EU Reporting: Mandatory or Voluntary?

It always did seem a tall order. That great big long list of mandatory disclosures facing European businesses has just got a lot shorter. In fact, companies can now opt out of disclosing on large number of the new sustainability metrics. It’s all thanks to something called materiality. It makes me wonder, how much of these "requirements" are mandatory after all?

The latest draft EU rules on corporate sustainability reporting propose some big changes. The general theme is more “flexibility”. More disclosures are becoming “voluntary” (including on biodiversity transition plans and many workforce metrics). Timelines have been pushed back.

Companies will love this. It gives them more time and more leeway. But those of us hoping for a giant treasure trove of consistent, comparable data look set to be disappointed.

The biggest change is down to something called materiality. This is about how companies decide what issues matter to measure and report on. The original idea was to force companies to disclose a whole series of metrics across all the different topics. But there was an opt out. If marine resources or microplastics just wasn’t relevant, you could opt out of the requirement based on something called the “rebuttable presumption”. Crucially, you needed to publish “reasonable and supportable evidence” to justify why you weren’t reporting on it. That would have acted as quite a big disincentive to skipping certain disclosures. And it would have significantly increased the volume of comparable datapoints in the market.

Now that’s changed. The principle that all metrics are assumed to be material has been struck out. The “general” disclosures, and those on climate (and some workforce ones) remain mandatory. But there is now a much more significant role for the materiality assessment process. What does that mean? It means it’s back to the companies to explain how they chose to decide what’s relevant, just like they might do with a voluntary standard like GRI.

The EU proposals still use the double materiality approach. In contrast to the new International Sustainability Standards Board (which focuses on the needs of investors for financially material information), the EU proposals ask companies to report on their impacts on people and planet. This means companies will have to get their heads around impact materiality and explain how they determine impacts, risks, opportunities and dependencies.

But materiality exercises vary. Companies do them in many different ways. Different stakeholders are invited in. The appetite for listening – particularly to challenging voices – differs wildly. The role of science, surveys, social norms and horizon scanning – in other words being genuinely open minded about impacts – varies hugely. In my experience, it’s unusual for a company to go through a materiality exercise and conclude at the end that they need to start collecting data on something new. Instead, these processes end up a post hoc justification for existing disclosures.

You can’t be too prescriptive about anything that is inherently customizable. Different companies have different impacts -that’s the whole point of materiality. The new EU draft tries to set out how a proper assessment should be done, covering positive and negative impacts, “informed by the due diligence process defined in the international instruments of the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises”. That’s good. But all these standards and guidelines provide wriggle room. There is no way around it. Materiality creates flexibility. It's simply not the same thing as mandating disclosures.

The EU estimates the delays will save businesses around 1.2 billion euros a year. The new emphasis on materiality is forecast to save an addition 230 million euros. That’s no small change in a tough economic climate – something businesses have been keen to emphasise in the consultations. Many companies will breathe a sigh of relief. But investors and data users won’t get the promised scale of the comparable datasets.

By shifting from prescribed metrics to a malleable corporate process, there is much more room for flexibility. And with flexibility come gaming, dodging accountability and shying away from tricky topics. Changes announced last year had already reduced the data points by 50%. It looks like it’s just getting easier. The expression “may disclose” – meaning its optional – appears 113 times in the latest “requirements”.  Whilst core and climate disclosures remain mandatory, the pivot to materiality will enable many more companies to strike out issues that they just don’t want to talk about. This means that rather than being mandatory requirements, many aspects just look voluntary.