Reporting Standards: Striking the Delicate Balance Between Ambition and Realism
As I reflect on the developments of reporting standards, I can’t help but recognize the significance of the European Commission’s stride in the realm of sustainability reporting by issuing the Delegated Act on European Sustainability Reporting Standards (ESRS). This act, developed within the framework of the Corporate Sustainability Reporting Directive (CSRD), aimed to enhance transparency in sustainability reporting practices among European companies. However, this milestone was not reached without its fair share of controversies and criticisms, prompting important discussions regarding the equilibrium between the lofty ambition to promote sustainability and the practical realism of implementing these standards.
My engagement with the CSRD has been intensive and purposeful. The reached agreement can be considered a significant triumph for the EPP Group, as it materializes our commitment to balance the rigor of sustainability with pragmatic business realities.
We have advocated fervently against overburdening European companies with excessive bureaucracy.
A notable achievement in this regard is the decision that sustainability and financial reports will not require separate audits. This approach is poised to significantly ease the financial burdens faced by businesses. I consider this relief being especially crucial in these challenging times, characterized by the global pandemic, an ongoing energy crisis, and heightened geopolitical tensions.
In our efforts within the EPP Group, we have vigorously defended against proposals that would have expanded reporting requirements to encompass all small and medium-sized enterprises (SMEs). Our successful negotiation has led to an agreement that confines these obligations primarily to listed SMEs, with a provision allowing them to opt out until 2028.
I firmly believe that while reporting standards are instrumental in ensuring fair competition and access to finance for businesses, they must also be realistic in terms of timeframes and content.
Most crucially, these standards should offer tangible benefits to every company that adopts them for measurement and reporting. It is with this conviction that we advocated for an additional two-year grace period, providing businesses with ample time to adjust to the new legislation. The rationale for this last point can be observed in Romania, my Member State, where companies are facing substantial changes in sustainability reporting, with compliance being a challenging and time-consuming endeavour. Data from Romania’s Ministry of Public Finance and consultancy firms reveal that only a small fraction of the 700 companies which would be required to report on sustainability have already implemented this measure. Hence, the novelty that this Directive is bringing is evident. The CSRD implementation in Romania will roll out gradually, starting in 2025 for companies already reporting under the Non-Financial Reporting Directive (NFRD). In 2026, other large undertakings will also need to disclose sustainability information. As a result, the additional two years for implementation offer a vital window for companies to comprehend, prepare for, and fully integrate these new reporting requirements into their operations.
On the other hand, companies already publishing sustainability information by using international standards and those proactively addressing the issue will find compliance easier. While the CSRD doesn’t mandate sanctions for non-compliance, Member States can introduce them. Romania’s current stance is against sanctions in implementing acts, following the directive’s text. However, to promote compliance, the CSRD introduces auditing of sustainability information in annual reports, holding administrators accountable. In these circumstances, I believe that success depends on the availability of trained personnel.
When considering the feedback on the ESRS, I acknowledge the concerns raised by influential investor associations, environmental NGOs, and notable think tanks. A primary issue they have highlighted is the question of whether the Act provides sufficiently reliable and comparable sustainability data. There’s a prevailing scepticism suggesting that the current standards might not be stringent enough. This perceived leniency could potentially allow companies to underestimate or underreport their environmental impacts. I am acutely aware of the dangers this poses, particularly the risk of “greenwashing” – where companies might misrepresent themselves as more environmentally conscious than they are in reality. Such practices are not only misleading to investors but also threaten to erode the trust placed in Europe’s commitment to fostering economies that are both environmentally responsible and socially equitable. However, I also recognize the potential danger of overburdening companies with overly stringent requirements too quickly.
Rapid imposition of strict standards could lead to significant compliance costs, operational disruptions, and possibly stifle innovation by diverting resources away from more impactful environmental initiatives.
Therefore, it’s crucial that these standards evolve and increase incrementally, allowing companies to adapt effectively and responsibly while minimizing counterproductive outcomes.
To conclude, developing non-financial reporting standards is a significant effort, requiring a balance between the overarching goal of sustainability and the practicalities of implementation. These standards need to be achievable in terms of time and content, ensuring they are not overly burdensome for individuals and companies. Furthermore, it’s crucial that these standards offer tangible benefits to every entity involved in measuring and reporting. This approach will ensure that the standards not only foster transparency and accountability but also add value to the businesses that adopt them.
