CSRD Delay a Necessary Slowdown in EU Rule Making or a Threat to Data Improvement?

The European Union’s proposal to delay full implementation of its cornerstone corporate ESG reporting code is being viewed in the sector as a sensible reassessment as the bloc faces accusations of regulatory overreach in its sustainability programme.

Nevertheless, some observers fear the delay will also slow the improvement in ESG data quality that is expected to result from the application of the Corporate Sustainability Reporting Directive (CSRD).

EU officials said the delay would give companies in the oil and gas, mining, road transport, food, cars, agriculture, energy production and textiles industries more time to get their broader CSRD reporting processes in place. It also gives a two-year reprieve to overseas companies, including an estimated 3,000 American firms, that trade in the region and would also be subject to the CSRD’s rules.

Further, it would provide the European Financial Reporting Advisory Group (EFRAG), which writes the CSRD’s reporting frameworks, more time to develop standards that are better tailored to each industry. Whatever the outcome of the proposal, all companies within scope of the CSRD must still comply with the general European Sustainability Reporting Standards (ESRS), which came into force this year as part of the CSRD.

The proposal is a sound one, argued Michelle Auger, former sustainability strategy director at Wells Fargo bank.

“From the preparers’ perspective, the challenge here is to ensure that their data collection and reporting infrastructure is fit for purpose,” Auger told ESG Insight. “While it would have been useful to be able to rely on sector-specific standards, relying first on the 12 ESRS allows preparers to set their foundations – there is an element of responsibility required of preparers to identify what should be material within their own sector and industry.”

EU Pause

The proposal represents a rare moment of pause in the EU’s passage of ESG regulations over the past few years. The breakneck speed with which rules such as the Green Taxonomy and Sustainable Finance Disclosure Regulation (SFDR) have been implemented has worried some investors and market participants.

Global corporate and financial law firm Norton Rose Fulbright warned that the slew of regulations passed in such quick succession could generate legal challenges. The prospect of protracted legal entanglements appears to be on the minds of rules framers in the US too. Securities and Exchange Commission (SEC) chair Gary Gensler said last year that the regulator’s oft-criticised leisureliness in drawing ESG rules was partly due to the need to avoid overreach.

EU leader, Commission president Ursula von der Leyen, hinted at a deceleration of rule-making in the autumn when she said that the bloc should reduce by a quarter the regulatory burden put on small and medium-sized companies (SMEs). The CSRD would apply also to larger non-listed firms.

Industry Worries

Simmering unease among some parts of the financial sector over the pace of implementation of the EU’s green regulations were also highlighted last week when groups representing investment managers and bankers urged a slowdown.

The European Fund and Asset Management Association (EFAMA), along with other financial industry groups including the European Banking Federation (EBF), called on the EU to scrap a series of proposed changes to the SFDR, which was introduce in 2021.

They industry groups said that “making changes to standards that have just been implemented is still premature”. They added that a “period of stability is necessary to avoid confusion for financial market participants”. Further, they argued that there was a lack of “infrastructure between these different sets” of green regulations.

Data Concern

Nevertheless, financial institutions and other consumers of ESG data have signalled disquiet over the delay. CSRD is expected to pull ESG data from more than 50,000 non-financial companies, improving the volume and quality of datasets, including those from smaller companies that make up most supply chain operators.

The paucity of sustainability metrics on the supply sector has been likened to an information blackhole that threatens companies’ ability to comply with new Scope 3 emissions reporting obligations.

“On the one hand, we think it is a wise decision to await further standards to make sure the data will be consistent and comparable,” said Bernard Schut, business director at BIQH Financial Data Services. “On the other hand, a delay means that investors and stakeholders may continue to face challenges in assessing and comparing the sustainability performance of companies based on their ESG disclosures.”

CSRD introduces for the first time in a piece of major ESG legislation the concept of double materiality, in which reporting companies must consider the impacts of their activities on the environment and society, and vice versa. This would require greater efforts by companies to find the most appropriate data.

Consequently, it has caused disquiet among firms who fear this will add to the resource burden of regulatory compliance. It has also been a sticking point in the US where the SEC is under pressure to implement only light touch climate reporting regulations.

Yann Bloch, head of product and pre-sales, Americas, at financial technology firm NeoXam, is nevertheless adamant that the proposal will be disruptive.

“This proposed delay to the Corporate Sustainable Reporting Directive could create a degree of worry in the institutional asset management community,” Bloch told ESG Insight. “These rules are meant to increase the level of sustainability information that is available, which would certainly make money managers’ ESG analysis and reporting easier. As it stands, while the availability of this kind of data is increasing, it can’t be accused of being equal to other types of financial information.”