In June 2022, the European Council and Parliament took a major step toward new ESG regulations that will affect thousands of companies in the EU and beyond. With a provisional agreement for the Corporate Sustainability Reporting Directive (CSRD) now in place, companies will need to have their sustainability reports independently audited each year, starting as early as January 2024.
The CSRD represents the latest step by the EU to promote greater transparency and consistency around ESG disclosures. “This means more transparency for citizens, consumers and investors. It also means more readability and simplicity in the information provided by companies, which must play their full part in society. Greenwashing is over,” France’s Finance and Economy Minister Bruno le Maire declared in the European Council’s press release. “With this text, Europe is at the forefront of the international race to standards, setting high standards in line with our environmental and social ambitions.”
The social aspects of a company’s ESG performance will also receive heightened scrutiny under the CSRD. “Today, information on a company’s impact on the environment, human rights and work ethics is patchy, unreliable and easily abused. Some companies do not report. Others report on what they want. Investors, consumers and shareholders are at a loss,” the EU Parliament’s lead negotiator Pascal Durand told ESG Today. “From now on, having a clean human rights record will be just as important as having a clean balance sheet.”
The CSRD provisional agreement comes on the heels of a March 21 announcement by the U.S. Securities and Exchange Commission (SEC). Under the SEC's proposed framework, publicly traded companies may soon be required to outline climate risks related to Scope 1 and Scope 2 emissions in corporate filings, such as registration statements and annual reports, with larger companies required to expand these disclosures to Scope 3 emissions and climate risks throughout the supply chain. Larger companies would also be required to have third-party verification of these disclosures, as with the CSRD regulations.
The CSRD and SEC proposals are asking for many of the same things, such as independent audits of ESG disclosures, but both sets of requirements have their own complexities and implementation timelines that depend on a company’s size and jurisdiction. How does this affect disclosures for compliance reporting, as well as ESG due diligence for acquisitions, partnerships and investments? Read on for our insights about what’s changing, what companies around the world can expect, and how they can prepare.
CSRD Context, Checklists and Compliance Deadlines
Requirements for corporate sustainability disclosures are not new to the EU, but the CSRD is a notable expansion. First revealed as part of the EU Green Deal, which aims to make the EU the first climate neutral continent by 2050, the CSRD proposal is designed to help investors gain more comprehensive non-financial information about businesses.
The CSRD will replace the EU’s current ESG directive, the Non-Financial Reporting Directive (NFRD). Notably, the CSRD has the potential to affect four times more companies — from 12,000 under NFRD to now approximately 50,000. EU businesses affected by the CSRD meet at least two of three benchmarks: they have at least 250 employees, €40 million in net turnover, and/or €20 million in assets. Non-EU businesses generating at least €150 million inside the EU are also included under the new regulations.
The CSRD will require companies to:
• Comply with the European Sustainability Reporting Standards (ESRS), which are expected to be released later this year and adopted by summer 2023
• Obtain a third-party, certified audit of their reported information
• Apply double materiality standards, which show businesses’ ESG impact on both their internal operations and outward-looking sustainability goals
The European Council and Parliament must approve the CSRD provisional agreement before it heads to the formal adoption procedure. Once it becomes law, companies already subject to the EU’s existing NFRD would have to adhere to standards beginning in 2024, with initial reporting due in 2025. Other companies would phase in according to the following schedule:
• Large businesses would need to comply by 2025, with the first report in 2026
• Disclosures from SMEs follow in 2026, with reporting starting in 2027
• Non-EU companies subject to the CSRD would need to comply by 2028, with initial reporting due in 2029
Next Steps for Businesses
In short, companies in Europe and elsewhere, large or small, may be subject to multiple ESG reporting frameworks within the next few years. In order to prepare, businesses should:
• Understand they may be subject to expanded ESG reporting under the CSRD — including companies outside the EU
• Follow news and updates regarding the ESRS
• Plan a strategy for tracking the information required to satisfy reporting standards
• For those who have until 2028 to implement new reporting, watch and learn from the experiences of EU companies who need to comply sooner
It’s also critical for companies to have a streamlined, scalable system for tracking data and requirements, especially for reporting standards that are works in progress and sometimes overlap.
An auditable ESG platform, such as Diligent ESG, is another tactic in the CSRD preparation toolkit that enables organizations to:
• Easily pull ESG data from systems of record, surveys and spreadsheets across the organization
• Save time and speed up the process through workflows, reminders and robotic automation
• Get a complete picture of ESG data, without duplications and gaps
• Ensure consistent disclosures across stakeholders and frameworks
• Map ESG data against a variety of standards
• Deliver updates to executives and board members through visual storyboards and dashboards
• Monitor compliance, public perception, third-party risk, and progress against peers and competitors
While 2024, 2026 and certainly 2029 may seem like a lifetime away on the calendar, the complexity and critical nature of these new disclosures make it imperative to act now. The earlier an organization starts preparing, the more time it will have to implement processes, test out systems and be truly ready for these new ESG requirements — and any others that emerge in the meantime.
