EU to adopt new sustainability reporting rules in October
The CSRD will cut unnecessary costs in reporting.
The European Union (EU) will be adopting a new directive in October 2022 mandating companies to publicly disclose sufficient information on their sustainability risks and opportunities, including the impacts on the people and the environment.
The Corporate Sustainability Reporting Directive (CSRD) will amend the Non-Financial Reporting Directive (NFRD) and will boost the European Green Deal or the set of measures to fight climate change with the aim of net-zero emissions by 2050, according to a report by Ernst and Young (EY).
EY said the directive indicated that sustainability reporting should be “comparable, reliable and easy for users to find and make use of with digital technologies.” It should also be in line with EU regulations, including the EU taxonomy.
“The directive aims to reduce unnecessary costs associated with sustainability reporting. Its goal is to enable companies to meet the growing demand for sustainability reporting in a cost-efficient manner,” EY said.
“Better data from companies about the sustainability risks they are exposed to, and their own impact on people and the environment, is essential for the successful implementation of the European Green Deal and the Sustainable Finance Action Plan,” EY said.
This amendment will apply to Accounting Directive, Transparency Directive, Audit Directive, and Audit Regulation.
With the adoption of CSRD, businesses are expected to disclose more sustainability-related information than before about their business models, strategy and supply chain. The provided information is expected to help investors compare with peers with expected capital flow toward companies, according to EY.
They are also expected to transform their approach to decision-making and how they share stories with their stakeholders.
Coverage
CSRD will apply to all companies listed on the EU-regulated markets, except listed micro companies. Listed small- and medium-sized enterprises (SMEs) have until 1 January 2026 to comply with the reporting requirements, even if there is a clause to “opt-out” until 2028.
A “large undertaking” by either an EU company or an EU subsidiary of a non-EU company is covered by the reporting directive. It will also apply to insurance undertakings and credit institutions.
Non-European companies with substantial activity in the EU or have a net turnover of over €150 million in the EU and which have at least one subsidiary, either large or listed, or branch with a net turnover of over €40 million in the region are mandate to draft a sustainability report at the consolidated level of the ultimate third-country undertaking.
Meanwhile, a subsidiary will be exempted if its parent firm included it in its CSRD report. Those not within the scope of the directive can apply voluntarily.
The directive will be turned into law 18 months after it takes effect. Companies covered would have to comply with the amended rules starting on 1 January 2024.
How to prepare
Companies covered by the directive would need to make changes to their preparation and disclosure of their sustainability information, EY said.
Sustainability information disclosures should include a forward-looking and retrospective view and should be qualitative and quantitative. It should also take into account the short-, medium- and long-term horizons and the company’s whole value chain.
They would also provide the users of the report an integrated view of their impact and performance on ESG factors through the new sustainability reporting standards.
Companies would also be required to prepare their financial statements and management report in one XHTML format and mark up sustainability information and tagged with a digital taxonomy for easier access to information.
Meanwhile, audit committees, under the new directive, will now have to monitor the effectiveness of a company’s internal quality control and risk management systems and its internal audit functions, as well as the assurance of annual and consolidated sustainability reporting.
The audit committees also need to notify the company’s administrative or supervisory body of the outcome of the assurance of sustainability reporting and review and monitor the independence of the assurance providers.
