ESG Ahead Brief
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Author: Veini Simolin
Title: ESG and sustainability expert
Blog: Sustainability Weekly in LinkedIn
This edition of sustainability weekly will be – I hope understandably – dominated by the release of the revised EU sustainability reporting standards. There has been a lot of chatter about the changes. This topic also took a while to digest. VSME has changed its name, the DMA can now be conducted top down instead of bottom up, some data points are gone, yet some persist. Lets take a look into what has happened through the lens of great work done by professionals in order to summarise this summer reading list from the EU.
From Willem Roekens
“The final version of the simplified European sustainability reporting standards is available. Here are 5 things you need to know about the new ESRS. 1/ Commission follows EFRAG: the Commission took over most of the EFRAG draft and added only a few additional simplifications. E.g. on secondary microplastics or flexibility in the carbon footprint calculation. 2/ Simplification & Relief: 70% less datapoints & many options to leave out things when it’s too difficult (similar to EFRAG draft) 3/ Wave 1 companies: they can choose whether to apply the simplified standards, the old standards or a hybrid version of the old + reliefs from the simplified ones. Make sure to discuss this with your auditor in time. 4/ Fair presentation: this is a significant change from checklists to relevant & decision-useful information. As this is more judgement-heavy, I’m curious to see how this will play out in practice. (similar to EFRAG draft) 5/ Anticipated financial effects: This remains required, but companies get (again) more time (till 2031). The financial sector fought hard for this to better manage financial risks linked to their clients’ vulnerability against climate-related impacts. Council and Parliament still have 2 months to object, but I haven’t come across any information that would indicate this might be the case.”
70 % reduction in the amount of data points is huge. This will be a welcome update to companies who felt that before the amount of disclosures was overwhelming. I also think that most of the reductions are justified. After all there were a lot of data points in the original ESRS that at least I felt of which the impact on the quality of information of reporting in general to be marginal. Another thing to note here is the work that auditors will now have with a lot of things left to the discretion of the reporting companies. It will be interesting to see if auditing resources go up dramatically based on the update.
From Martyna Jermalonek:
“The European Commission issued today plenty of summer reading for sustainability reporting fans, i.e.: post-consultation simplified ESRS, and voluntary reporting standards. Ca. 450 stakeholders responded to the Commission’s call for feedback on the ESRS consultation. Considering that the Commission reviewed the feedback and published a revised version of the ESRS within A MONTH after the consultation closed, it is clear how eager it is to finalise the process. Many Wave 1 entities have postponed their decision on whether to early adopt the simplified ESRS until the completion of the Commission’s work. Now the real assessment begins, and companies need to decide whether to continue with the approach they already know and repeat last year’s reporting process, or gain a head start by adopting the simplified standards already for FY’26. Regardless of the outcome, it will be an interesting reporting season for auditors with two sets of rules on the table. Noteworthy changes to simplified ESRS include: 1. Explicit introduction of third reporting option for FY’26 (apart from reporting solely under old ESRS or only new ESRS)- possibility to apply old ESRS with specific reliefs from simplified ESRS. 2. Transitional provisions: – extended relief period for disclosing ALL anticipated financial effects; for Wave 1 entities applicable until FY’28; for other entities accessible for the first 2 reporting years (previously 1 year); – extended relief period for disclosing QUANTITATIVE anticipated financial effects for other entities than Wave 1 accessible for the first 4 reporting years (previously 3 years); Regardless of the above, reporting entites should keep in mind that monetary amount of assets at climate risk under E1-11 is not subject to transitional provisions. 3. Different structures of sustainability statement than 4 part division will be allowed provided that there will be a reasoned explanation. 4. The new text better stresses when characteristics of employee and non-employees metrics shall be disclosed. #ESRS #sustainability #PwC”
To me one of the more interesting issues here is the option for companies to conduct their reporting mixing the old and new ESRS standards. We are absolutely going to get some very interesting reports based on this update.
The full EU press release for the updated standards can be found here: go give it a read:
EU PRESS RELEASE: https://ec.europa.eu/commission/presscorner/detail/en/mex_26_1515
As mentioned there has also been an update to the VSME. Namely the name. The lighter, voluntary standard aimed at companies outside of the scope of the CSRD is now called simply VS (Voluntary standard). This change is related to the expanded scope of the VS, which moves in line with CSRD scope reduction from 250 employees up to 1000 employees. This means that the standard is no longer aimed at SMEs, but even larger companies that still fall under the 1000 employee line. The update comes with few other changes though. Mostly certain data points have been moved around. The biggest update is related to the value chain cap, which means the protection that smaller companies get from larger customers ESG data demands. For SME’s the cap is the whole VS standard, so this standard is the limit for what larger companies can demand, but there is a specific carve out for micro undertakings (10 or less employees). They have an even smaller value chain cap, which seems fair to me. It would be silly to have micro undertakings be beholden to the same standards as a company with say 700 employees. Other than that, the VS standard is pretty much the same as the standard previously released by EFRAG.
Here is some very interesting breaking news from professor Jan Rosenow. Electrification has become a topic of interest in the EU lately due to the instability of the oil market. This means that there is renewed interest in getting the EU electrification process to catch up to other electric heavy areas in the world. I love this analysis, and there is a lot more to find. Go check out Jan’s Substack bright spots here: https://janrosenow.substack.com/p/europes-electrification-rate-has
“BREAKING: EU Electrification Action Plan has leaked. My take here: Europe’s electrification rate has been stuck at 23% for a decade, while China, Korea and Japan have pushed past 30%. The leaked draft of the European Commission’s Electrification Action Plan, due for adoption later this year, is the first serious attempt to close that gap, and having read the whole thing I think the framing is broadly right. It gets the central barrier right. On Eurostat’s retail prices for the second half of 2024, with all taxes and levies included, electricity costs EU industry almost three times what gas does, and households about two and a half times as much. Only Finland and Sweden come in below a ratio of 2 on the industrial side. As long as that gap holds, the economics of switching to a heat pump or an electric process remain challenging. The Commission proposes an electricity to gas price ratio target of 2 for industry and 2.5 for households by 2030 and alongside the plan is a proposed new regulation that would stop electricity being taxed more heavily than gas. It anchors that rule in a legal base needing only a qualified majority, sidestepping the unanimity that has frozen energy tax reform for years. There is new thinking elsewhere. The clean heat market mechanism the Commission wants to explore by 2027 would oblige manufacturers to sell a rising share of clean heat, which is a bigger idea than the subsidy tweaks we usually get. A Green VAT framework would let member states cut tax on EVs, heat pumps and batteries. And there is a firm KPI to double the heat pump installation rate by 2030. My slight caution is that a fair amount of the plan restates things already announced, and the headline target is still a bracket, [X]% by 2040. Whether this becomes a turning point or another well-argued communication depends on whether ambition is transposed into policy. Full analysis in Bright Spots: https://lnkd.in/eqrvXus4”