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The European Sustainability Reporting Standards (ESRS) is set to come into force for approximately 50,000 companies in the EU on 1 January 2024. While companies have about a year left to make the necessary preparations in order to adapt their reporting processes to the ESRS requirements, final guidelines are still being ironed out by the European Financial Reporting Advisory Group (EFRAG). EFRAG is the expert panel appointed by the European Commission to provide technical advice on the development of disclosure standards.
Following the end of the public consultation period in August 2022, EFRAG has been deliberating on the concerns and suggestions raised by representatives from industry experts, reporting specialists, and sustainability practitioners. Among the concerns raised is a particular concept called the ‘rebuttable presumption’. This article discusses this concept in detail as we explore the implications of such an approach and the reasons it has polarised consultants with such force.
EFRAG has released 13 exposure drafts proposed for the ESRS. These drafts are the initial working drafts that will eventually form the full sustainability reporting standards that companies will be subject to under the Corporate Sustainability Reporting Directive (CSRD), the EU’s new law requiring companies to disclose management of ESG matters following a standardised framework, that is, ESRS.
The 13 exposure drafts cover the spectrum of environmental, social, and governance topics deemed material to most companies. ESRS 1 and ESRS 2 cover general requirements that are mandatory for all companies regardless of sector. This includes the reporting principles underlying the ESRS framework, including the process for determining materiality. Herein is where the instance of rebuttable presumption is raised. There are generally two ways to approach materiality:
The ESRS adopts the second approach, where general requirements of G1 and G2 exposure drafts outline a set of mandatory disclosures. However, it makes allowances for omissions under a rebuttable presumption, where companies can be excused for excluding certain disclosures if they can justify the omission based on immateriality.
In Article 55 of ESRS 1 General Provisions, the guidelines specify that
“all mandatory disclosure requirements established by ESRS shall be presumed to be material and, therefore, to justify full disclosure…”.
It continues:
“However, to consider the undertaking’s facts and circumstances and the outcome of its assessment process, such a presumption is rebuttable on the basis of reasonable and supportable evidence”.
Companies omitting mandatory information must prove that the particular reporting area is not material for the undertaking. The guidelines proceed to specify a comprehensive list of areas for consideration in order to qualify the rebuttal, including all the related subtopics that are part of the mandatory disclosure and whether they are material information.
Clearly, EFRAG is attempting to incorporate flexibility into the standards to accommodate a wide range of circumstances, while maintaining the universality required to achieve the goals of uniform reporting.
What implications does this small clause have for companies? A lot, apparently.
The rebuttable presumption is significant because of two chief concerns:
These are quite major implications that are directly tied to the effectiveness and practicability of implementing the ESRS and have therefore understandably caused debate among many circles.
The rebuttable presumption creates room for variance in reports. Imagine two companies in the same industry with different disclosures. This goes against the purpose of the ESRS to ensure comparable disclosures that can inform capital market players.
The other fair argument against the rebuttable presumption (#2 above), is that companies may see this as a way out of mandatory reporting, choosing topics they can comply with and finding reasons to omit others. Further, the process of justifying an omission could cloud an otherwise clear and concise report, which are two general principles of sustainability reporting.
There are other concerns raised by stakeholder groups that the burden of proof further creates confusion and complicates the reporting process, citing common practices borrowed from financial reporting that simply presume materiality for all disclosures included in a report and immateriality for omitted disclosures.
On 23 November 2022, EFRAG released the final proposed draft standards of the ESRS to the European Commission for consideration. Among the amendments made based on public feedback, the removal of the rebuttable presumption was one of them.
This still does not mean that companies are free to omit disclosures as they wish, or that no exceptions can be made. In the latest draft, ESRS 1 General Requirements, guidelines stipulate that companies shall disclose those outlined under Article 32, “irrespective of the outcome of the materiality assessment”. Furthermore, if a company concludes that a topic is not material and omits all the required information in a topical ESRS, “it shall briefly explain the conclusions of its materiality assessment”.
However, if only some data points are excluded, it is automatically considered immaterial. When reporting on policies, actions, and targets, if the reporting company is unable to comply due to an absence of these, they shall state this to be the case. Some leeway is allowed for metrics and targets, where companies are allowed to include or omit information based on their materiality assessment.
With the final proposed standards submitted for consideration, companies will hear about a decision on the adoption of the ESRS some time mid-2023, after the European Commission deliberates on them with other EU agencies and member states.
Once adopted, the member states will be responsible for ensuring implementation and enforcing compliance within their own jurisdictions. In the meantime, a separate set of sector-specific standards will be up for consideration, as well as a supplement for small businesses.