A consequence of the EU economic crisis is an increased willingness from the financial sector to make their practices more sustainable, and an ambitious expansion of the green agenda. In most member states, green schemes are considered a priority by their respective governments. The new EU sustainability reporting regulations respond to this need, as the EU hopes to be a global driver in achieving a sustainable economy.
It's clear that, in a lot of member states, the green agenda is offering ambitious new momentum for a sustainable economy, starting with the supply chain and moving upstream to the large corporations and financial institutions. The EU sustainability reporting directive will hold businesses and institutions accountable for their practices and the impact these have on the environment. Social accountability has been crucial for businesses and institutions for some time now, and people are demanding greater transparency from those they buy from and work with.
How the EU is Tackling Sustainability Reporting
The EU exposure drafts cover all that relates environmental, social and governance reporting. The set of thirteen exposure drafts of European Sustainability Reporting Standards for companies based in EU member states. The standards are set to introduce comprehensive new disclosure requirements and will affect most listed and large companies based in the EU, including large (within the EU definition) European subsidiaries of foreign parent companies.
The legislation is still in progress, but the current proposals indicate that the new regulations will apply to reports published on or after 1 January 2025. There are requirements for limited assurance at first, and after six years reasonable assurance. The new sustainability reporting legislation is hoped to apply public policy objectives, as the need for a greener economy is ever more pressing.
So what do the sustainability reporting requirements involve exactly? The Corporate Sustainability Reporting Directive (CRSD) was adopted in April 2021. Amongst others, one of its key proposals is that companies report sustainability information in accordance with EU Sustainability Reporting Standards (ESRSs). The new regulations are expected to be adopted by the European Commission. If adopted then the European Financial Reporting Advisory Group (EFRAG) will be responsible for developing what the new sustainability reporting standards are.
Who would be affected? Currently, companies who are required to report under the current legislation, the Non-Financial reporting directive (NFRD) are large public-interest companies with over 500 employees. Under the new legislation, these large corporations will have to comply with the new sustainability reporting standards as set in January 2025. This will cover reporting periods ending on 31 December 2024. Subsequently, the legislation will also cover all large and most listed companies, applying to reports published on or after 1 January 2027. Large companies will be defined as those which have more than 250 employees; over 40 million euro net revenue, and over 20 million euro total assets.
The new regulations will introduce a single standard for sustainability reporting, a single standard on the overall disclosure requirements, as well as specific disclosure requirements for eleven ESG matters. The disclosure topics discussed by the EU commission are the following. Firstly, there are environmental issues, climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and the circular economy. A draft was also issued about social matters, which are workforce, workers in the value chain, affected communities, and consumers and end users. Governance matters were the final topic, and this covered governance, risk management and internal controls, as well as business conduct.
Companies will be required to report about their business model, how they implement policies and meet targets, and what their action plans are to do so. They will also be required to disclose how they measure their performance. The EU regulations will set out conceptual guidelines for completing the reports, which companies will need to observe. These include providing information about the quality of the information provided, and the ‘double materiality’ concept, which is defined in the new regulations. Finally, companies will need to consider reporting boundaries and the time frames used for reporting on sustainability issues (i.e. short, medium or long term).