New EU taxonomy reporting requirements are driving companies to pay closer attention to where they source their products and/or which bonds and stocks they invest in. As well as being driven by EU directives, companies are also being driven by consumer demands and expectations. Consumers are becoming increasingly eco-conscious, and they want to know whether the products they are buying have a negative, neutral or positive impact on the environment. The draft of the corporate sustainability reporting directive (CSRD) will update the EU taxonomy reporting requirements. This is another step in the development of a EU regulatory framework for sustainable finance. Companies with over 250 employees or listed companies will have to detail their environmental, social and governance (ESG) policy in standardised documents. In short, businesses will have to be transparent about their environmental impact.
No doubt the initiatives brought about by the EU taxonomy reporting requirements will push those less green corporates to be more mindful about their practices, as they will need to be more transparent about them. However, there are already many companies, large companies such as Unilever, Panasonic and IKEA, who have already become greener. IKEA has invested in sustainability throughout their entire business operations, starting at their supply chain. Although soon the EU taxonomy reporting requirements will drive corporations to be more mindful of where they source materials for their products, IKEA and Unilever have already been working on this.
However, not all companies have taken steps as bold as Unilever. The European Commission’s proposal will test the robustness of companies’ commitments to their environmental obligations. The EU taxonomy reporting requirements will introduce four new features which will increase corporates’ accountability and level standards across the EU. The directive is hoped to aid the transition to a sustainable economy. The new features are an extension of the scope to all large companies and companies listed on a regulated market (except listed micro companies); a certification requirement for sustainability reporting; more detailed and standardised requirements on the information to be published by companies; improved accessibility of information, by requiring its publication in a dedicated section of company management reports.
Updates to the non-financial reporting directive (NFRD)
Another proposal by the EU is to address the shortcomings in the current rules on disclosure of non-financial information, which was found to be insufficient quality, meaning that investors could not properly take it into account. This would hinder the move to a more sustainable economy. The NFRD is further evidence of the EU’s key role in setting sustainable standards, which will surely drive other jurisdictions to set comparable ESG standards for businesses.
This directive proposes a broader scope, enables clearer and broader reporting requirements, and ensures that reporting complies with mandatory EU standards. It also provides that digital access to sustainability information will become a requirement.
The EU taxonomy reporting requirements may be met with some hostility from certain businesses, who might see it as burdensome and be afraid they don’t have sufficient time to adapt to the new rules. However, the EU Council amended the scope in order to ensure that the reporting requirements don’t place undue burden on listed SMEs (since the obligations do not apply to other SMEs), and ensures that they have sufficient time to adapt to the new rules.
The new EU taxonomy reporting requirements will help investors, consumers, policymakers and other stakeholders to evaluate large companies’ non-financial performance. Consumers will be able to make more informed choices about which brands they choose. Compliance with the directive is happening soon: companies must submit their reports aligning with CRSD on the 1st January 2024 for the 2023 financial year. It will be challenging for companies, as data collection takes time and resources. However, the directive is a step forward as regards achieving a more sustainable economy. It is expected to improve money flow towards sustainable activities across the EU, and will likely influence other jurisdictions to channel money into greener activities.