The European Central Bank published its staff opinion on the revised European Sustainability Reporting Standards (ESRS), warning that several of the measures put in place to ease sustainability reporting requirements for companies under the EU’s Omnibus process will “significantly reduce transparency for investors and other market participants.

Noting the Omnibus’ process’ removal of approximately 90% of companies from the scope of the Corporate Sustainability Reporting Directive (CSRD), the ECB staff also suggested using the revised ESRS as the basis for voluntary sustainability reporting, in place of the current voluntary sustainability reporting standard for SMEs (VSME), which it said was “developed for a very different purpose.”

The publication follows the release in early December by EFRAG (the European Financial Reporting Advisory Group) of its finalized proposed revision of the ESRS, aimed at significantly simplifying and reducing sustainability reporting requirements for companies under the EU’s CSRD regulation. The simplification of the ESRS formed a key part of the European Commission’s Omnibus I initiative aimed at significantly reducing the sustainability reporting and regulatory burden on companies.

The revised ESRS introduced a series of significant changes to the standards, including reducing mandatory datapoints by 61%, and eliminating all voluntary disclosures, increasing flexibility for companies to use estimates and reducing pressure for direct data collection from suppliers, as well as providing expanded reliefs and phase-in flexibilities for companies.

While welcoming several of the simplifications to ease the implementation of the new reporting requirements and add clarity to the standards, the ECB staff highlighted several areas for improvement “to ensure that the revision strikes the right balance between the need for simplification and the need to preserve the EU policy objectives of the CSRD,” with key focus areas including the permanent relief measures, phase-ins and exemptions from disclosure requirements, interoperability with international standards such as the IFRS Foundation’s ISSB standards, and concerns around the revised ESRS’ appropriateness for disclosures by banks and financial firms.

One of the key concerns raised by the ECB staff related to the “long list of permanent reliefs and phase-in provisions applicable to many disclosure requirements, as well as certain explicit and implicit exemptions for the financial sector,” which the publication warned “will significantly reduce transparency for investors and other market participants, as well as negatively affecting the overall availability and comparability of financial risk-relevant information necessary for adequate risk management and financial stability purposes.”

The ECB staff noted for example that the revised ESRS significantly reduced the climate change and biodiversity-related topical standards “which are particularly important for assessing and managing physical and transition risks,” which when coupled with relief measures and phase-ins “can significantly weaken the availability, comparability, and decision-usefulness of the topical disclosures considered most relevant by the ECB.”

The staff issued a series of recommendations, including introducing a time limit to reliefs related to the disclosure of metrics and to lack of data quality, in order to “avoid creating permanent blind spots for users and hindering appropriate risk management,” and to reduce the six-year phase-in for reporting quantitative information about anticipated financial effects (AFEs).

The ECB staff publication also noted that while the revised ESRS improved alignment with international standards in some areas, it noted that some of the new reliefs introduced in the simplification process “go beyond IFRS and hence constitute a loss of interoperability with IFRS,” warning that the changes “could weaken the comparability of EU corporate data, reduce investor confidence and hamper the ability of EU firms to attract sustainable finance.”

Notably, the ECB staff opinion follows the release of a study by EFRAG following the publication of the revised ESRS that found that a majority investors were similarly concerned about the simplification process’ impact on data quality, citing concerns including reduced comparability, loss of critical climate-related data, and less information due to the use of relief for metrics.

An additional area of concern raised the ECB staff related to the appropriateness of the revised ESRS for disclosures by banks, noting in particular that “some of the changes made to the ESRS lead to a curtailing of the value chain dimension of the disclosures, and this could be detrimental to the quality of disclosures by banks.”

In addition to the highlighted areas for improvement, the ECB staff publication also noted the increased role for voluntary sustainability reporting standards, in light of the significant reduction in the number of companies covered by the CSRD regulation as a result of the Omnibus process, noting that the existing VSME standards were intended for non-listed SMEs with fewer than 250 employees, “but they will now potentially be applied by a very large and diverse population of more than 40,000 companies, including large and listed companies with global reach and a complex risk profile.”

To address the needs of the large companies that will now report on a voluntary basis, the document suggests the possibility of using the revised ESRS for voluntary reporting, noting its superior capability to “flexibly cater for a wide range of companies in terms of size and complexity thanks to the materiality principle which lies at their core,” relative to the VSME.

In a post announcing the release of the staff opinion, Irene Heemskerk, Head of the Climate Change Centre at the ECB said:

“Sustainability information is not a nice to have. It provides important insights in the risks and resilience of corporates, as well investment opportunities and how corporates are preparing for the future.”

Click here to access the ECB staff opinion.