After the GDPR and whistleblowing rules, another EU directive is coming that will probably affect the activities of all companies operating in the European Union sooner or later.
ESG (Environmental, Social, Governance) is getting more and more attention in the investment community, and the English term refers to environmental, social and governance aspects. ESG aims to take into account the environmental, social and governance policies and activities of companies, in addition to their financial performance. ESG is now not only a key driver for business decisions, but is also an increasingly important indicator for company evaluation and will soon become an EU-wide obligation.
It is important to note that there are already directives in the European Union that require ESG reporting, although these are still only narrowly applicable. Under Directive 2014/95/EU, also known as the Non-Financial Reporting Directive (NFRD), large public interest companies with more than 500 employees are already required to report on their policies on the environment, social and employment issues, respect for human rights, anti-corruption and bribery since 2018.
However, the current ESG regulation needs to be improved in several respects. Reporting obligations cover only around 11,700 companies in the EU, do not meet the increased demand for information from investors, NGOs and social partners, are difficult to access and, as companies report under different frameworks, are not easily comparable. This has led to a review and rethinking of ESG reporting rules, leading to the creation of the Sustainability Reporting Directive (SRD), which would extend reporting requirements and introduce a number of new elements.
The CSRD Directive expands the number of companies covered to around 49,000, as from 2023 all large companies and listed companies (except micro-enterprises) will have to report on their sustainability policies.
The European Commission has adopted a package of proposals that focus on simplifying EU rules and increasing competitiveness, and will unlock additional investment capacity. This is a major step forward in creating a more favourable business environment that will help EU companies grow, innovate and create quality jobs.
The first “Omnibus” packages include simplifications in the areas of sustainable financial reporting, sustainability due diligence, EU Taxonomy, the Carbon Cap Adjustment Mechanism and European investment programmes. The proposals will reduce the complexity of EU requirements, especially for small and medium-sized enterprises (SMEs) and small medium-sized companies (SMCs), while focusing the regulatory framework on the largest companies that have a greater impact on climate and the environment and helping them to access sustainable finance to make the clean transition.
The CSRD introduces new disclosure requirements: companies will not only have to describe their sustainability policies, but also their strategic objectives, resilience to sustainability risks, the role of their governing bodies in sustainability, and intangible assets such as intellectual and human resources, social and relational capital.
While under the NFRD, companies can choose between national, EU or international frameworks and the European Commission only provides non-binding guidance on reporting, the CSRD requires uniform sustainability reporting standards and a single digital format. This will make ESG reporting by companies comparable. A further difference is that the NFRD requires auditors only to verify that non-financial statements have been prepared by companies, whereas the CSRD requires a mandatory audit to check that management’s accounts comply with legal requirements. The CSRD also allows the sustainability report to be included only in the management report, removing the possibility for Member States to allow a separate report.
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