Agreement on corporate sustainability disclosures paves way for ‘two-speed Europe’, investors warned.
A recent Brussels deal marked a significant step toward comprehensive sustainability reporting by European corporates, but experts say EU Member States must now also step up to deliver ESG-based disclosures to investors.
Susanna Arus, EU Public Affairs Manager at Frank Bold, said the Corporate Sustainability Reporting Directive (CSRD) – which updates the 2014 Non-Financial Reporting Directive (NFRD) and comes into force on 1 January 2024 – could create a ‘two-speed Europe’.
Arus raised concerns about the staggered implementation dates which allow companies longer to comply with CSRD if they are not already reporting under NFRD.
Firms already subject to the NFRD must comply with CSRD by January 2024, while large companies not reporting under the existing directive have an extra year. Listed SMEs, small and non-complex credit institutions and captive insurance undertakings must report in line with CSRD from 2026.
“It is imperative that Member States provide clarity to companies by making the necessary changes in national law before January 2024 and ensure that all large companies – not only those already covered by the EU NFRD – are required and able to report for the financial year of 2024.”
She continued: “A gradual implementation would risk creating a two-speed Europe that would put some countries and companies at a disadvantage to access sustainable finance flows,” she said.
Consequences of delay
CSRD introduces detailed sustainability reporting requirements which must be centrally published and certified, covering environmental rights, social rights, human rights and governance factors. It applies to all large companies and all companies listed on regulated markets, which are responsible for assessing the information at the level of their subsidiaries.
Non-European companies, generating a net turnover of €150 million in the EU and which have at least one subsidiary or branch in the EU, must also report under CSRD. Although listed SMEs also fall under CSRD, an opt-out allows exemption until 2028.
Arus added that any delay or prolongation of the status quo “should be out of question” arguing that it would have “severe consequences on European efforts including REPowerEU, Sustainable Finance Agenda, Green Deal, EU Climate Law. Stakeholders should encourage national regulators for a swift transposition to national law”.
However, Peter Paul van de Wijs, Chief External Affairs Officer at Global Reporting Initiative, said the deadlines are “realistic”, arguing that it is reasonable to allow additional time to comply to firms that are new to reporting.
“If they are already complying the NFRD then they could be able to meet the CSRD straight away. But we have to be realistic about the extra work for companies that are new to this,” he said.
Yet Arus insisted staged implementation has the potential to hamper the investment decisions of asset owners, placing the transition to a net zero economy under threat.
She said: “Without reliable ESG data from EU companies, finance flows will not be adequately allocated to contribute to this transition. Investors and asset managers have made it clear that any delay will have a negative impact on the ability of companies and financial market participants to support the sustainability transition of our economy.”
Double materiality
Following the Council and European Parliament’s agreement on CSRD, French Finance Minister Bruno le Maire described the regulation as “excellent news for all European consumers”.
“They will now be better informed about the impact of business on human rights and the environment. 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,” said le Maire, whose country has held the revolving EU presidency in the first six months of 2022.
“Greenwashing is over. 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,” he said.
Arus welcomed CSRD’s stipulation that companies consider both material sustainability-related risks to the company as well as material impacts of the company on sustainability; known as double materiality.
Double materiality is central to the European Financial Reporting Advisory Group’s (EFRAG) European Sustainability Reporting Standards (ESRSs) which provide guidance on how to comply with CSRD. The ESRSs ere developed with input from GRI and are currently undergoing consultation before being presented to the European Commission.
“The ESRSs will specify disclosure requirements on impacts across all ESG topics from climate change to circular economy to biodiversity to human rights. These disclosures, including specific KPIs, will provide a clear framework against which companies will consider their risk,” Arus says.
Consequently, investors will also have a clear framework against which they can assess a company’s sustainability and its risk in their portfolios.
Arus also welcomed requirements that companies analyse the resilience of their business model in the context of European 2050 net-zero target and more generally Paris Agreement goals.
She said: “The draft ESRS clarifies concrete information that companies should disclose about the alignment of their transition plans in this regard.”
Van de Wijs said CSRD was an improvement on the NFRD, particularly regarding the demands on larger companies to disclose ESG risks throughout their supply chain.
“What has come out of the negotiations is stronger legislation that we had before. Large companies are expected to have full disclosure including across their value chain. There is no longer a conversation about that,” van de Wijs said.
