they are resilient, sustainable, and competitive 😊