The EU takes a major step forward in sustainability reporting

In the wake of the EU Green Deal and the ambitious Sustainable Finance strategy, the European Commission (EC) published on 21 April 2021 its awaited project of revisions of the Non-financial Reporting Directive (NFRD), which is now called the Corporate Sustainability Reporting Directive (CSRD).

This CSRD proposal aims to bridge the identified gap between sustainability information disclosed by undertakings in the scope of the NFRD and the users’ needs for comparable, relevant and reliable information, as highlighted by the EC public consultation on the previous NFRD. It should ensure that the information companies report enables financial market participants subject to the Sustainable Finance Disclosures Regulation (SFDR) to collect the data they need to comply with their recent transparency obligations (i.e., the extent to which the products and services they offer to the market are considered sustainable in light of ESG factors).

Although the proposal merits further detailed examination, some key takeaways are already quite clear:

The scope of entities subject to the reporting would be enlarged. All large and all listed companies (except micro-undertakings) would now be in the scope of the CSRD, increasing substantially the scope of the current NFRD and ensuring that circa 49,000 EU undertakings would now have to report sustainability information compared to 11,600 undertakings as of today. Simpler requirements and deferred timelines would be available for SMEs.

A foundational and game-changing element is the proposal to develop and adopt EU sustainability reporting standards that would be mandatory for all undertakings within the scope of this CSRD. These standards would be developed by EFRAG and specify the information to be disclosed. They would be adopted through delegated acts, with the EC consulting also with the relevant European Supervisory Authorities and Agencies, the CEAOB and the Platform on Sustainable Finance.

These standards should streamline relevant pieces of EU legislation – starting with the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation – and build on and contribute to international initiatives in sustainability reporting, taking account the work of global standard-setting initiatives for sustainability reporting and existing standards and frameworks for natural capital accounting, responsible business conduct, corporate social responsibility, and sustainable development. In particular, the EU developments will aim at supporting global convergence and take account of the IFRS Foundation possible sustainability standards, as well as those of the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the International Accounting Standards Board (IASB), the Value Reporting Foundation, the Task force on Climate-related Financial Disclosures (TCFD), the Carbon Disclosure Standards Board (CDSB), and CDP.

The sustainability reporting would now have to be included in the management report, digitised in a machine-readable format and audited (starting with limited assurance by the undertaking’s auditor, or a third-party assurance services provider if a Member State decides to allow so) without any possible exemption for Member States, as from fiscal year 2023 (reports published in 2024).

These requirements would have direct consequences on the collective responsibilities of the administrative, management and supervisory bodies (including the audit committee) of undertakings on reported sustainability information ensuring that the undertaking has reported against the EU sustainability reporting standards (or standards assessed to be equivalent by the EU).

The disclosure requirement would include a larger number of reporting areas, including business model and strategy (including opportunities and risks related to sustainability matters and plans of the undertaking to ensure that its business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5C° in line with the Paris Agreement), targets, governance, policies, due diligence processes along the value chain, principle risks and their management, indicators, intangibles and the process to identify information to be disclosed.

The sustainability reporting standards would specify the information that needs to be disclosed regarding environmental factors (aligned with the EU Taxonomy ), social factors including employee factors and human rights (including equal opportunities, working conditions, gender equality, employment of people with disabilities, etc.) and governance factors (including business ethics, anti-corruption, internal control, etc.).

In the next steps, the CSRD will have to follow a full legislative process, be debated, and possibly amended, at the EU Parliament and Council before being formally adopted. This process could take several months.

This same day, the European Union also took significant steps regarding the Taxonomy Regulation, disclosing the final delegated acts defining the technical screening criteria required to be met for determining what are considered to be “green activities” for the two first environmental objectives: Climate change Mitigation and Climate change Adaptation.

These two steps demonstrate the high level of ambition and commitment of the European Commission towards delivering its Sustainable Finance strategy and moving swiftly.

More information on the CSRD and the European Commission’s April Sustainable finance package can be found here.

1. As defined in Article 3(4) of Directive 2013/34/EU (the “Accounting Directive”): Large undertakings are undertakings which on their balance sheet dates exceed at least two of the three following criteria: balance sheet total: 20M€; net turnover: 40M€; average number of employees during the financial year: 250.

2. Climate change mitigation; Climate change adaption; Water and marine resources; Resource use and circular economy; Pollution; Biodiversity and ecosystems.