What does the delay in sector- specific standards really mean for companies reporting under the CSRD?

After much deliberation, yesterday the European Parliament announced that several key elements of the Corporate Sustainable Reporting Directive (CSRD) will be delayed by 2 years – this includes the adoption of sector-specific standards. Additionally, there is now a delay in the adoption of the general sustainability reporting standards for non-EU companies until 2026. 

Why have they been delayed?

The proposal to delay these standards was first announced in October last year due to backlash from companies stating that the initial sector-agnostic European Sustainability Reporting Standards (ESRS) were complex and somewhat burdensome enough without the addition of sector-specific ones.

In addition to providing companies with more time to get to grips with the sector-agnostic ESRS, the delayed adoption of the sector-specific standards is also hoped to provide the European Financial Reporting Advisory Group (EFRAG) with more time to develop the new standards. In the past, there has been concerns that regulations related to the EU’s Sustainable Finance Package and Green Deal have been rushed through with a lack of forethought for the practical implementation of the regulations. Examples here include the EU Taxonomy which still only covers a small selection of environmentally sustainable activities with no socially sustainable Taxonomy yet developed. Another example includes the Sustainable Finance Disclosure Regulation (SFDR) which is currently undergoing several consultations (including the complete overhaul of the regulation!) which many feel would not have happened if the regulation had involved better engagement with the investment community.

So, is the delay good news?  

In short, no. There are several arguments for and against the delay of the sector-specific standards which I’ve broken down below:

Pros:

-          It provides companies with more time to become familiar with the sector-agnostic ESRS;

-          It acknowledges the level of effort required to implement existing ESRS;

-          It proposes an iterative approach for companies to follow rather than potentially overwhelming them with all ESRS at once;

-          It gives EFRAG more time to develop the standards and engage the right stakeholders (the upcoming sector classification workshops are a good sign that they’ve learnt their lesson here).

Cons

-          The sector-agnostic ESRS are built with a corporate lens at heart, however many sectors (such as financial institutions) are likely to struggle with these;

-          There is the potential that (in typical EU regulation style) certain standards proposed in the sector-agnostic ESRS are either rolled back or contradicted by the time the sector-specific ESRS are released;

-          Companies will be in the process of adopting and implementing potentially brand new policies, processes, resources, and costs to respond to the sector-agnostic ESRS, there is the potential that these overheads may increase with the sector-specific ESRS.   

In short, there are still lots of unanswered questions: could the sector-specific ESRS result in even more disruption? Could the rhythm of collecting and tracking ESRS data be disrupted in two years time with the new standards? Are the more ‘unique’ sectors, such as financial institutions, geared up to adopt the sector-agnostic standards without their own sector-specific ones?

We’ll see.