Nummer: 171

Usability in the ESG reporting agenda

Danish companies’ welcome EU efforts to make reliable and comparable ESG (Environmental, Social and Governance) data even more of a competitive parameter. Harmonized EU rules are preferable to different national rules in each Member State, both for establishing a level playing field, for reducing the combined burdens on companies who operate across the Single Market, and for the overall goal of the European Green Deal: To make the European economy more sustainable. 

However, the sustainability regulation at the European level (i.e., Corporate Sustainability Reporting Directive, Corporate Sustainability Due Diligence directive and the EU Taxonomy and Sustainable Finance Disclosure Regulation) is extensive and complex. Its overall usability should be improved by introducing proportional measures. Where in some areas the requirements will most likely not present a burden to companies, data requirements in other areas can be too  burdensome for companies, compared to the value they create for investors and society. Others are practically impossible to comply with. 

It is important that the proportional measures continue to support the established infrastructure from requirements to the financial sector in SFDR, Taxonomy, Pillar 3 etc and requirements to the non-financial undertakings in ESRS established on the draft standards from EFRAG. There requirements and the established infrastructures with the SFDR shall be retained in any case.  

Furthermore, the preliminary assessment of the application of the new ESG rules show that there is considerable uncertainty about the interpretation and application of the rules on the ground across companies and sectors. 

Dato:
13. september 2023
Type af anbefaling:
Tidlig interessevaretagelse i EU
Tema:
Tidlig interessevaretagelse
Ansvarlig ministerium:
Erhvervsministeriet
Status på anbefaling:
Følges

The affected EU-Regulation 

Sustainable Finance Disclosure Regulation, Taxonomy Regulation, Corporate Sustainability Reporting Directive, European Sustainability Reporting Standards, Corporate Sustainability Due Diligence Directive, EU Green Bonds, EU Green Claims, Regulation on prohibiting products made with forced labour on the Union market, Whistle-blower Directive. 
 

The affected Danish regulation 

Danish Financial Statements Act and the executive orders for financial statements for financial undertakings.
 

Affected businesses

In Denmark, most large companies have reported on ESG for a number of years due to the Danish implementation of the Non-Financial Reporting Directive (NFRD). This is due to the fact that Denmark chose to expand the scope of NFRD to roughly 2.300 entities. The new CSRD reporting requirements significantly expand the reporting obligations for roughly 50.000 European reporting entities who are impacted by both the CSRD and the Taxonomy Regulation at the same time. Furthermore, the new reporting requirements require reporting on the value chain, bringing a significant proportion of the SMEs into scope of ESG-reporting.

 

Reasoning behind the recommendation 

Challenges linked to the application of the new ESG rules are expected to become even greater in 2025 when the scope of application extends to all large companies most of which have more than 250 employees, as the CSRD enters into force. The EU Commission recognizes the challenges associated with the use (usability) of the new ESG rules. For instance, the EU Commission has asked the export group "Platform on Sustainable Finance" to prepare recommendations on how application and reporting in relation to the taxonomy can be simplified.

The same usability issues apply to the reporting standards under CSRD, where EFRAG have been tasked to provide guidance on the European Sustainability Reporting Standards.

 

Expected consequences for industry and commerce

CSRD is estimated to result in additional compliance costs for Danish companies in the range of 1 billion euro.

 

Certain considerations

The EU Commission should work for the following usability improvements in the European ESG reporting framework: 

  • Introduce proportional measures across the sustainable regulation without impairing the established infrastructure between requirements to the financial sector and requirements in ESRS.
     
  • Clear guidance for assessment of materiality e.g., air pollutants, waste, use of water etc. to provide certainty for companies on which data they need to make available – including to de-scope areas/standards.
     
  • Align definitions of sustainable activities in the sustainable finance agenda with other global standards, e.g., IFRS with the EU as the driver to achieve higher standards globally. 
     
  • More focused/narrower reporting on the value chains in those areas where requirements are too burdensome so that only the most/obviously significant matters based on materiality assessment are to be reported. 
     
  • As it is a large undertaking to report on the companies’ own activities as well as the value chain, companies should be allowed time to focus on the conditions of the core of the company first, and after having policies and practices in place, they can start reporting on the value chain. This exercise should be limited in time, concluded as fast as possible and not lead to companies transferring any sustainability issues to their value chains. 
     
  • Sector specific standards should only provide additional application guidance according to the requirements of the sector agnostic standards. Additional sector-specific disclosure requirements should be introduced as soon as possible and no later than 5-7 years, when there is a better basis for developing standards based on experience from implementation and work with the sector-agnostic standards 
     
  • Proportionality, materiality and operationality is crucial to secure valuable sustainability reporting and the overall objective: To ensure sustainable transition.

This proposal will focus on concrete measures to simplify the application of the EU's new ESG rules, in order to both increase the competitiveness for European companies and accelerate sustainable development.
 

A key element would be to introduce proportional measures across the sustainability regulation. Furthermore, EU reporting initiatives need to be seen holistically across DG’s and units.
 

We suggest introducing measures to simplify the application of the EU's new ESG rules. Proportionality and usability should be the guiding principles across sustainability regulation. Where possible, definitions of sustainable activities in the sustainable finance agenda should – as the ESRS standards – be aligned with other global standards, e.g., IFRS, while clear guidance should be provided on assessment of materiality e.g., air pollutants, waste, use of water etc. to provide certainty for companies on which data they need to make available – including de-scoping areas/standards, where appropriate.
 

Furthermore, EU reporting initiatives need to be seen holistically across all Directorate-Generals and Units in the European Commission and the established infrastructure to the requirements to financial sector must be retained. To that end, proportionality, materiality and operationality is crucial to secure valuable sustainability reporting and the overall objective. This entails more focused/narrower reporting on the value chains, ensuring that only the most significant matters based on materiality assessment are to be reported. Also, sector specific standards should only provide additional application guidance according to the requirements of the sector agnostic standards. Finally, additional sector-specific disclosure requirements should be introduced as soon as possible and no later than 5-7 years, when there is a better basis for developing standards based on experience from implementation and work with the sector-agnostic standards.
 

It is important to underline that the efforts to make ESG rules usable for companies, should focus on creating value for consumers, investors and for society as a whole.  

Regeringen tiltræder EU- og Regelforums anbefaling. Regeringen vil arbejde for de europæiske bæredygtighedsstandarder er proportionale, og at rapporteringskravene skaber værdi for brugerne af bæredygtighedsinformation. Regeringen arbejder for, at bæredygtighedsstandarderne efter CSRD er implementerbare og nemme for virksomhederne at håndtere, samt at en indførelse af kommende rapporteringskrav sker trinvis. Særligt vil regeringen arbejde for at muliggøre en digital og mere automatisk deling af bæredygtighedsdata i EU. Hertil at virksomheder kan håndtere og rapportere standardiserede bæredygtighedsdata digitalt og mere automatisk i deres daglige forretningsprocesser, digitale systemer og dele data via en fælles åben it-infrastruktur, anvendt på tværs af relevante reguleringer på tværs af EU og uden for EU. Regeringen arbejder yderligere for, at rapporteringskravene er forenelige med behovene for information fra de finansielle markedsdeltagere i forhold til de rapporteringskrav, som de er pålagt efter anden finansiel EU-lovgivning.