The number of companies required to make disclosures on ESG affairs across the European Union will quadruple once an innovative law has been adopted by the European Council on 28 November.
The Corporate Sustainability Reporting Directive (CSRD), which was passed in the European Parliament this month, broadens the scope of the existing ESG reporting law, the Non-Financial Reporting Directive (NFRD).
The CSRD also tightens rules governing the detail of how and what they disclose, and will be phased in between 2024 and 2028. Despite these innovations, some policy experts describe the directive as ineffectual.
Its increase in scope, however, has prompted claims from Pascal Durand, CSRD rapporteur at the European Parliament, that it represents “a small revolution”. Due to the inclusion of listed SMEs, large non-EU companies, and large private companies, in addition to the large listed companies covered by the NFRD, the number of relevant companies jumps from 11,700 to 50,000.
Promoters of the directive draw particular attention to the integration of non-EU entities such as the subsidiaries of US firms, which is rare in the EU statute. These have to comply if their EU turnover exceeds €150m.
“For once, the EU is the rule maker instead of being the rule taker,” claimed a spokesman at the European Parliament, comparing them with US rules demanded of EU companies with facilities on US territory.
Another notable feature is the standardisation of reporting methods and topics. This was absent from the NFRD, so that companies could cherry pick their favourite narratives. By contrast, the CSRD abolishes the previous use of 1,700 different reporting frameworks in favour of a single system.
For the first time, the directive also requires assurance on ESG reporting, and auditors now have to obtain an accreditation as strict as that for financial auditing.
“The idea is to obtain the same level of assurance as for financial information,” said the spokesman. ESG information is to be published in the same management report as the financial statements.
It is now more detailed and specific, and includes principal adverse impacts in order to match the information needs of the financial sector imposed in the Sustainable Finance Disclosure Regulation. “There is very little room for manoeuvre in terms of what is not reported”, he said, suggesting this would end greenwashing.
The integration of double materiality into the reporting standards accompanying the directive is another ambitious novelty in the directive.
This means companies show not only how material ESG factors affect their balance sheet, but how they themselves impact the environment and human rights, for example. The standards are due to be adopted by the European Commission in June 2023.
Though most of these requirements are innovative, there are doubts on the directive’s ability to drive change. A key factor motivating its launch is the EU green transition plan, limiting global warming to 1.5 °C to fulfil the Paris Agreement, requiring greenhouse gas emissions reductions of 45% by 2030. Companies have to show how their business model and strategy align with this.
“It’s a rather soft reporting law with a long phase-in period”
Anne-Catherine Husson-Traore, Novethic’s CEO
Given that deadline – only two years after CSRD rules take full effect, time remaining is insufficient.
“It’s a rather soft reporting law with a long phase-in period,” commented Anne-Catherine Husson-Traore, chief executive officer of French research firm Novethic, and a member of the high-level expert group that recommended the EU Sustainable Finance Action Plan in 2017.
What is more, global standards under development at the International Sustainability Standards Board diverge from the reporting standards accompanying the directive by ruling out double materiality, for example. This indicates the potential emergence of rival systems.
Among concerns about the directive is its weakness on sanctions for non-compliance. It requires these to exist, but member states decide the penalties themselves.
Husson-Traore suggested other types of legislation, such as the EU ban in October on new combustion engine cars from 2035, are more powerful. However, she praised the directive’s intent.
“It is very, very new that company directors ask questions about their negative impacts on the environment, labour and other issues”, she said.
For their part, the directive’s advocates emphasise its interconnection with the forthcoming Due Diligence Directive, which aims to ensure that companies convert plans they disclose into action.
No comments yet