(Bloomberg) -- Tens of thousands of companies operating in Europe face new requirements to report their operations’ ESG impacts as the European Union pushes ahead with a plan to address climate change and environmental degradation through increased transparency and market pressure.
The European Commission said Monday that it adopted a checklist that companies must use to disclose the effects of climate change and other environmental and social factors on their businesses, and also report their impact in places they operate. The new European Sustainability Reporting Standards are the mechanism for implementing the EU’s Corporate Sustainability Reporting Directive, the first initiative globally to take a so-called double materiality approach.
The adoption “marks the dawn of a new age of environmental responsibility in business and financial planning,” said Mirjam Wolfrum, EU policy engagement director at CDP, a nonprofit that runs one of the world’s biggest voluntary disclosure systems, in a statement. “With approximately 50,000 companies now obligated to report on sustainability, these standards are a critical stepping-stone toward making high quality environmental reporting a business norm.”
The decision comes just weeks after asset managers and investors launched a coordinated — and failed — appeal to the commission to toughen its proposal. The standards apply to both non-financial and financial companies, and are out of step with the stricter reporting requirements for financial firms, they said. Specifically, companies have been given too much latitude to decide what to disclose in an attempt to cut reporting burdens.
The disappointment was palpable. “We regret that the investors’ calls to retain key ESG indicators as mandatory have not been heard,” said Aleksandra Palinska, executive director of the European Sustainable Investment Forum (Eurosif), in a statement. “Investors need specific corporate disclosures to allocate capital” in line with EU environmental objectives and to meet finance industry reporting requirements.
Amid a summer of heat waves, wildfires and droughts, there was concern about the commission’s decision to let companies decide what climate information is material to report. The EU buckled under industry lobbying, according to the independent climate think tank E3G.
“Under pressure, the commission has backtracked on mandatory disclosure of climate-related information,” Tsvetelina Kuzmanova, senior policy adviser at E3G. said in a statement. “This perceived flexibility on disclosure requirements will come at the cost of better data availability and comparability – seriously hindering the creation of a precise, reliable sustainability reporting framework.”
The commission said that while it cut back mandatory reporting, companies will have to conduct materiality assessments to identify what they should report.
Those assessments aren’t voluntary and they must also be audited by a third party. That means companies will have to provide “a detailed explanation” of why, for example, climate change isn’t relevant to its operations when it has “wide-ranging and systemic impacts across the economy.”
“The standards we have adopted today are ambitious and are an important tool underpinning the EU’s sustainable finance agenda,” Mairead McGuinness, the commissioner for financial services, said in a statement. Earlier in July she warned that excessively tough reporting rules could backfire and lead to a “significant pushback.”
Efforts in the US to introduce similar reporting requirements have met with a wall of opposition, mostly from Republicans. They are trying to block the Environmental Protection Agency from regulating pollution from power plants and vehicles, and GOP state attorney generals are calling in Wall Street money managers to report on their climate work.
Under the EU’s new reporting standards, companies will have to disclose whether they have climate transition plans and also report relevant social factors, including human rights violations, as part of the larger plan to highlight the investment risks and opportunities presented by ESG factors.
“The standards strike the right balance between limiting the burden on reporting companies while, at the same time, enabling companies to show the efforts they’re making to meet the Green Deal Agenda,” McGuinness said. That will ensure they’ll have access to financing.
The standards will be phased in. Large companies will be required to publish their first reports in 2025, based on 2024 data, while smaller companies will get more time. EU authorities also are scheduled to develop industry-specific disclosure requirements.
--With assistance from Lyubov Pronina.
(Updates to add comments from nonprofit organizations)
©2023 Bloomberg L.P.