Sustainability Disclosure Rules: Informal Agreement Reached

04-07-2022

 

On 21 June 2022, EU Governments and Members of the European Parliament (MEPs) reached an informal agreement on new EU rules for Environmental, Social and Governance (ESG) reporting. The draft Corporate Sustainability Reporting Directive (CSRD) had been published by the European Commission in April 2021 to amend and strengthen the existing Non-Financial Reporting Directive (NFRD).

According to the agreement, companies will be required to report on topics ranging from climate change, workers in value chain, and to anti-corruption in line with European Sustainability Reporting Standards currently under development. Furthermore, the sustainability information will have to be independently audited and provided within the company’s management report.

Who will be covered by the new rules?

According to the agreement reached by MEPs and EU Governments, the CSRD will apply to all large companies and to all companies listed on regulated markets except for micro-enterprises. Therefore, the rules will also apply to listed SMEs - though they will have the possibility to opt-out for 2 years after the entry into application of the Directive, i.e., until 2028.

Non-European companies generating a net turnover of €150 million in the EU, and which have at least one subsidiary or branch in the EU, will also have to provide information on their environmental, social and governance impacts.

The entry into application of the Directive will be phased as follows:

  1. Companies already covered by the NFRD: FY 2024 (first reports published 2025)
  2. Other large companies: FY 2025 (reports 2026)
  3. Listed SMEs: FY 2026 (reports 2027)
  4. Non-EU companies with EU branches/subsidiaries: FY 2028 (reports 2029)

What will change in the reporting obligations?

With the new rules, companies will also be required to report on:

  • Transition plans: a new requirement to report on “implementing actions and related financial and investment plans” in line with the 2050 climate neutrality objective (European Climate Law), as well as Paris 1.5C and, where relevant, on the exposure of the undertaking to coal, oil and gas-related activities
  • Targets (to be specified whether science-based or not): must be “time bound” and include, where appropriate, absolute greenhouse gas emission reduction targets at least for 2030 and 2050
  • Due diligence information: in line with EU Corporate Sustainability Due Diligence Directive, reporting on principal actual or potential adverse impacts “and other adverse impacts which the undertaking is required to identify according to other EU requirements […] to conduct the due diligence process”
  • Value chain information: for the first 3 years of application, if the company cannot obtain value-chain information, it should explain a) the efforts made b) why the information could not be obtained, and c) the plans to obtain the information in the future.

Sustainability reporting will have to be certified by an accredited independent auditor or certifier. Furthermore, the information will have to be published in a dedicated section of company management reports.

Mandatory reporting standards

Companies in the scope of the new rules will be expected to report in line with mandatory European Sustainability Reporting Standards. The European Financial Reporting Advisory Group (EFRAG), which has been tasked with providing proposals for EU-level standards, recently published a first batch of draft sector-agnostic EU standards. The first set of standards is planned for adoption by the EU Commission via delegated acts by 30 June 2023, followed by a second set of standards for SMEs and sector-specific aspects by 30 June 2024.

Next steps

From the Council’s side, the provisional political agreement was approved by the Permanent Representatives Committee (Coreper) last week. The European Parliament is set to vote on it first in the JURI Committee on 14 July and then approve it at Plenary level in October 2022. Once approved in Plenary, the file will go back for the Council formal approval. The Directive will then enter into force 20 days after its publication in the Official Journal of the European Union.

amfori’s work

Watch the recording of our members-only webinar “amfori insights and reporting” which is meant to support our members to better explain their work on due diligence, risk mapping and risk assessment. The webinar also explains how to properly interpret amfori Insights data. In other words, not to focus on communicating the number of audits performed and ratings, but rather explain why you source from specific countries, how you deal with the risks you come across and why you made certain choices. 

Those Insights will help you prepare for future regulatory requirements.

Related news

https://www.amfori.org/news/amfori-reacts-corporate-sustainability-reporting-directive-proposal

For more information, please contact Valentina.bolognesi@amfori.org, Senior Social Policy Advisor