Sustainability Disclosure Becoming the Norm

27-05-2021

 

=> IN BRIEF

On 21 April, the European Commission unveiled a new Corporate Sustainability Reporting Directive (CSRD) to amend and strengthen the existing Non-Financial Reporting Directive (NFRD), alongside an EU Taxonomy delegated act on climate mitigation and adaptation. Both instruments are meant to accelerate the transition to a sustainable climate-neutral economy which meets the ambitions of the EU Green Deal.

The CSRD proposal focuses on two main areas: extending sustainability disclosure obligations and ensuring consistency in what good disclosure looks like.

  • More companies will be covered by sustainability disclosure obligations in the future:  The Commission’s new CSRD proposal extends the scope of the current reporting requirements to all large companies (i.e. all companies with above 250 employees, whether they are listed or not), and to all listed SMEs. This means that around 50,000 companies could be subject to sustainability disclosure obligations going forward against 11,000 currently.
  • Sustainability reporting will be more encompassing: The Commission wants sustainability reporting to become more detailed, consistent, and reliable.

a. The CSRD proposal goes a step further than the current NFRD in terms of reporting as it introduces a more prescriptive list of reporting issues clustered around the three Environmental, Social, Governance (ESG) pillars.

b. Companies will no longer be given as much flexibility in the way they decide to report. They will be expected to report in line with mandatory EU sustainability reporting standards which will specify both generic and sector-specific information to be disclosed.

c. Companies will have to publish all information as part of their management reports and to disclose it in a digital, machine-readable format.

d. The disclosed information will have to be subject to assurance.

The CSRD proposal will now go through the negotiation process and might be changed in parts. If an agreement on the text is reached by the EU Institutions by mid-2022, large companies could start reporting in 2024, covering the financial year 2023.

In the meantime, a public consultation is up and running.

If you are interested in learning more about the CSRD proposal and how it ties in with the Commission’s work for the adoption of legislation on human rights and environmental due diligence as part of the forthcoming Sustainable Corporate Governance Initiate (SCGI), read on below.

 

=> IN DEPTH

What exactly is being proposed with the CSRD?

#1: More companies will be covered by sustainability disclosure obligations in the future  

Today around 11.000 companies disclose so called “non-financial information” relating to “environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters".

The Commission is proposing that sustainability disclosure obligations be extended to all large companies (i.e. all companies with above 250 employees, whether they are listed or not), and to all listed SMEs (with the exception of listed micro-enterprises, though listed SMEs will be subject to a proportionate regime). This means that around 50.000 companies could be subject to sustainability disclosure obligations going forward.

#2: Sustainability reporting will become more detailed

The CSRD proposal clarifies the notion of double materiality, a concept already introduced by the Non-Financial Reporting Directive (NFRD). Companies in scope will have to report both on how various sustainability matters affect their business, and on the impacts of their activities on people and the environment.

While the reporting areas are broadly aligned with the current NFRD, the CSRD proposal goes a step further and introduces a more prescriptive list of reporting issues clustered around the three Environmental, Social, Governance (ESG) pillars. This means, that the companies in scope will be required to report on their business model and strategy, policies, targets including progress towards achieving them, governance, due diligence process including on the actual or potential adverse impacts connected with their value chain and the mitigating actions taken thereof.

Specifically, companies will be required to report on their “plans to ensure alignment with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C”.

Companies will be expected to report both qualitative and quantitative information, as well as retrospective and forward-looking information. Furthermore, companies will have to explain how their business model and strategy take the company’s stakeholders’ interests into account.

#3: Sustainability reporting will become more consistent

Importantly, companies in the scope of the new rules will be expected to report in line with mandatory EU sustainability reporting standards which will specify both generic and sector-specific information to be disclosed. This is a significant point of departure from the current reporting of non-financial information, where companies are provided with guidance but ultimately given the flexibility to report according to the way it suits them best.

By October 2022, the European Commission is expected to adopt a first batch of those standards via delegated acts covering baseline information to be disclosed on all ESG reporting areas. These will include details on climate change mitigation, adaptation; water and marine resources, circular economy; pollution; biodiversity and ecosystems; equal opportunity, including related to gender; working conditions, including wages, and collective bargaining; respect for human rights; the role of the company’s administrative, management and supervisory bodies, and their composition; business ethics and corporate culture.

Separate, proportionate standards for listed SMEs are to follow in 2023, which non-listed SMEs are encouraged to use on a voluntary basis, as well as sector-specific standards.

#4: Sustainability reporting will become more reliable

Contrary to the flexibility offered by the NFRD, the CSRD proposal tightens the rules related to sustainability reporting in terms of how information is to be shared. The proposal indicates that companies are to publish all information as part of their management reports and to disclose it in a digital, machine-readable format.

In an effort to boost the reliability and quality of the disclosed information, the proposal also introduces an assurance (EU-wide audit) requirement for the reported sustainability information.

What’s next?

The CSRD proposal is still a proposal. As such, it can still be subject to changes as it goes through the negotiation process. If an agreement on the text is reached by the EU Institutions by mid-2022, large companies could start reporting in 2024, covering the financial year 2023.

Given the impacts of the COVID-19 crisis, the European Commission is proposing that requirements for listed SMEs apply only 3 years after they apply to other companies.

Synergies with other EU policies

The CSRD proposal should not be seen in isolation. Rather, as part of a coherent set of instruments to increase transparency and provide more pertinent, reliable and comparable data that will channel capital towards sustainable activities. This, in turn, will help the EU to advance on its Green Deal agenda.

Article 8 of the Taxonomy Regulation requires companies in the scope of the existing NFRD to report on their alignment with the Taxonomy Regulation. If the enlarged scope of the CSRD is approved by the EU Institutions, additional companies will have to report on the extent to which their activities are sustainable.

But the EU Commission is not just working on streamlining and improving the quality of reported information. It is also busy drafting legislation that will entail a horizontal obligation for companies to conduct due diligence on their human rights and environmental impacts as part of the so called Sustainable Corporate Governance Initiative (SCGI). Both the UNGPs and the OECD Guidelines for Multinational Enterprises, the most authoritative standards on responsible business conduct, expect companies not only to conduct due diligence but also to report and externally communicate about their due diligence efforts. The CSRD and the SCGI should therefore be regarded as mutually reinforcing.

amfori’s work

amfori Advocacy continues to engage both with EU Institutions and external stakeholders on the SCGI dossier. Given the interdependencies with the CSRD proposal, we are also planning a submission to the ongoing consultation. Get in touch with Valentina Bolognesi, Senior Social Policy Advisor, if you want to know more about our work and contribute to shaping it.

Related news

https://www.amfori.org/news/trends-financial-sector-shifts-climate-crisis

https://www.amfori.org/news/agreement-reached-eu-taxonomy-rules-sustainable-finance

https://www.amfori.org/news/three-complementary-ways-shaping-corporate-due-diligence