Mandatory ESG reporting in the EU
Describing Mandatory ESG reporting in the EU
Certain large companies within the EU must disclose ESG information under the Non-Financial Reporting Directive (NFRD).
The NDRD applies to large public-interest companies with more than 500 employees, coveting approximately 11 700 large companies and groups across the EU, including: · listed companies · banks · insurance companies · other companies designated by national authorities as public-interest entities
However, from 2023, the NFDR will be replaced by a new ESG reporting directive – the Corporate Sustainability Reporting Directive (CSRD). The CSRD will extend the scope of companies obliged to comply with approximately 50.000 companies in the EU, corresponding to 75% of the EU’s companies turnover. For organisations either based in the EU or that have subsidiaries within the region, that path is now unavoidable.
With the CSRD confirmed, companies are facing up to some unavoidable facts: ESG is entering the annual reporting process Sustainability information will sit alongside financial information The amount of data that needs to be collected will greatly increase So too will the number of people involved in the integrated reporting process Sustainability information will be audited The mandate aims to increase trust in ESG reports and bring greater transparency to sustainability information. It’s one of the single biggest changes to the annual reporting process in a very long time, and it will force organisations to rethink their reporting. Right now, 98% of finance professionals in Europe are concerned about ESG metrics being added to the annual report. And understandably so. Accommodating more people, more data and more work within the same timeframes presents significant logistical challenges. The drives to minimise risk and ensure data integrity are the two biggest concerns for organisations’ future reporting cycles. To address these concerns, it’s necessary to bring about meaningful, targeted transformation that eases workloads while increasing trust in data, ensuring transparency, and strengthening collaboration across traditionally siloed teams.
What is the CSRD?
First, it’s important to know what the regulation is. In short, the CSRD is a piece of EU legislation that establishes environmental, social and governance (ESG) reporting requirements for organisations. The aim is to expand upon and replace the Non-Financial Reporting Directive (NFRD)—a regulation criticised, in part, for its implication that ESG has no financial relevance. With the CSRD, there is no ambiguity. Sustainability information, which includes topics within ESG and is defined across 12 standards, is entering the front end of the annual report. It will need to be treated with the same degree of rigour and suspicion as financial information. Who will the CSRD impact? In total, around 50,000 organisations will need to comply with the CSRD. As for when they’ll need to ensure compliance, the European Commission has planned a phased rollout: FY’24: For all organisations that are already within the existing scope of the NFRD (currently around 11,700 organisations) FY’25: All “large” organisations—firms with a net turnover of €40 million or more, at least €20 million in assets and 250+ employees Later: All listed companies, including listed small and medium-sized enterprises (SMEs) but with the exception of micro enterprises Importantly, the CSRD will also impact non-EU companies with EU-based subsidiaries, or with securities on EU-regulated markets, which have a net turnover of over €150m within the EU. Because the CSRD was introduced following Brexit, the UK will also be treated as a third country. Limited, and reasonable, assurance are both on the table We now know that public organisations will also need to include an assurance report for sustainability disclosures—but not right away. Here’s how the rollout is going to work: October 2026: On or before 1 October 2026, the Commission will provide limited assurance standards for auditors to use when assessing the assurance of sustainability reports October 2028: On or before 1 October 2028, reasonable assurance standards will be provided—but only if it’s determined that reasonable assurance is feasible for auditors The move towards greater assurance within the EU is significant. It means that organisations need oversight of all data within the integrated reporting process. The CSRD will greatly expand the scope of what needs to be reported and who needs to be involved, which could introduce new risk within the process—organisations will need to find ways to contain and minimise this risk. A digital format has been mandated The confirmation that the CSRD will require a digital format and the use of a digital taxonomy shouldn’t come as a surprise. The measures introduced when the European Single Electronic Format (ESEF) came into force in early 2022 will, most likely, be incorporated within the CSRD. By the time the CSRD comes into force, all affected organisations will have some level of comfort with XBRL®/ iXBRL™ tagging and converting to the iXHTML format. They will have likely established a process and taken steps to improve on it. The motivation behind this move is clear. The CSRD has been created to bring greater trust and transparency to ESG reports, better demonstrate the financial value of sustainability information and improve the accessibility of ESG reports. For investors to act on this information, it needs to be presented in a standardised format that enables comparability. It needs to be digital.
How to prepare for the CSRD
There are three main tenets that organisations will focus on during their preparations: trust, transparency, and collaboration. Trust: Organisations want to feel as confident in their sustainability information as they do in their financial information—they’ll look at how to ensure data accuracy and consistency Transparency: They’ll work towards gaining greater oversight of both data and process Collaboration: And they’ll establish seamless, open channels of communication and collaboration to reduce time-to-market The passing of the CSRD is a significant milestone that will bring greater accountability to ESG reporting across the EU. Incidentally, it will also lead to widespread reformation of long-established reporting practices. The status quo for annual reporting is changing: the CSRD is the spark that’s lighting the fire.
EU Taxonomy
Why do we need an EU taxonomy? In order to meet the EU’s climate and energy targets for 2030 and reach the objectives of the European green dealSearch for available translations of the preceding linkEN•••, it is vital that we direct investments towards sustainable projects and activities. The current COVID-19 pandemic has reinforced the need to redirect money towards sustainable projects in order to make our economies, businesses and societies – in particular health systems, more resilient against climate and environmental shocks. To achieve this, a common language and a clear definition of what is ‘sustainable’ is needed. This is why the action plan on financing sustainable growthSearch for available translations of the preceding linkEN••• called for the creation of a common classification system for sustainable economic activities, or an “EU taxonomy”. What is the EU taxonomy? The EU taxonomy is a classification system, establishing a list of environmentally sustainable economic activities. It could play an important role helping the EU scale up sustainable investment and implement the European green deal. The EU taxonomy would provide companies, investors and policymakers with appropriate definitions for which economic activities can be considered environmentally sustainable. In this way, it should create security for investors, protect private investors from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation and help shift investments where they are most needed.
What are the EBA ESG Pillar 3 Disclosures?
Starting in 2023, The European Banking Authority’s Pillar 3 disclosure standards on ESG risks require banks’ issued securities traded on an EU regulated market to report information in four main categories: • Exposure to carbon-related assets and assets subject to climate change-related risks including transition and physical risks • Support for counterparties through the low-carbon transition and in climate adaptation • Key performance indicators on sustainable finance activity based on the EU Taxonomy Regulation • And integration of ESG considerations into governance, business, strategy and risk management