The Corporate Sustainability Reporting Directive aims to improve the quality, comparability and relevance of sustainability reporting by companies in the EU. Brendan Ringrose explains what it’s all about
The pandemic, turmoil in Ukraine, stricter regulatory controls and the effects of climate change have all contributed to the heightened level of urgency surrounding environmental, social and governance (ESG) reporting.
The Climate Action and Low Carbon Development (Amendment) Act was signed into law in July 2021.
The Climate Act commits Ireland to reaching specific greenhouse gas emission-lowering targets by 2030 and 2050 and provides a framework for doing so.
Greenwashing and reporting
The European Commission’s Corporate Sustainability Reporting Directive (CSRD) is a proposed legislative measure aimed at improving the quality, comparability and relevance of sustainability reporting by companies in the EU.
One of the main objectives of the CSRD is to address the problem of greenwashing, which occurs when companies make false or misleading claims about ESG performance to improve their reputation or gain competitive advantage.
Greenwashing undermines the credibility and effectiveness of ESG reporting, making it difficult for investors, consumers and other stakeholders to assess the true sustainability performance of a company.
The CSRD will apply to all large companies and all companies listed on regulated markets (except listed micro-enterprises).
Organisations must not only disclose how sustainability issues impact them, but also how their activities impact society and the environment.
Strengthening sustainability
The European Commission’s Action Plan for Financing Sustainable Growth directly targets ‘strengthening sustainability disclosures and accounting for rule-making’ as one of 10 key focus areas.
In tandem with the trend towards mandatory ESG reporting, more and more companies are choosing to disclose ESG information to satisfy stakeholder demands voluntarily.
The CSRD obliges companies within the scope to report against common EU reporting standards adopted by the European Commission as delegated acts. Companies are likely to start reporting in 2024, based on FY 2023 information.
Reporting considerations
Companies will need to consider the following over the next several years.
Timeline for implementation
The timeline for the implementation of the standards and reporting is:
- FY 2023: first set of Sustainability Reporting Standards will be available by mid-2023 based on the draft standards published by the European Financial Reporting Advisory Group in November 2022;
- FY 2024: second set of Sustainability Reporting Standards will be available and EU Member States will adopt the EU directive;
- FY 2025: first reports due for the financial year 2024.
Who does it apply to?
The CSRD applies to all large companies governed by, or established in, the EU with:
- >250 employees and/or;
- >€40 million turnover and/or;
- >€20 million in total assets of listed companies.
Small and medium listed companies get an extra three years to comply.
What must be included?
- A dedicated section of the company’s management report must include the information necessary to understand its impacts as well as how sustainability matters affect its development, performance and position.
- Though the Non-financial Reporting Directive did not require auditing, the terms of the CSRD require sustainability reporting to be checked externally when the CSRD takes effect. Companies will need to seek limited assurance of sustainability information. This requirement is less extensive than that required for the financial audit statement but will, nonetheless, require external scrutiny.
- Companies must disclose information relating to intangibles (social, human and intellectual capital).
- Reporting should be in line with Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation.
An entity will be exempt from the reporting requirements if the consolidated management report of a parent company includes the results of the company and its subsidiaries.
Reporting
This must be included in the management report.
The bottom line
Mandating standardised reporting provides for increased comparability in the public domain. This means that organisations can be held accountable by their stakeholders and, in turn, is likely to play a role in procurement processes.
Brendan Ringrose is a partner with Whitney Moore LLP Law Firm
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