“Companies will have to report on how their business model affects their sustainability, and on how external sustainability factors (such as climate change or human rights issues) influence their activities”.
In January 2023 the new EU Corporate Sustainability Reporting Directive (CSRD) became law across the European Union. It will strengthen the existing rules on non-financial reporting introduced to the Accounting Directive by the Non-Financial Reporting Directive (NFRD). It will bring in more details reporting requirements on areas such as environmental rights, social rights, human rights and governance factors.
It will apply to all large companies and companies listed on regulated markets with limited exceptions. After a lengthy transition period it will also apply to SMEs and to some non-European companies with operations in the EU, which will have to provide a report on their environmental, social and governance (ESG) impacts. The European Financial Reporting Advisory Group (EFRAG) will be involved in developing European standards.
The Directive is complex, long and densely written in the form of amending legislation. Not perhaps a good read, but no less significant for that.
It will apply in four stages –
reporting in 2025 on the financial year 2024 for companies already subject to the NFRD;
reporting in 2026 on the financial year 2025 for large companies 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 a net turnover above Euros 150 million in the EU if they have at least one subsidiary or branch in the EU exceeding certain thresholds.
EU Member States will have 18 months in which to implement this legislation into their own.
The Directive is part of the EU’s European Green Deal and its Sustainable Finance Agenda.
Perhaps the real significance of this Directive is that it will require companies, starting with large companies, working down to SMEs and also reaching out to significant companies operating within the EU, to sit down and work out their policies and disclosures on a much wider and more testing range of sustainability issues. The Directive’s coverage of “sustainability matters”, taken in context and as drafted, includes a very wide range of environmental, social and human rights, and governance factors, including anti‐corruption and anti‐bribery matters.
We can expect that sustainability reporting standards will be developed which will cover a company’s approach to -
climate change mitigation, including scope 1, scope 2 and, where relevant, scope 3 greenhouse gas emissions;
climate change adaptation;
water and marine resources;
resource use and the circular economy;
pollution;
biodiversity and ecosystems;
equal treatment and opportunities for all, including gender equality and equal pay for work of equal value, training and skills development, the employment and inclusion of people with disabilities, measures against violence and harassment in the workplace, and diversity;
working conditions, including secure employment, working time, adequate wages, social dialogue, freedom of association, existence of works councils, collective bargaining, including the proportion of workers covered by collective agreements, the information, consultation and participation rights of workers, work-life balance, and health and safety;
respect for the human rights, fundamental freedoms, democratic principles and standards established in the International Bill of Human Rights and other core UN human rights conventions, including the UN Convention on the Rights of Persons with Disabilities, the UN Declaration on the Rights of Indigenous Peoples, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work and the fundamental conventions of the International Labour Organization, the European Convention for the protection of Human Rights and Fundamental Freedoms, the European Social Charter, and the Charter of Fundamental Rights of the European Union.
That is quite a list of factors for companies to be considering. They may need to spend some of the time between now and full application of the legislation to their operations to plan for its application and implementation.
Hopefully the Directive will continue to be broadly aligned with the obligations of the Task Force on Climate-Related Financial Disclosures and with emerging internationally agreed standards of disclosure, in particular those being developed by the International Sustainability Standards Board (ISSB)