Europe

EU Policymakers Must “Support the Timeline” for Sustainability Reporting

Investors and NGOs issue warning following delays to other parts of Europe’s sustainability legislation.

A multi-stakeholder collective has called on the European Parliament and Council to maintain momentum and support proposals for new corporate sustainability reporting requirements from 2024, in the face of rising political and business opposition.

“Implementing the EU standards is instrumental to help companies provide relevant information that is needed by all users of such data (including investors, financial market participants and civil society) and in line with EU public goals and commitments on climate, environment and human rights,” the letter noted. Signatories include NGO ShareAction, the UN-convened Principles for Responsible Investment (PRI) and asset manager Schroders.

The proposed Corporate Sustainability Reporting Directive (CSRD) will replace the Non-Financial Reporting Directive (NFRD) as the key European legislation covering sustainability reporting by corporates. The updated directive will require over 50,000 firms to provide a non-financial statement on a series of ESG-related factors and, through the Article 8 Delegated Act of the Taxonomy Regulation, which came into force this month, disclose their alignment with the taxonomy’s environmental technical screening criteria.

Following a slew of delays to other parts of the EU’s sustainability legislation – including Level 2 of the Sustainable Finance Disclosure Regulation (SFDR) and the Sustainable Corporate Governance proposal – concerns are mounting that approval of the CSRD will be delayed, too.

Under the current timeline, the CSRD proposal will be adopted by the European Council and Parliament during the first half of this year, giving companies time to prepare for reporting on 2023 business activities in 2024.

Finalisation of the CSRD is subject to tri-party negotiations between the European Commission, Parliament and Council. The European Parliament is expected to vote on the CSRD in March and the French Presidency of the European Council plans to have a general approach by the end of February. This would allow trilogue negotiations to start right away between the EU Parliament and Council.

But US investment bank Jefferies has said progress will “not be plain sailing” due to challenges over double materiality and the directive’s wider scope. Any delay to the timetable would push back implementation, thus leaving investors waiting longer for comparable mandated data on corporate sustainability.

“We call on European policymakers to maintain momentum while finalising the negotiations for the reform of the legislation,” the letter said. “The business case for standardising sustainability reporting is undisputed as well as the importance of sustainability data as a critical cornerstone to achieve the objectives set in the EU Green Deal and the sustainable finance agenda.

Setting the Standard for Sustainability Reporting 

Standards-setting body the Global Reporting Initiative (GRI) and the European Financial Reporting Advisory Group (EFRAG) are developing the European Sustainability Reporting Standards (ESRSs) in parallel to CSRD to ensure the Commission is able to maintain momentum.

Following a public consultation in Q1, the proposal for the ESRSs is expected to be sent to the Commission by June. If it is happy with this proposal, then the ESRSs will be formally adopted through a Delegated Act by October this year. More tailored ESRSs for small- and mid-sized enterprises (SMEs) are expected October 2023.

“The CSRD will set the framework and key elements for corporate sustainability reporting and the accompanying mandatory EU standards will help standardise these disclosures, increasing the comparability and relevance of ESG data,” Susanna Arus, EU Public Affairs Officer for law firm Frank Bold, one of the letter’s signatories, told ESG Investor.

The standards will measure the social and environmental impacts of corporates falling under CSRD’s scope, adopting a double materiality lens which encompasses both firms’ exposure to sustainability-related risks and how business operations impact the environment and wider society.

“The EU standards must be grounded in the double materiality concept in order to align with the broader policy context (including rules on investors’ disclosure, EU taxonomy, EU Green Bonds Standard and ESG benchmarks) and achieve the EU’s commitments on sustainability and respect for human rights,” the letter said.

This is a different approach to the one adopted by the IFRS Foundation’s International Sustainability Standards Board (ISSB), which focuses on enterprise value, calling on firms to disclose their exposure to financial climate-related risks. Letter signatories agree with the European Commission’s commitment to reviewing how, and to what extent, European and other international sustainability standards are compatible.

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