r3.0 Public Comment on European Sustainability Reporting Standards Delegated Act
By Bill Baue & Ralph Thurm
The first word in the term Public Consultation Process makes it clear whose interests are ostensibly served by the process — those of the public. It seems as if the powers that be behind the European Sustainability Reporting Standards (ESRS) have failed to metabolize this fact, as the Delegated Act codifying the Standards amounted almost exclusively to dilutions of the previous draft of the Standards, concessions that benefit businesses (who lobbied hard for this result) and harm the very public that the Standards — and the Public Consultation Process — are intended to serve.
After more than two decades of engaging in these kinds of sham Public Consultation Processes, we at r3.0 are now at the end of our rope. We have spent countless hours of good faith engagement in what can only be understood as a bad faith process. Strong evidence is marshaled forth by many civil society organizations in support of robust, authentic sustainability standards, only to be summarily ignored by the standard setters, who contort logic in their rationalizations for undermining sustainability and the public interest.
This time is no different. We at r3.0 summoned the strength to draft and submit one final Public Comment before throwing in the towel. At this point, even engaging in these Public Consultation Processes only serves to legitimize what are actually illegitimate processes.
We made this clear in our Public Comment Letter to the International “Sustainability” Standards Board (I?SB):
“We also preface this Public Comment Letter with an explicit acknowledgement of the utter futility of this Consultation exercise, as historical precedent — combined with toothless Due Process — essentially ensures that you will ignore Public Comments that identify the fatal flaws in your ideological reasoning and predetermined outcomes. We submit this Public Comment purely for the record, without an ounce of faith that the strength of its case will hold sway. Of course, we wish it were otherwise, and would be glad to eat our words if you prove us wrong.”
Unsurprisingly, we did not need to eat our words, as we were proven right by the release of the I?SB Standards, which undermine the achievement of sustainability, and the Basis for Conclusions, which ignore our input.
So: here we go again, one last time…
We at r3.0 — Redesign for Resilience & Regeneration — want to start off our response (which later includes a number constructive critiques) by welcoming several aspects of the European Sustainability Reporting Standards (ESRS), as we outline below.
Double Materiality = Necessary but Not Sufficient
While we applaud ESRS for integrating what is now called “double materiality” — a new name for the long-existing concept of assessing both inside-out impacts and outside-in impacts first introduced in the third generation (G3) of Global Reporting Initiative (GRI) Sustainability Reporting Guidelines (2006) — we hasten to add that even double-materiality falls short of what’s needed for an authentic approach to materiality for sustainability standards, as such sustainability materiality would need to integrate reference to sustainability thresholds in ecological, social, and economic systems — sometimes also referred to as the carrying capacities of the capitals, ie vital capital resources that rightsholders rely on for their wellbeing. The United Nations Research Institute for Social Development (UNRISD) provides in-depth guidance on how to apply “Context-Based Materiality” (so named after the GRI “Sustainability Context” Principle) that accounts for the carrying capacities of capitals, i.e. sustainability thresholds. See McElroy 2019 Making Materiality Determinations: A Context-Based Approach United Nations Research Institute for Social Development.
Thresholds & Allocations — from Ad Hoc to Comprehensive
While we also applaud ESRS for integrating the concept of thresholds & allocations in several of the Environmental Standards, here again, we hasten to add that such integration of thresholds & allocations into the ESRS standards is currently ad hoc, applied only to a subset of the Standards, when logic would demand that sustainability thresholds be applied across the board, starting at the highest level in ESRS1 and ESRS2, and cascading through ALL other E and S and G Standards. We do not see how any standard that labels itself a “sustainability” standard can possibly escape this common sense conclusion of integrating thresholds (and allocations where necessary) to the entire set of Standards, starting from the top-most Standard and cascading through ALL Standards.
Retention of ALL Proposed Standards
We appreciate that none of the proposed Standards have been deleted or postponed.
Now, on to our critical feedback, offered in the spirit of constructive input.
From Mandatory to Voluntary
While we appreciate that ESRS1 and ESRS2 remain mandatory, we find it highly problematic that the majority of the Standards — 5 Environmental, 4 Social , and 1 Governance — have been shifted from mandatory to voluntary. This differential treatment of ESRS 1 & 2 on the one hand, and all the ESRS E, S, and G Standards on the other hand, does not hold water intellectually — indeed, the stakeholder who experience companies E and S and G impacts do not have the luxury of such discretion — the impacts do not disappear when companies opt against disclosing them.
This points to the fatal flaw in the EU’s “proportionality” argument, which essentially seeks to relieve companies of the burden of disclosure without commensurately relieving stakeholders of the burden of companies’ impacts. It is true that companies bear proportionate responsibility for their proportionate impacts on shared resources (such as the climate regulation system or freshwater or knowledge), the act of disclosure is binary, and cannot be divvied up like pieces of a pie: a company either discloses its impacts, or it does not. When companies create impacts on resources that stakeholders and rightsholders rely on for their wellbeing, this generates a duty or obligation to manage said impacts sustainably, and disclose information on its impact management so stakeholders and rightsholders can assess the sustainability of said impacts. The only way for companies to relieve themselves of these duties and obligations to manage and disclose these impacts, is to divorce their business models from these impacts.
What makes this shift from mandatory to voluntary (based on the faulty notion of proportionality) particularly problematic is that the only mandatory Standards, ESRS1 and ESRS 2, are devoid of the very thresholds that define sustainability. Accordingly, this proposal essentially transforms ESRS from a normative sustainability standard to an incrementalist ESG standard.
We therefore urge the reversal of this illogical provision in the Delegated Act, and call for the reinstatement of mandatory disclosure of ALL Standards.
Voluntary Materiality
The same critique applies to the shift to voluntary materiality, whereby companies may (not shall) explain why something is not material. If an impact is not material, the burden is on the company to demonstrate this lack of materiality. The GRI G3 Guidelines introduced a far superior approach, the comply or explain regime that allowed companies to omit issues that it could demonstrate were immaterial. Essentially, this would amount to demonstrating that the company’s business model does not intersect with a resource that stakeholders or rightsholders rely on for their wellbeing, such that the company bears no duty or obligation regarding that resource, hence that impact is immaterial.
The danger of the approach proposed in the Delegated Act is that companies could have a material impact on resources, but legally opt against disclosing that impact, leaving impacted stakeholders and rightsholders in the dark as they experience the impacts.
“Voluntary disclosure of compatibility of business model and strategy with “planetary boundaries” (ESRS 4)”
The most pressing sustainability issues are those associated with tipping point thresholds, or non-linear phase shifts from an existing state, into a new, unpredictable, state — particularly adverse, catastrophic, or existentially compromising states. The Stockholm Resilience Centre’s Planetary Boundaries (PBs) framework connects many of the PB thresholds, such as climate change, directly to adverse tipping points, tipping elements, and even tipping cascades. Accordingly, the PBs are the last sustainability issue that should be made voluntary to disclose, precisely because transgression of the PBs represents the greatest sustainability risk — or more precisely, existential risk.
We should hasten to add that tipping dynamics also apply not only to ecological systems, but also to social systems, and accordingly, disclosure of compatibility of business models and strategies with “social foundations” should also be mandatory.
A similar logic applies to biodiversity transition plans, which the Delegated Act makes voluntary. ESRS logically requires companies to disclose their climate transition plans, but fails to apply the same logic of requiring companies to disclose their biodiversity transition plans. This difference would seem to rest on the logic that a climate transition is necessary, but a biodiversity transition is not, which is utterly irrational in the midst of the 6th Mass Extinction event that humanity is currently navigating.
Intransparent Stakeholder Dialogue Process
The Delegated Act relieves companies of the responsibility for disclosing their stakeholder dialogue process, thus making it essentially impossible for stakeholders and rightsholders to assess the sufficiency of companies’ stakeholder engagement.
Modification on Information Disaggregation
The United Nations Sustainable Development Performance Indicators note that companies can hide unsustainable performance through lack of “granularity.” Enabling companies to opt out of information disaggregation by specific sites essentially invites companies to conceal unsustainable performance.
Modification on Diversity
Similarly, the Delegated Act’s modification on diversity, requiring disclosure only of non-discrimination policies, does not make logical sense. In addition to company commitment to diversity supporting basic human rights, greater diversity is strongly correlated to stronger business performance, so systematically depriving stakeholders of diversity information runs contrary to common sense.
Interoperability with I?SB
While we appreciate the value of alignment between reporting standards for creating consistent disclosure demands for companies and comparability of data for stakeholders, we retain healthy skepticism over the focus on “interoperability” with the International Sustainability Standards Board (ISSB, or I?SB as we prefer due to the Board’s coopting of the term sustainability), precisely because I?SB is not a sustainability standard. The most concerning aspect is that ESRS is shifting itself closer to the I?SB definition of financial materiality. Speaking about the recently released I?SB Standards, Mirova CEO Philippe Zaouati said,
“the logic of simple financial materiality is mortifying. Applied not just to the climate, but to all other environmental and social issues in the future, it means the absence of corporate responsibility for the general interest. Fortunately, the reporting standards that the European Commission is about to adopt are based on a double materiality, albeit somewhat watered-down.”
Accordingly, ESRS shifting itself to accommodate I?SB represents exactly the wrong directionality, as it shifts ESRS away from sustainability performance disclosure. Any and all interoperability dynamics should shift I?SB to ESRS (and beyond, as Zaouati suggests), not the other way around.
Data Consistency for Investors
The Delegated Act undermines the consistency of data for investors, according to a Eurosif press release:
“Eurosif is very concerned with the European Commission’s latest changes to the draft standards, which mark a significant setback in ambition compared to the final recommendations published by EFRAG in November 2022. […] The proposed draft Delegated Act renders all ESRS standards, disclosure requirements and data points subject to a materiality assessment. Combined with the added flexibility authorised by the Commission for these assessments, this would effectively allow companies to leave out entire parts of their sustainability disclosures. If adopted as such, this draft Delegated Act risks undermining the effectiveness of the CSRD as well as the implementation and coherence of the EU sustainable finance framework. Investors and other financial market participants need reliable and comparable sustainability-related corporate disclosures to make informed investment decisions. […] Furthermore, making some of the most essential climate disclosures — including indicators on GHG emissions, climate targets and transition plans — subject to a materiality assessment is inconsistent with the EU Commission’s commitment to deliver on the objectives of the European Green Deal and EU Climate law.’
See also here from Responsible Investor.
We conclude our Public Comment Letter by imploring that ESRS both retain its current level commitment to sustainability thresholds & allocations (i.e., ESRS should not decrease this commitment), and more importantly, increase its commitment to sustainability thresholds & allocations by applying them to ALL Standards, starting with ESRS 1 and ESRS 2 (where they are currently nowhere to be found), and cascading to ALL Environmental Standards (not just those currently covered, which inexplicably excludes climate change!), as well as ALL Social and Governance Standards, where they are currently totally absent.
Until ESRS applies sustainability thresholds & allocations comprehensively across the board, it cannot be considered an authentic sustainability standard.
Sincerely,
Bill Baue and Ralph Thurm
r3.0
Note: Our submission can also be found on the EU Website here.
