EU puts sustainability ‘on equal footing’ with financial reporting

As COP27 got underway in Egypt, the EU voted overwhelmingly for a major shakeup of corporate disclosures, making ESG a core part of the annual reporting process.

The Corporate Sustainability Reporting Directive will affect about 50,000 organisations, requiring them to report on their impact on the environment and on social and governance issues, such as equality and discrimination.

“For the first time… we are putting sustainability reporting on an equal footing with financial reporting,” said Mairead McGuinness, European Commissioner for financial stability, financial services and Capital Markets Union.

Who will have to comply with these rules?

CSRD will apply to all large companies, regardless of whether they are listed, and all listed companies, with exception of “micro-enterprises”. This means listed SMEs will have to report on sustainability, though the EU will develop simpler and “proportionate” standards for them.

To ensure a level playing field, companies outside the EU that have “significant activity” in the region will also have to comply with these regulations. This includes companies with a net turnover of more than €150m in the EU.

What do companies have to report on?

Broadly, businesses will have to report on environmental, governance and social issues. This will be a combination of general standards that every company will have to follow and sector-specific standards.

Businesses will also have to disclose their decarbonisation plans, in line with the Paris Agreement’s goal of limiting global warming to 1.5C.

The specifics are still a work in progress, and the European Commission will unveil its first reporting standards by June 2023.

Is CSRD aligned with global standards?

The EU aims to make its rules align with both Europe’s existing legal frameworks and with global standardisation initiatives.

• More on TCFD: Climate rules increase pressure to rethink leases

In a Q&A about CSRD, the Commission said it supports efforts by the G20, G7 and others to build on work done by the Task Force on Climate-related Financial Disclosures. New rules, it said, “would build on and contribute to standardisation initiatives at a global level”.

How new are these requirements?

CSRD strengthens the EU’s Non-Financial Reporting Directive, which has, since 2014, required large public-interest companies, such as banks and insurance companies, to report on ESG-related issues.

Beyond expanding the scope of who has to make disclosures, CSRD will require audits of reported information for the first time. Companies will also have to ensure their reports are machine-readable and digitally tagged so they can feed into a central access point that the EU is developing.

When will CSRD come into force?

There will be a phased rollout:

• From financial year 2024: all organisations required to report under the NFRD
• FY 2025: all large companies
• Later: all listed companies, excluding micro-enterprises

Why has the EU introduced these rules?

McGuinness summed up the EU’s overarching motivation during the debate on CSRD: “We need accurate and reliable information to ensure that investments are being made towards a more sustainable future.

“Companies need the information to plan their transition paths, and investors need the information to have clarity about what they’re investing in and to combat greenwashing.”

The European Commission argued that company reports have not been good enough or consistent enough for comparisons between companies.

Responding to the landslide vote for CSRD, the Corporate Governance Institute said that ESG is “broken”.

“No one knows or defines the true meaning of sustainable, there are no efforts to properly audit or analyse, and no single body to notice or punish misrepresentation of data or a failure to comply with internal or external policy,” said David Duffy, CEO of the organisation, calling CSRD “truly overdue”.