The European Commission has adopted the delegated regulation setting the ‘European Sustainability Reporting Standards‘-that is, the templates to be followed for non-financial reporting-in implementation of the ‘Corporate Sustainability Reporting Directive‘ (EU) No 2022/2464 (CSRD).
1) CSRD, Corporate Sustainability Reporting. Introduction
Corporate Sustainability Reporting Directive
(EU) No 2022/2464 complements the Accountability Directive 2013/34/EU by requiring companies to devote part of their reporting to non-financial information on ESG(environmental, social, governance. See notes 1,2).
European lawmakers would thus like to redirect capital flows toward ‘sustainable’ investments, in line with the Green Deal proclamation that envisions a carbon-neutral Europe by 2050.
The Brussels executive has therefore defined the first set of standards (CSR information and content), to be followed by sector-specific ones, also taking into account SMEs(Small and Medium Enterprises) and non-EU-based companies.
2) Obligated enterprises
There are about 49,000 companies obliged to implement CSRD in the European Union:
– large European companies with >employees, their subsidiaries and companies listed on regulated markets, as of 1.1.24,
– enterprises with >250 employees and turnover > €40 million and/or total assets > €20 million, from 1.1.25
– non-EU companies with turnover > €150 million and at least one subsidiary in the European Union. From 1.1.25,
– listed small and medium-sized enterprises, excluding micro enterprises (< €2 million , < 10 employees), from 1.1.26. (3)
3) European Sustainability Reporting Standard (ESRS).
EFRAG – European Financial Reporting Advisory Group – consulted stakeholders to develop ESRS(European Sustainability Reporting Standard), in line with other relevant international standards. (4) With the idea of simplifying the starting pattern, by:
– Reduction in information burden (-40%),
– Reduction in data points (-50%),
– reliance on the enterprise to assess the relevance of the information to be provided (subject to ‘general information’, climate standard items, disclosure requirements and workforce items for enterprises with more than 250 employees). (5)
Further simplifications were introduced by the Commission then to further reduce burdens on businesses, particularly smaller ones, including:
– all standards are subject to the company’s materiality assessment, with the exception of ‘general information’,
– Graduality in the introduction of certain requirements, for the first year of implementation of the Sustainability Reporting Standards,
– expansion of voluntary data points (i.e., biodiversity transition plans, indicators on ‘non-employees’ of the company, reasons for considering certain sustainability issues ‘non-material’).
4) ESRS. Three macro-groups of standards for non-financial reporting
European ‘Corporate Sustainability Reporting‘ standards include three macro-groups of information.
4.1. Horizontal standards
Horizontal rules apply to all areas of reporting, regardless of the sector where the enterprise operates. They include general (ESRS 1) and information content requirements (ESRS 2). Disclosures should incorporate the elements of due diligence (7) and follow a structure consisting of:
– Governance (GOV). The processes, controls and procedures put in place to monitor and manage the impacts, risks and opportunities that the actions put in place may generate,
– Strategy (SBM). How the company’s strategy and business model interact with its material impacts, risks and opportunities. Including how the company deals with such situations,
– Impact, risk and opportunity management (IRO). The process by which the company identifies impacts, risks, and opportunities and assesses the relevance and ways to manage material sustainability issues through policies and actions,
– Metrics and targets (MT). Criteria for measuring the effectiveness of its actions, also taking into account the goals set and the progress made toward their achievement.
4.2. Thematic Standards (ESG)
The core of ‘Corporate Sustainability Reporting,’ the exposure of ESG factors, applies to all companies, regardless of sector. Companies decide what information is relevant, based on a flow chart (in Appendix E to this document). The thematic standards are divided into environmental, social, governance (ESG), with sub-chapters to follow.
E) Environment. Five environmental standards:
– climate change (ESRS E1. Climate change adaptation, climate change mitigation, energy),
– pollution (ESRS 2. Air, water, soil, living organisms and food resources, substances of concern, substances of very high concern, microplastics),
– water and marine resources (ESRS 3),
– biodiversity and ecosystems (ESRS 4. Direct impact drivers on biodiversity loss, species status, extent and condition of ecosystems, impacts and dependencies on ecosystem services),
– resource use and circular economy (ESRS 5. Resource inflows and their utilization, resource outflows related to products and services, losses and waste),
S) Social. Four information schemes on:
– own staff (ESRS S1. Working conditions, equal treatment and opportunity, other work-related rights),
– workers in the value chain (ESRS S2. Working conditions, equal treatment and opportunities for all, other labor-related rights),
– communities (ESRS S3. Economic, social and cultural rights of affected communities, civil and political rights of communities, political rights of indigenous people),
– consumers and end users (ESRS S4. Impacts related to information to consumers and/or end users, personal safety of consumers and/or end users, social inclusion of consumers and/or end users).
G) Governance
(ESRS G1. Corporate culture, protection of whistleblowers, animal welfare, engagement in politics and lobbying, bribery and corruption, supplier relationship management including payment practices).
4.3) Industry standards
Other information is applicable to all enterprises in an industry to address substantial impacts, risks and opportunities that are not covered-or not sufficiently covered-by existing regulations (Appendix A, item 10). (6)
If an enterprise assesses that an impact, risk, or opportunity is not covered, or not sufficiently covered by the general and thematic standards, but is significant to its enterprise, it shall provide the additional information relevant to understanding those impacts, risks, or opportunities. (Appendix A, item 11).
5) Qualitative characteristics of information
The sustainability statement should be drafted taking into account key qualitative features – relevance of information, faithful representation of reality – and ‘enhancing’ qualitative features (e.g., verifiability, understandability, comparability. See Appendix B).
ESG disclosure should be based on the principle of dual materiality, i.e., impact materiality and financial materiality. ‘The company’s materiality assessment process may lead to the identification of situations where actions to address certain impacts or risks, or to benefit from certain opportunities in relation to a sustainability issue, could have substantial negative impacts or cause substantial risks in relation to one or more other sustainability issues‘.
Dario Dongo and Alessandra Mei
Notes
(1) Directive 2013/34/EU of the European Parliament and of the Council on the annual financial statements, consolidated financial statements and related disclosures of certain types of undertakings https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02013L0034-20230105&qid=1688716003576
(2) Directive (EU) 2022/2464 of the European Parliament and of the Council amending Regulation (EU) No. 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU regarding corporate sustainability reporting https://eur-lex.europa.eu/legal-content/IT/TXT/?uri=CELEX%3A32022L2464
(3) Dario Dongo, Elena Bosani. Corporate Sustainability Reporting. ESG reporting requirement for companies kicks off. GIFT (Great Italian Food Trade). 18.11.2022
(4) Commission delegated regulation (E) supplementing Directive 2013/34/EU of the European Parliament and of the Council as regards sustainability reporting standards. https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1688066205921&uri=PI_COM%3AAres%282023%294009405
(5) A sustainability issue is financially material if it causes or can reasonably be expected to cause material financial effects on the enterprise. This is where a sustainability issue generates or may generate risks or opportunities that have a substantial influence, or could reasonably be expected to have a substantial influence, on development, financial position, financial performance, cash flows, access to financing, or cost of capital in the short, medium, or long term. Risks and opportunities may arise from past or future events.Dependence on natural, human, and social resources may be a source of financial risks or opportunities (Annex I, Objectives, para. 49)
(6) Dario Dongo. Corporate Sustainability Reporting, new EU directive kicks off. GIFT (Great Italian Food Trade). 2.12.22
(7) Dario Dongo, Elena Bosani. Sustainability budgets and responsible investment, ESG and CSR due diligence. Reg. EU 2022/1288. GIFT (Great Italian Food Trade). 29.7.22
Dario Dongo, lawyer and journalist, PhD in international food law, founder of WIISE (FARE - GIFT - Food Times) and Égalité.
Graduated in Law from the University of Bologna, she attended the Master in Food Law at the same University. You participate in the WIISE srl benefit team by dedicating yourself to European and international research and innovation projects.
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