If the EU is to meet the challenging goals it has set itself on sustainability, companies need to play their part. The trade bloc’s policy aims – collectively referred to as the European Green Deal – include becoming the first world's net-zero continent and shifting to a ‘circular economy’ where economic growth no longer relies on the Earth's natural resources.
To help meet these objectives, the EU Commission has proposed the Corporate Sustainability Reporting Directive (CSRD). The legislation, which replaces the existing Non-Financial Reporting Directive (NFRD), has been designed to make sustainability information more detailed, comparable and credible for investors and other stakeholders.
The arrival of the CSRD reflects broader trends within corporate reporting, where companies are making more links between financial and sustainability issues, and speaking to a wider group of stakeholders, says Simon Cleveland, head of public policy and regulation at Deloitte. The EU has not called the directive NFRD II, he notes. Instead, regulators have come up with a new name that eschews the term ‘non-financial’, underlining that sustainability directly impacts the bottom line.
The CSRD significantly extends the scope of Europe’s sustainability disclosure regime. Under the proposals, large private companies and listed small to medium-sized enterprises (SMEs) would now be covered. As a result, the number of companies that need to follow the EU’s sustainability reporting rules would rise from around 11,600 to 49,000, according to the commission’s estimates.
Other major changes include a new emphasis on ‘double materiality’, more detailed reporting rules, the development of EU sustainability reporting standards and a requirement for limited assurance of sustainability information. Below, we highlight five key areas IROs should be aware of.
1. The importance of double materiality
When the EU brought in the NFRD in 2014, it included the idea that companies should report on material issues that affect the business, and also how the business impacts the environment and people – what’s known as the ‘double materiality’ perspective. The commission reiterated the importance of this dual materiality approach in subsequent reporting guidelines released in 2017 and 2019.
Despite the regular prompts, however, the EU feels companies have not fully taken on board this idea. In response, the CSRD ‘clarifies the principle of double materiality’ and removes ‘any ambiguity’ that companies should follow this approach in their reporting. Under the new rules, companies should ‘disclose information that is material from both perspectives as well as information that is material from only one perspective,’ states the directive.
‘It’s an interesting way of reframing who the report and accounts are for,’ says Cleveland. ‘Not only are you moving away from the historical financials into this broader concept of what the business is – its purpose and wider stakeholders – but you’ve also got to think about it from the point of view of those stakeholders.’
2. New reporting requirements
If adopted, the CSRD will bring in more detailed reporting requirements for companies. While the directive’s text only covers the required information at a high level, it does give an overview of what companies will need to publish. Among the requirements are:
- A description of the business model and strategy, including risks and opportunities related to sustainability, how the business is aligned with the Paris Agreement of capping global warming at 1.5ºC and how different stakeholder views are taken into account
- Sustainability targets and progress toward those goals
- How sustainability issues could affect a company’s value chain and supply chain
- Information on intangibles, such as human and intellectual capital.
The information will be required to cover short, medium and long-term time horizons, be both forward-looking and backward-looking and feature both qualitative and quantitative information, according to the directive.
The CSRD would also require companies to report in line with forthcoming EU sustainability standards. The creation of the standards has been delegated to the European Financial Reporting Advisory Group, a private organization supported by the EU. The commission aims to adopt the first set of standards by October 2022.
Of crucial interest to companies will be how the EU’s own standards line up – or don’t – with other approaches already in existence or being developed. Issuers have begun to widely use the standards and frameworks created by SASB, GRI and TFCD, as well as other groups.
Furthermore, the IFRS Foundation is working with a range of organizations to establish an International Sustainability Standards Board and develop harmonized global rules.
The commission says EU standards should be created via collaboration with other projects and align where appropriate, though it adds that Europe’s own specific requirements will need to be taken into account.
This is an extract of an article that was published in the Fall 2021 issue of IR Magazine. Click here to read the full article.
