29 August 2022

Rebuttable presumptions rebutted in comment letters to EFRAG

Concerns over the rebuttable presumptions approach to reporting in the draft European Sustainability Reporting Standards (ESRS) diluting the quality of reporting and overburdening entities was expressed in a number of comment letters sent to EFRAG.

The ESRS are designed so that the standards' disclosures are deemed to be material to all companies concerned, however through the materiality assessment a reporting company can, by providing evidence, exercise a rebuttal on this assumption on one topic or subtopic, thus not having to report on it.

The concept was heavily debated during outreach events organised by EFRAG in June, and unsurprisingly came up in stakeholders’ responses to the consultation on the ESRS exposure drafts.

Corporate disclosures has looked at 39 comment letters sent to EFRAG as part of the consultation and found that 11 of these organisations voiced their concerns over the ‘rebuttable presumptions’ approach to reporting obligations.

Business Europe, a business lobby group, said: “This is confusing and risks reducing readability, increasing the reporting burden and makes reports less valuable to preparers and users.”

The Financial Executives Association (FEA), a group of CFOs of Dutch listed companies, and Diligentia, a global community of associations, companies and professionals which campaigns for responsible business conduct, agreed that it would create a significant reporting burden to companies, and FEA added that it was “impractical and will dilute the management report with a lot of irrelevant content”.

The impracticality of the approach was mentioned by a number of organisations, such as the Federation of European Securities Exchanges (FESE) and Principles for Responsible Investment (PRI).

Deutsche Bank called for the approach to be scrapped saying: “The principles of sustainability reporting should be consistent with financial reporting in that only relevant and significant disclosures to the reporting entity should be included and there should be no requirement to explain why a disclosure was omitted.”

The suggestion of only including relevant information using the format of financial reporting was also mentioned in comment letters by Munich RE and Business Europe which argued that the assurance element would ensure that the topics omitted were not material.

However, addressing criticism during the outreach events organised by EFRAG, CEO Saskia Slomp told stakeholders that assessing whether disclosures are relevant and explaining why they are not is a common approach in financial reporting.

An alternative recommendation listed in comment letters was to change to an industry-specific approach. FEA said: “We recommend that companies should consider a core set of topics appropriate to their industry while retaining the ability to decide which ones are material for users of the disclosure.”