I agree, it sounds much more natural to use "that" in your translation. I guess the question is, is it also more common to say "das" rather than "es" in this sort of context in German?
Because if the variant with "es" is the most common German variant of this sentence, and the variant with "that" is the most common English variant of this sentence, then clearly "that" should be accepted as a correct answer.
. . . but if, on the contrary, saying this sentence with "es/it" sounds as clumsy in German as in English, then the distinction between "es/it" and "das/that" clearly ought to be preserved, so we don't fall into bad habits . . .
Unfortunately, I don't which is the case.