New European rules for Corporate Sustainability Reporting
#news and trends • 27/05/2021 • Inès Aoun; Katelijne NorgaAll large European companies - some 50,000 in all - will soon be required to communicate more transparently about their environmental, social and governance (ESG) performance and publish a sustainability report. That has everything to do with the ambition to make the European Union climate neutral by 2050.
1. What is it about?
Since 2017, organisations and companies of major social importance (e.g. listed companies, banks and insurance companies with more than 500 employees) in Europe are legally obliged to publish a non-financial report or a sustainability report. This is stated in the Non-Financial Reporting Directive (NFRD).
As part of the Green Deal, as part of the strategy to boost sustainable investments, the European Commission decided to revise the Directive. This revision is, together with the EU Taxonomy for Sustainable Activities, part of a package of measures to direct more money towards sustainable activities. In this way, the Commission wants to encourage investors to redirect their resources to sustainable technologies and businesses: a necessary lever to make Europe climate neutral by 2050.
A uniform standard for reporting on ESG criteria should allow all stakeholders, including investors and the financial sector, to consult clear and audited information on large European companies.
The stakeholder consultation (on the existing directive) also showed that current sustainability reports are not always accurate. Often, crucial information is missing and sometimes there is suspicion that things are being presented greener than they actually are.
This criticism and the fear of greenwashing are included in the reform that the Commission is now implementing. With the new directive, Europe also wants to contribute to a culture of public accountability in companies.
2. What changes?
- The obligation to disclose non-financial information is extended to all large companies and listed SMEs. This means that some 50,000 companies will have to publish a report, instead of the current 11,000.
- Furthermore, the Commission wants to streamline reporting. The European Financial Reporting Advisory Group (EFRAG), a private initiative financially supported by the Commission, will develop a uniform standard that builds on European standards for reporting non-financial and climate-related information. These standards are currently non-binding and contain little detail. EFRAG will also align the new European standard with international frameworks that already exist, such as those of the Global Reporting Initiative (GRI).
- At the same time, the Commission wants to provide a clear standard for integrated reporting, where financial data and non-financial information are disclosed together. This has everything to do with the leverage the Commission wants to create for the green transition. Investors need combined information to assess the financial risks arising from the climate crisis and other environmental disasters. These 'new' risks are increasingly determining the resilience and long-term value of companies. The Commission is therefore working towards alignment with the international Sustainability Accounting Standards Board (SASB) and the standards of the International Integrated Reporting Council (IIRC).
- All reports must be audited before they are published in order to guarantee their quality. The Commission wants to impose this obligation in stages, starting with a limited audit in order not to burden companies too much with costs and to allow the audit market to prepare for stricter audits in the future.
- Finally, companies are required to publish their report digitally and to 'tag' it according to a classification system that is yet to be developed. This should ensure that investors can easily compare and use business information.
3. What do companies have to report?
The subjects that companies are required to report on remain unchanged:
- environmental impact
- social issues and dealing with employees
- anti-corruption and bribery
- diversity in the boardroom (e.g. age, gender, education and professional background)
4. When will all this come into force?
Now that the Commission's proposal is final, it will go to the European Parliament and the European Council. In the meantime, EFRAG is working on a first draft set of standards. This is expected by mid-2022, after which a series of consultations with various expert committees will follow before the standard can finally be adopted.
Depending on the negotiations in Parliament and Council, it is expected that the first set of standards will be adopted under the new legislation by the end of 2022. This means that the first reports under to the new directive and standards will cover the year 2023 and will be published in 2024.
Taking the step towards your own sustainability report? We are happy to help! Contact us at mail@pantarein.be to get acquainted.
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