The reformed rules will address major issues regarding the quality, consistency and comparability of sustainability information that companies disclose in accordance with existing EU legislation, as seen in studies published by the Alliance for Corporate Transparency.
The CSRD clarifies transparency obligations for large companies operating in the EU regarding their impacts, risks and opportunities on sustainability – including their decarbonisation and performance plans – and mandates the development and adoption of mandatory ESG standards for corporate sustainability reporting.
This reform is the basis for ensuring the success of the European Sustainable Finance Agenda, the EU Green Agreement and the REPowerEU plan: relevant and comparable sustainability data are a prerequisite for channeling financial flows to support the transition to an EU net zero economy. It is also necessary to ensure that financial market participants meet their obligations, as well as to monitor progress towards the EU’s climate, biodiversity and human rights goals and commitments, and to reduce the EU’s dependence on fossil fuels, and thus Russia (for which we need data on energy consumption and production of companies, renewable energy production, etc.).
5 key changes and missed opportunities:
- The scope of the law has been extended to all large listed and unlisted companies with more than 250 employees. According to European Commission estimates, this includes about 50,000 companies, leaving out over 99% of companies in the EU. The included SMEs are included in the initial proposal for a mandatory way of reporting from 2026 according to simplified standards (recommended by several studies and surveys, including those of the EU Commission). The final text allows them to sign out by 2028, which will have major implications for the willingness of SMEs to take advantage of sustainable financial flows and their relationship with banks, public procurement opportunities or the demands of business partners. The European Parliament, as well as investors, civil society and academic studies have recommended an approach to defining high-risk sectors and expanding the scope of SMEs in these industries.
- The reporting obligations of companies have been specified, ie for disclosure:
- Transition plans to achieve climate neutrality by 2050, including actions, investment plans and exposure to fossil fuels;
- Time-bound targets related to sustainability issues and the progress of companies in achieving them (including greenhouse gas emission reduction targets);
- Due diligence information on sustainability, ie. the transparency of the processes and adverse impacts identified in the company’s value chain, and the actions taken to address such impacts.
- A key measure of CSRD is the development and adoption of mandatory ESG standards based on double materiality (i.e., detecting the impact of companies on the planet and people, as well as the risks and opportunities for the company arising from sustainability issues).
- Following the CSRD guidelines, this will include quantitative and qualitative data and cover both retrospective and future-related information;
- Draft EU standards (sectoral agnostic) have been published and are open for public consultation until August. They have been designed by a multi-stakeholder expert group to make companies feasible, flexible and implemented. The Expert Group, part of the new EFRAG Sustainability Reporting Pillar, will now proceed with technical proposals for sector-specific standards.
- In terms of timeframe, the agreement reached by the co-legislators proposes delayed implementation until 2024 for those companies already covered by existing legislation (EU Non-Financial Reporting Directive) and 2025 for other large listed and unlisted companies (above 250 employees). is the original proposal was to be integrated into national law by the end of 2023, the agreement now includes a transposition period of 18 months. It is imperative that Member States provide clarity to companies by making the necessary changes before January 2024.
- The European Commission is being asked to assess the implementation of the Directive and the adoption of standards by small and medium-sized enterprises before 2028, which is too late given that voluntary measures have proved ineffective and that many companies in high-pollution sectors are not covered by CSRD.
Corporate Transparency Alliance organizations welcome the above developments, in line with NGO policy recommendations, and lament the missed opportunities.
Susanna Arus, EU Communications and Public Relations Manager at Frank Bold states:
“It is imperative that Member States provide clarity to companies by making the necessary changes to national legislation before January 2024 and ensure that all large companies (not just those already covered by the EU Non-Financial Reporting Directive) are required and able to report for the 2024 financial year. Gradual implementation would risk creating a two-speed Europe that would put some countries and companies at a disadvantage for access to sustainable financial flows. ”
Giorgia Ranzato, T&E Sustainable Finance Officer, Member of the EFRAG Expert Group and the Sustainable Finance Platform, states:
“Despite the exclusion of small and medium-sized enterprises and the delayed entry into force, today’s agreement establishes the EU as a world leader in sustainability reporting. But the devil is in the details: all the specific requirements for detection have yet to be defined. We saw this with the Taxonomy Regulation: ambitious first-level legislation, and then weak criteria that nullify all work. We hope that the Commission and the Council will not destroy this dossier either. “
Mirjam Wolfrum, Director of Political Engagement, CDP Europe said:
“CSRD is a significant achievement for bold corporate disclosure rules that will lead companies to set emissions and natural targets in line with science. Companies that disclose data through CDP are well prepared for new requests. We have always developed and adapted our questionnaires in the light of new standards, priorities and regulations, and we will continue to do so. ”
In response to the deal, Elisa Peter, director of Publish What You Say, said:
“We welcome the attention that legislators have paid to high-risk sectors. A fair transition will not be possible without full transparency of oil, gas and mining companies on their extraction projects. The sustainability rules that will now be developed to implement yesterday’s agreement are vital to people, climate, the environment and good governance in oil, gas and mineral-producing countries. ”
On the outcome of the CSRD trilogue, Isabella Ritter, EU policy officer at ShareAction, comments:
“The introduction of mandatory sustainability reporting standards across the EU will finally provide investors with comparable and qualitative sustainability data to better consider the impacts of their investments. With standards covering the entire ESG spectrum and following a dual materiality approach, investors will be able to redirect capital flows towards more sustainable activities. In particular, disclosing companies about transition plans, including greenhouse gas reduction targets, will provide investors with long-awaited information about the climate ambitions of their companies in which they invest. ”
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