The principle of ‘rebuttable presumption’ in the ESRS

The European Sustainability Reporting Standards (ESRS) will come into force in the EU on January 1, 2024. While affected companies still have time to make the necessary preparations to adjust their reporting processes to comply with the ESRS standards, the final guidelines are still being developed by the European Financial Reporting Advisory Group (EFRAG).

After the end of the public consultation period, EFRAG has been discussing the concept of ‘rebuttable presumption’. This article discusses this concept in detail, examining the impact of such an approach and the reasons why it has polarized consultants so strongly.

Materiality and the rebuttable presumption

The European Financial Reporting Advisory Group (EFRAG) has released 13 exposure drafts proposed for the European Sustainability Reporting Standards (ESRS).  These drafts are the first ones that will ultimately form the complete standards for sustainability reporting that companies will be subject to.

The 13 drafts cover the spectrum of environmental, social, and governance topics that are relevant to most companies. ESRS 1 and ESRS 2 encompass general requirements that are mandatory for all companies, regardless of the industry. These include reporting principles that underlie the ESRS framework, including the process for determining materiality. This is where the concept of rebuttable presumption comes into play.

In general, there are two ways to determine materiality:

1. Companies decide for themselves which topics are material.
2. There is a determination of a set of core topics that are generally material and mandatory for all.

The ESRS adopts the second approach. 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 must prove that a specific reporting area is not important to them if they omit mandatory information. There is a long list of areas and subtopics that must be considered to determine if it is truly significant to report on them.

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.

Implications of the rebuttable presumption

The rebuttable presumption is particularly interesting for the following reasons:

• It contradicts the goals of the ESRS. They actually aim to standardize guidelines for sustainability reporting, and increase transparency of ESG management and performance.
• In relation to the latter goal, the rebuttable presumption can be used as a loophole for companies that want to avoid certain disclosures.
• It creates room for deviations in the reports. Companies may see this as a way out of reporting requirements by selecting topics they can comply with and finding reasons to omit others.

These are significant impacts that are directly related to the effectiveness and feasibility of implementing the European Sustainability Reporting Standards, and have understandably led to discussions in many circles.

Other interest groups fear that the burden of proof will create more confusion and complicate the reporting process. They refer to common practices in financial reporting where it is simply assumed that all information included in a report is material, and the omitted information is immaterial.

Latest update about the rebuttable presumption

On November 23, 2022, EFRAG submitted the final proposed standard drafts for the ESRS to the European Commission for review. Changes made based on public feedback included the elimination of the rebuttable presumption.

However, this does not mean that companies can omit information at their discretion or that no exceptions can be made. In the latest draft, it says that affected companies must provide the information “regardless of the result of the materiality assessment.” If a company concludes that a topic is not material and omits all required information in a current ESRS, “it must 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.

The future of the ESRS

With the final suggested 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.

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