Remarks on the European Sustainability Reporting Standards Transparency about sustainability risks and impacts lies at the heart of this generation’s mission to shift the necessary trillions of finance toward urgently needed climate and sustainability transformations. One central instrument to achieve transparency about sustainability risks and impacts is the Corporate Sustainability Reporting Directive (CSRD). Its effectiveness however hinges entirely on the quality of the European Sustainability Reporting Standards (ESRS). This is where the Directive’s objectives of mandatory disclosure and its important double materiality concept will need to be translated into explicit, meaningful and effective disclosure requirements. We welcome the standards’ combination of cross-cutting, sector agnostic and sector specific standards. Together, these standards have the potential to reduce the economically costly and inefficient information asymmetries around sustainability performance through a combination of comprehensive and targeted disclosures. As all standards will be based on a double materiality concept1, they can add substantial value over and above existing capital market-oriented standards2, which exclude critical sustainability related risks, opportunities and impacts. The experience and corresponding scientific literature is crystal clear about the enhanced performance and effectiveness of sustainability reporting in reducing information asymmetries in financial markets.3 The CSRD will only deliver mandatory sustainability reporting effectively, if the mandatory nature of reporting is consistently implemented at the level of the ESRS and ultimately, the corresponding delegated acts, which the work of EFRAG aims to provide substantial input to. In recognition of the far-reaching implications and the great potential of the ESRS, we thoroughly analysed the standards to be able to support the work of EFRAG (and the Commission services) by providing science-based feedback and concrete suggestions for their further development. Our recommendations are based on (i) our team’s deep and long-term work with and expertise in sustainability reporting (and its regulation), from a policy, usability and academic perspective expanding well beyond policy and market practice in the EU, and on (ii) expert workshops and coworking sessions that we specifically designed to gather input from experts in the area of disclosure, relevant EU regulatory processes, climate, biodiversity, forestry, agriculture, supply chain data, circular economy and further critical sustainability issues (please refer to the Appendix I for a process description and further details on the expert consultations). Regarding our feedback on topical standards, we focus on ecosystem conversion, in particular deforestation, as a major threat for biodiversity and climate, and hence ultimately, human
As defined in the CSRD (Art. 19a (1)). Such as the Sustainability Accounting Standards Board (SASB) standards, which were used, for example, in the development of the drafts of the International Sustainability Standards Board (ISSB) standards 3 Cho, S. Y. et al. (2013), Corporate social responsibility performance and information asymmetry. Journal of Accounting and Public Policy, 32(1), 71-83; Fuhrmann, S. et al. (2017), The contents of assurance statements for sustainability reports and information asymmetry. Accounting and Business Research, 47(4), 369- 400; Krüger, P. (2015), Climate change and firm valuation: Evidence from a quasi-natural experiment. Swiss Finance Institute Research Paper; Schiemann, F., & Sakhel, A. (2019), Carbon disclosure, contextual factors, and information asymmetry: The case of physical risk reporting. European Accounting Review, 28(4), 791-818. 1 2
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