On 10.11.22, the European Parliament passed the Corporate Sustainability Reporting Directive, CSRD, which obligates companies to ESG(Environmental, Social and Governance) reporting.
The directive fills in the gaps and uncertainties of the former dir. 2014/95/EU(Non-Financial Reporting Directive, NFRD), due to its broader scope and requirements. (1)
1) ESG, mandatory reporting.
Companies must provide adequate reporting on the ‘sustainability’ of their activities-with a focus on respect for human, social and environmental rights (ESG governance factors)-based on common, EU-defined criteria.
Reporting should describe:
- Corporate sustainability strategy model (risk analysis, prevention and mitigation),
- Business plans for ecological transition,
- Corporate sustainability goals and reporting on their progress,
- Role of governing bodies,
- Management and control of ESG issues;
- Main risks to the enterprise related to sustainability issues,
- Information on intangible assets, including intellectual, human, social and relational capital.
2) Obligated enterprises
The pool of companies obligated to ESG (or CSR, Corporate Sustainability Reporting) reporting is expanded substantially. To the point of involving about 49,000 companies, up from the current 11,600. Thus:
– large companies in the EU (>500 employees), their subsidiaries and companies listed on regulated markets, already subject to dir. 2014/95/EU, must adapt reporting to the new rules as of 1.1.24 (with report publication in 2025),
– large enterprises with >250 employees and >40 million euros in turnover and/or 20 million euros in total assets, as well as non-EU enterprises that invoice >150 million in the EU and have at least one branch there, hitherto excluded from nonfinancial reporting requirements, must initiate it as of 1.1.25 (publication report 2026),
– listed small and medium-sized enterprises (SMEs or Small and Medium Enterprises), excluding micro enterprises, (2) must provide ESG reporting from 1.1.26 (to be published in 2027).
3) EU Standards for ESG Reporting.
The European Financial Reporting Advisory Group (EFRAG) is delegated to develop and propose differentiated ESG reporting standards related to the size of companies. The first set of standards (large enterprises) is adopted by 6/30/23, the second (small and medium-sized enterprises, risk sectors) by 6/30/24. With periodic review at least every three years.
‘Information should be based, where appropriate, on conclusive scientific evidence. The information should also be harmonized, comparable, and based, where appropriate, on uniform indicators, while at the same time giving enterprise-specific information and not undermining the enterprise’s business position‘ (CSRD, recital 33)
3.1) Sectors at risk
Sectors at high risk of negative ESG impact, therefore subject to specific standards, fall into four macro-categories:
(a) agriculture, forestry and fishing, oil, gas, mineral extraction,
(b) manufacturing, including food production and textiles,
(c) water supply, electricity, gas, steam and air conditioning supply, sewerage and waste management,
(d) wholesale and retail sales, transportation and warehousing, construction and real estate activities.
4) Principle of ‘double materiality‘
Annual ESG (CSR) reports must also specify how:
– sustainability factors influence business development and performance ( outside-inside perspective),
– the company’s activities produce impacts on society and the environment ( inside-out perspective).
5) Statutory audit and control
Certification of ESG (CSR) reporting by entities licensed to conduct statutory audit is mandatory.
The reliability and trustworthiness of the data is also subject to official public audits that follow the criteria adopted for auditing financial statements.
6) Digital branding, transparency
ESG (CSR) budgets and reports must be compiled in XHTML format. With marking, via tags, on sustainability information.
This task is instrumental in the implementation of the so-called European Single Access Point (ESAP). A European, publicly accessible web-based database aimed at:
– Increase transparency in the market and
– Provide investors and users with harmonized and comparable information. (3)
7) Consultation, publication
Management of enterprises should consult workers’ representatives on ways to collect and verify sustainability information that may affect them.
The publication of thecorporate sustainability reporting (ESG) report should accompany the financial statement report so that it can be analyzed in an integrated way.
8) Implementation
Following the Council’s approval, expected on Nov. 28.11.22, the directive is published in the Official Journal of the EU and enters into force 20 days after publication. (4)
9) Medium-term outlook
The new Corporate Sustainability Reporting framework-in prescribing detailed reporting of the impacts of global value chains on ESG factors-is expected to narrow the margins of greenwashing that is still widespread. In line with the European Green Deal and the Agenda for Sustainable Finance (5.6).
Closing the circle will come with the approval of the proposed Corporate responsibility due diligence directive and the regulation on due diligence in the most critical supply chains from the perspective of socio-environmental impact (7,8).
Dario Dongo and Elena Bosani
Notes
(1) Dario Dongo, Elena Bosani. Due diligence and ESG, corporate social and environmental sustainability, the proposed EU directive. GIFT (Great Italian Food Trade). 20.4.22.
(2) Unlisted small and medium-sized enterprises, in addition to micro enterprises, are eligible for ESG reporting. Applying, in that case, the same standard as that established for listed SMEs or SMEs
(3) Dario Dongo. Sustainability reporting, ESG and due diligence. GIFT (Great Italian Food Trade). 18.7.22
(4) European Parliament. Corporate Sustainability Reporting Directive (CSRD). Text approved 10.11.22
https://www.europarl.europa.eu/doceo/document/TA-9-2022-0380_EN.html
(5) Dario Dongo. European Green Deal, the new strategy in EU. Égalité. 13.12.19
(6) Sustainable finance (europa.eu)
(7) Dario Dongo, Elena Bosani. Due diligence and ESG, corporate social and environmental sustainability, the proposed EU directive. GIFT (Great Italian Food Trade). 20.4.22
(8) Dario Dongo, Elena Bosani. Due diligence and deforestation, stop unsustainable imports of commodities. Proposed EU regulation, the ABC. GIFT (Great Italian Food Trade). 6.3.22
Dario Dongo, lawyer and journalist, PhD in international food law, founder of WIISE (FARE - GIFT - Food Times) and Égalité.
Lawyer in Milan and Frankfurt am Main. An expert in family, juvenile and criminal law, she is now enrolled in a university master's programme in food law
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