The European Commission is revising the European Sustainability Reporting Standards (ESRS) through the so-called “Omnibus proposals. The aim is to reduce the reporting burden on companies. As an ESG specialist, Empact responded to EFRAG’s public consultation on this revision.
Our key message: the revision is going in the wrong direction
In our view, the proposed simplifications under Omnibus 1 are a step in the wrong direction. While they reduce the administrative burden, they simultaneously undermine the strategic value of ESG reporting.
Back for a moment to the reasons for the CSRD and the ESRS. Europe, like the rest of the world, needs to become more sustainable. Pollution is increasing in many countries, as are inequalities between people, companies and regions. The idea behind the CSRD is to require companies to be transparent about sustainability performance (sustainability matters). So this is just about providing transparency, not an obligation to actually do more sustainable er fairer business. The expectation then is that if a company performs poorly, the market (and stakeholders) will eventually correct the company. See the EU Commission’s 2021 explanation of the CSRD. However, it may take a long time for companies to recognize the huge opportunities embedded in this powerful EFRAG framework.
At Empact, we are also seeing a number of other positive developments:
- The CSRD ensures that sustainability is part of executive discussions;
- The CSRD provides reason and guidance to truly deal strategically with sustainability now;
- “What gets measured, gets done” does not always hold true, but there is a good chance that the CSRD and the ESRS will provide just that. Voluntarily, but with a direct line to potential reputational damage.
We also see some negative trends with companies and their CSRD commitment. Many companies view CSRD as pure compliance. All kinds of questionnaires are sent out within supply chains, auditors literally start checking data points themselves with the ESRS in their hand, and there are big questions about the definition of some ESG data points. Thus, something that is fundamentally correct becomes a real nightmare for companies. The numbers and the explanation behind the numbers are only used for the annual report and that’s it. As one client put it, “So the CSRD is the new GDPR from Europe.”
In doing so, a number of companies are completely missing the opportunity to look at their operations from a different perspective. We previously wrote an article about the value of ESG for companies. In short, very good that we are thinking through together how we can make CSRD and ESRS relevant for companies. The challenge is precisely to transform ESG reporting from compliance to strategic opportunity, and not to become EU Privacy Law 2.0.
Our five recommendations for the review
1. Make the dual materiality analysis more practical
The current approach to materiality analysis (DMA) feels too artificial for many organizations. It does not sufficiently align with business processes and therefore does not function as a strategic tool that reflects both inside-out and outside-in perspectives.
Our advice is to start from the company’s core activities: what does the organization do, where do these activities touch on ESG issues, and what are the identified risks and opportunities? The DMA methodology should be revised on this basis. Then also immediately abolish the I of IROs. It creates confusion because in addition, the term “Impact” is also used to assess ESG impact that comes from the IROs.
Also, stop distinguishing between Impact and Financial materiality. In practice, the artificial distinction between “impact” and “financial materiality” does not always make sense. Make impacts financially relevant and simplify the division into risks and opportunities.
2. Reduce the narrative reporting burden
The current “shall disclose” data points in the ESRS are too detailed and prescriptive. We advocate reducing the narrative requirements to one data point per Disclosure Requirement (DR) and reducing the total number of DRs.
We see in practice that companies from the first reporting wave are already integrating their reports into readable sections that cover governance, strategy, policy, actions, targets and measures. This shows that too strict a separation of these elements does not fit business practice.
3. Separate ESRS from other EU regulations.
ESG data points arising from other EU regulations such as SFDR, the EU taxonomy or Pillar 3 (for financial institutions) should be optional within the ESRS. The standards should focus on ESG information relevant to the business model, not on compliance with other regulations.
Who is responsible for providing the appropriate financial ESG data – the company or the financial institution using that data? If it is the company’s responsibility, they may decide to include this information. If not, it is up to the financial institution how to handle it.
Yes, this may mean extra work for larger companies (wave 1), but the positive effect is clear: for 90% of companies, it significantly reduces the reporting burden.
4. Simplify the structure of standards.
The relationship between the overarching standards (ESRS 1 and 2) and the thematic standards (E1-E5, S1-S4 and G1) is confusing. Governance, business model and materiality results are now mandatory for each material theme and are covered by ESRS 2, while they are also reflected in the thematic standards.
Simplifying ESRS 2 and giving more weight to the thematic standards will create a more logical whole that better reflects the business. Governance, strategy and materiality should paint an overall picture, while the detailed information can remain in the thematic standards. This change immediately reduces the number of data points.
5. Interoperability with other sustainability frameworks
The EU sets the global standard for ESG. We must realize that most international frameworks are limited on their content. For example, IFRS S1 and S2 (with TNFD and TCFD) is much smaller than the ESRS, so that the information of IFRS S1 and to a lesser extent S2, in fact adds little value. As a result, there is a risk that IFRS S1 and 2 will only be used for annual reporting. A missed opportunity.
Although GRI has a strong reputation, the level of ESG information is relatively superficial. It is not set up as a business-oriented framework, but rather as a way to showcase ESG performance. That said, GRI is a good starting point for companies new to ESG reporting. It should be integrated into the ESRS, but we should dare to go beyond the limitations of this framework.
From compliance to strategy
The broader context of these recommendations is that true simplification should better align ESG reporting with common business practices. By focusing on material risks and opportunities, linking ESG to key financial metrics, and reducing unnecessary narrative requirements, we can elevate ESG from compliance to strategy.
This would help companies truly use sustainability reporting as a tool to improve performance – not just as an administrative burden or checklist. Only then will we make the ESRS and ESG in general a real driver of sustainable transformation.
This article is based on our official feedback to EFRAG on the revision of ESRS.