Sustainability reporting: EU
Varying regulations per country can be irritating and hard to oversee. In our series, we go through the world’s continents and parts with the most significant industries and give an overview of what sustainability reporting is mandatory or becoming mandatory in the next years.
Companies underly various regulations about what they must report on depending on where they are located and/or selling their products. Changing regulations per country can be irritating and hard to oversee. In our series, we’ll go through the world’s continents and parts with the most significant industries and give an overview of what sustainability reporting is mandatory or becoming mandatory in the next years. We’re starting the series with the EU:
As part of the Green Deal, the EU has committed to being the first climate-neutral continent by 2050. The European Union aims for a cleaner environment, affordable energy, smarter transport, new jobs, and a better quality of life. The first plan was presented in 2019. Today, many of the pledges have become regulatory actions. What data do companies in the EU have to report on? These are the four main reports:
Corporate Sustainability Reporting Directive (CSRD)
Currently: Non-Financial Reporting Directive (NFRD)
When talking about reporting, financial and non-financial reporting is differentiated. The NFRD, or soon to be CSRD, is a non-financial report, as the name suggests. Large and listed companies must report on how they operate and manage social and environmental challenges. While the NFRD concentrates on social factors like
- social matters and treatment of employees
- respect for human rights
- anti-corruption and bribery
- diversity on company boards (in terms of age, gender, educational and professional background)
the CSRD, which was approved by member states in November 2022,
- introduces more detailed reporting requirements and a need to report according to mandatory EU sustainability reporting standards
- extends the scope to all large companies and all companies listed on regulated markets
- requires the audit of reported information
- requires companies to digitally ‘tag’ the reported data, so it is machine-readable and feeds into the European single access point
Through standardizing the collection and analysis of the reported ESG data, the reporting is supposed to improve the flow of capital towards sustainable activities across the EU. At the same time, the CSRD enables civil society organizations, trade unions, and other stakeholders to evaluate the non-financial performance of large companies and encourages these companies to develop a responsible approach to business. Companies are first expected to report on the new CSRD in 2024.
In June 2023, the European Commission proposed changes to the European Sustainability Reporting Standards (ESRS) and the upcoming Corporate Sustainable Reporting Directive (CSRD). The proposed amendments aim to ease the burden on smaller companies and first-time reporters by extending phase-in times for certain sustainability factors and allowing companies to focus on material sustainability factors.
The Commission’s draft considers concerns about the challenging nature of reporting requirements, especially for first-time reporters, and aims to reduce compliance costs. Key proposals include allowing companies with fewer than 750 employees to omit certain data in the first year, providing an extra year for disclosing information on non-climate environmental issues, and introducing materiality assessments to focus on reporting on relevant sustainability factors.
In October 2023, the Commission announced further CSRD changes. Announced alongside the Commission’s release of its 2024 Commission Work Programme, the statement outlines their intention to postpone the adoption date for the sector-specific ESRS by two years. Additionally, it recommended delaying the adoption of rules for large non-EU companies that operate in the EU to provide sustainability reporting by 2 years.
As the Commission notes in its proposal, the postponement of these two key rules has arisen in order to allow “companies to focus on the implementation of the first set of ESRS,” “ensure that EFRAG has time to develop sectoral ESRS that are efficient,” and “limit the reporting requirements to the minimum necessary.”
The EU taxonomy is a classification system that was implemented in July 2020. It was designed to support the EU Green Deal objectives. The classification system defines which economic activities can be deemed environmentally sustainable, meaning actions that substantially contribute to at least one of the EU’s environmental objectives while not harming any other objectives and meeting minimum social safeguards. By classifying environmentally sustainable actions, EU taxonomy is supposed to improve sustainable investment and create security for investors, protect from greenwashing, motivate companies to be more sustainable, diminish market fragmentation and help shift investments.
The system is built on Technical Screening Criteria (TSC), which define requirements for the EU environmental objectives. These are:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection of healthy ecosystems
Right now, only one TSC is finished and approved. It defines sustainable activities for climate change adaptation and mitigation objectives and has been applied since January 2022. The classification for the remaining objectives is supposed to follow later in 2022. All financial market participants, large companies, and listed SME businesses must report against the Taxonomy.
Sustainable Finance Disclosure Regulation (SFDR)
The Sustainable Finance Disclosure Regulation is a financial report. It requires financial market participants and advisers to state how they report sustainability risks and impacts concerning their financial products. Investment product suppliers must disclose how sustainability concerns are communicated to customers. If products are promoted to comply with ESG characteristics, so to a part sustainable, they also must adhere to the taxonomy regulation of not harming other sustainability objectives.
Product Environmental Footprint (PEF)
The Product Environmental Footprint (PEF) is a planned methodology based on Life Cycle Assessment. The European Commission wants to use it to show the environmental impact of single products over their whole lifecycle. It differs from LCAs by following more stringent and product-category-specific rules, determined by the European Commission. These category rules are making sure that the aspects that matter the most in each product category are not ignored. The approach, which ran through a test phase with more than 300 companies and 2000 contributing stakeholders in different fields of activities, has the goal to provide a common way of measuring environmental performance. Right now, the PEF system is in the transition phase, which will pave the way for policy development and wider industry rollout. PEF rollout is expected by 2024.
What does this mean for you?
The bottom line is that you must report if you’re a big company. Trying to wait it out is a dangerous bet. Your company being accused of greenwashing will likely cost you more than investing in accurate reports now.
Although there is no immediate threat of a fine, neglected climate risks are reputational risks for your company. The way out: invest in transparency and urgently in corporate sustainability.