Big news for companies regarding their sustainability status and their sustainability reporting: companies will soon be required to publish detailed information on sustainability matters. This is done via the Corporate Sustainability Reporting Directive (CSRD). The goal is to increase a company’s accountability, to prevent divergent sustainability standards and ease the transition to a more sustainable economy. Armstrong’s famous quotation has never been more spot-on if you ask us: ‘A small step for man, one giant leap for mankind’. Let’s go sustainable!
New sustainability reporting rules for companies
The Corporate Sustainability Reporting Directive is a part of the European Green Deal and the sustainable Finance Agenda. The final green light for corporate sustainability has recently been given by the European Council on November 28th 2022 to be precise (source). The (CSRD) requires companies to report on the impact of corporate activities on the environment and society, furthermore, it requires the audit (assurance) of reported information. In short, companies will have to report on how their business model affects their sustainability, and how external sustainability factors such as climate change, influences their business. This will result in better informed investors and stakeholders, regarding that they will know what they signed up for sustainability and future wise.
For which companies/organizations is this relevant?
The CSRD introduces a more detailed reporting requirement on sustainability matters such as environmental rights, social rights, human rights and governance factors. This will apply to all large companies (both public and private) in the EU and companies listed on the regulated markets.
The new reporting rules will also apply to listed SMes (small and medium enterprises) depending on their specifics. An opt-out will be possible for these listed SMes untill 2028.
Non-European companies with operations outside the EU that have net sales of €150 million in the EU and at least one subsidiary or branch in the EU will also be required to submit a sustainability report. These companies must provide an ESG report: a report on their environmental, social and governance impacts.
The requirements for the new reporting will include:
- Reporting of social and governance issues in addition to environmental and climate change reporting. Examples are anti-corruption and anti-bribery, corporate governance, respect for human rights and labor, diversity and inclusion.
- Disclosing information about a company’s sustainability processes and the actual and potential negative impacts of the company’s operations and value chain.
- Reports on scope 3 emissions including scope 3.6 emissions from business travel.
When the CSRD will be phased into use
The new reporting rules will be phased in four stages and are starting from 2024:
- Reporting in 2025 on the financial year 2024 for companies already subject to the NFRD, large companies with more than 500 employees;
- Reporting in 2026 on the financial year 2025 for large companies (>500) that are not currently subject to the NFRD;
- Reporting in 2027 on the financial year 2026 for listed SMEs (except micro undertakings), small and non-complex credit institutions and captive insurance undertakings;
- Reporting in 2029 on the financial year 2028 for third-country undertakings with net turnover above 150 million in the EU if they have at least one subsidiary or branch in the EU exceeding certain thresholds.
Companies have to hire an independent auditor or certifier that will ensure companies to comply with the reporting and certification standards.
The possible effect of the new reporting rules
These new reporting measures will have significant impact on organizations in the short term, as they have to comply with the new rules.
The effect of the CSRD is that there will be more transparency for investors to invest in truly sustainable activities across the European Union. It will give them an idea of the long run investment. Also, by covering all the Environmental, Social and Governance (ESG) elements, they aim to increase investments in sustainable companies and activities.
More investments and focus to sustainability will hopefully result in a more sustainable climate. If companies are forced to think about their sustainability footprint and have to document this, it is likely that this will positively affect the trend to go green or sustainable. It simply becomes more interesting for investors.
We notice the trend to pursue more sustainable business operations first hand, as a lot of our clients choose our water tap because it is the more sustainable solution. By using a water tap instead of packaged drinks, companies cut off all the single-use waste and their negative impact on our climate. Hopefully, this will result in more fish than plastic in our oceans.
Key takeaways regarding the CSRD
- Your organization’s management will be required to certify that an adequate risk and control framework safegaurding and governing reported ESG information under the CSRD has been established.
- The whole organization, from finance to risk management and operations need to start making decisions on ESG governance over responsibilities and resourcing.