The European Council and the European Parliament have taken an important step towards the implementation of a new sustainability reporting system in Europe. It concerns the Corporate Sustainability Reporting Directive, or CSRD, which requires companies to have their reported sustainability information independently verified.
Asset managers and investors currently are challenged to reliably determine sustainability investments in corporates because companies are not yet required to report sustainability-related information. This gap also makes the industry vulnerable for green-washing allegations. Once more stringent requirements for sustainability reporting kick into force investors will be able to more accurately pinpoint sustainable investments in equities.
The CSRD will force companies to disclose more information in their annual report about the influence of climate risks on their business and the contribution they themselves make to the climate issue. One of the consequences of this is that investors can better assess listed companies with regard to ESG criteria and the impact they have.
The tightened rules agreed last week update the 2014 Non-Financial Reporting Directive, or NFRD, the current EU framework for sustainability reporting. The new rules will significantly increase the number of companies currently required to disclose sustainability information to more than 50,000 from around 12,000 currently, introduce more detailed reporting requirements and require verified assurance of the information reported.
ESRS framework for sustainability reporting
The rules require disclosure under a common framework of European Sustainability Reporting Standards, or ESRS, currently being developed by Efrag, the European Financial Reporting Advisory Group. Under the new system, companies will be required to report on issues ranging from environmental and social rights to human rights and governance factors.
Bruno le Maire, France’s Minister of Economy and Finance and currently the six-monthly President of the European Council, said last week that the agreement is good news for European consumers: “They are now 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 simplicity in the information provided by companies who have to play their social role. Greenwashing is over.”
The new agreement requires companies to have the information they provide on their climate or human rights impact independently verified and certified. The agreement also extends the reporting requirements to non-European companies that generate more than 150 million euro in the EU.
New requirements apply from 2024
The CSRD rules will apply to companies already covered by the NFRD in early 2024, and to other large companies in the following year. From 2026, SMEs will also have to provide information on sustainability, while some can opt out until 2028.
“Today, information about a company’s impact on the environment, human rights and work ethics is patchy, unreliable and easy to misuse,” EU Parliament chief negotiator MEP Pascal Durand, of the liberal Renew Europe said. “Some companies do not report. Others report on what they want. Investors, consumers and shareholders lose out. From now on, having a clean human rights record is as important as having a clean balance sheet.”
The proposal aims to address shortcomings in the existing rules on disclosure of non-financial information, which were of insufficient quality to allow investors to take proper account of it. Such shortcomings hamper the transition to a sustainable economy.
Efrag to draft standards
Efrag will be responsible for drafting European standards, following technical advice from a number of European agencies. The rules will apply to large European companies from 2025. In 2028 non-EU companies will also be affected.
National regulators will ensure that companies comply with the more stringent requirements that will now be introduced.