With the upcoming transition from the Non-Financial Reporting Directive (NRFD) to the Corporate Sustainability Reporting Directive (CSRD), the EU is changing the rules for sustainability reporting. But changes do not only happen in the EU. The SEC announced an initiative on sustainability reporting in the United States, and so did the FSA in Japan. The Swiss Federal Council announced mandatory reporting on climate issues for a growing number of public companies, banks and insurance companies. The UK government announced formal plans to introduce legislation requiring mandatory climate-related disclosures by companies and financial institutions, and New Zealand will join, too. As a response to globalised business in a globalised world, the International Financial Reporting Standards (IFRS) Foundation, the institution that governs financial reporting in more than 140 countries, announced the formation of the International Sustainability Standards Board (ISSB). The ISSB will develop and maintain its own set of sustainability disclosure standards.
What will change with the CSRD? First of all, the CSRD will apply to more businesses than the NFRD. While the NFRD affected around 11.000 corporations, the upcoming CSRD will impact about 50.000. Furthermore, the directive will even apply to corporations from abroad if they have subsidiaries in the EU. The CSRD will also change the scope of information businesses will need to disclose in their sustainability reports.
The EU has ambitious plans for a sustainable economy. The regulatory measures aim at redirecting capital flows towards this goal by introducing legislation and regulation like the Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy, the NFRD and soon the CSRD. From the perspective of corporations, the CSRD is the most significant part of the EU regulatory regime.
NFRD, SFDR and EU-Taxonomy – these acronyms are at the forefront of European sustainability regulations.
- The EU Taxonomy is a common system for determining whether an economic activity qualifies as environmentally sustainable.
- Non-Financial Reporting Directive (NFRD) – The NFRD is the disclosure regime that is relevant for corporations.
- Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants and financial advisors to disclose ESG relevant information about their investments.
The CSRD will be the successor of the NFRD.
The CSRD is not only a significant step up in terms of reporting requirements. It will also apply to around five times more corporations compared to the NFRD. So under the CSRD, nearly 50.000 companies will have to report on sustainability.
The CSRD will apply to corporations that meet two of the following three criteria:
- €40 million in net turnover
- €20 million on the balance sheet
- 250 or more employees
The CSRD does not only apply to those companies established in or governed by the law of an EU member state. It will also apply to companies not based in the EU that have securities on EU-regulated markets. Listed micro-companies are not in the scope of the CSRD.
The introduction of the CSRD brings further changes, for example, in the type and scope of reporting:
- CSRD and Double Materiality
- Scope of Sustainability Reporting
- CSRD and the Demand for Limited Assurance.
- Sustainability Reporting as a Part of the Management Report
- Digital Tagging
- Explicit Responsibility of Management and Supervisory Boards
Corporations will have to disclose information on environmental, social and governance factors.
Environmental related disclosures include information on
- Climate change mitigation
- Climate change adaptation
- Water and marine resources
- Resource use and circular economy
- Biodiversity and ecosystems
Disclosure on social factors include information related to
- Equal opportunities for all
- Working conditions
- Respect for the human rights
Governance related disclosures will cover
- The role of the undertaking’s administrative, management and supervisory bodies
- Business ethics and corporate culture
- Political engagements of the undertaking
- Management and quality of relationships with business partners, including payment practices
- The internal control and risk management systems
From what we know so far, the European Commission plans to adopt the CSRD in late 2022. Before that,
- a preliminary set of standards has to be adopted by October 2022
- another set of standards with complementary and sector-specific information will be released one year later (October 2023)
Corporations will most likely need to adjust their reporting to the new sustainability standards in 2023 to report by them for the first time in 2024 on the 2023 fiscal year.
Update 1 : 21 June 2022
The European Council announced in a press release on 21 June 2022 that it has reached a provisional agreement with the European Parliament regarding the EU’s Corporate Sustainability Reporting Directive(CSRD).
The European Council emphasized that the Sustainability reports have to be certified by an accredited independent auditor or certifier. The key modification to the draft CSRD relates to the implementation timeline, which will now be done in a phased manner as follows.
- 1 January 2024 for companies already subject to the non-financial reporting directive;
- 1 January 2025 for companies that are not presently subject to the non-financial reporting directive;
- 1 January 2026 for listed SMEs, small and non-complex credit institutions and captive insurance undertakings.
More details are available in the press release here.
2024 is not far away, and the reporting has to happen on the 2023 fiscal year data. So the question is how companies can respond to the challenge to align to the CSRD in the given timeframe. Given the timelines communicated, time is at the essence. To stay ahead of the wave, corporations need to act fast now.
Some companies are leading at the forefront of sustainability reporting. By doing so, it is easier for them to adjust to new regulations to achieve compliance. Others will have to report for the first time, so the challenges in adapting to the reporting regime will be much higher for them. In any case, sustainability reporting comes with a steep learning curve. The earlier businesses start to take the first steps forward, the better.
2023 is approaching fast. Sustainability reporting is a complex subject. If you would like to learn more about how NordESG can help you, do not hesitate to get in touch with us.
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