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Publ. date 30 Aug 2021Nowadays, despite there being recent efforts towards a sustainable and transparent economic system in the European Union, the current reporting frameworks are still lacking transparent information, which is a decision-making factor for investors, but also the wider scope of stakeholders. With investors being short on a clear overview on companies’ exposures to sustainability-related risks, this imposes a barrier on the level of investment companies can receive, as investors have a growing interest on companies’ impacts towards ecosystems and societies. This is largely due to investors having their own disclosure requirements, following the Sustainable Finance Disclosure Regulation towards having a credible market for green investments. For this reason, the EU commission has proposed the CSRD. The main implications of this directive and recommendations to prepare alignment with these requirements are summarized at the end of the article, and available in more detail in the freely downloadable checklist document.
Essentially, the CSRD will be an important tool towards enhancing transparency amongst stakeholders. The existing NFRD already forms a solid basis for corporate reporting on ESG matters, but it only applies to large corporations of more than 500 employees that are considered “public interest entities”. This meant that the scope of applicability was restricted to listed companies and/or banks and insurance firms.
With the introduction of the new proposal, all large companies will be required to conform to the CSRD, whether these have shares being traded in stock exchange markets or not. In addition, the Commission has extended the scope to also include SMEs that are listed in EU regulated markets, where listed micro-companies will be excluded from these requirements. Even though SMEs will have an additional three years to comply with the proposed regulations and will be subject to more proportionate, simpler standards, these firms should attempt to actively address this now, as they could risk being excluded from potential investment portfolios.
The main elements surrounding the new directive are further explained in the table below.
NFRD (Current EU directive 2014/95/EU) | CSRD |
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To whom it concerns? | Large ‘public interest’ companies (i.e. listed entities, banks and insurance firms) with more than 500 employees | All large companies with at least two of the following requirements:
All listed companies with the exception of micro-companies which have less than 10 employees or have less than 2 million in turnover or in total assets |
When will it come to play? | Active since FY2018 | Companies’ FY 2023 management reports must be complying to the CSRD Sustainability Reporting Standards will be introduced at different stages:
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Number of companies within scope | Approximately 11,700 | 49,000 – representing more than 75% of the total turnover from EU companies |
Reporting requirements | Companies need to report on at least the following items: environmental matters, social and employee-related matters, respect for human rights, anti-corruption and bribery matters, as well as diversity on company boards. For each item, companies must include information on their policies, outcomes and risks. | Additional reporting requirements to be included in the upcoming Sustainability Reporting Standards (amongst others):
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Where do companies need to report? | Information included in the Annual Report | To be incorporated in the Management Report |
Assurance through third-party provider | Not a mandatory requirment for majority of countries | A ‘limited’ level assurance is mandatory. Implementation of assurance requirements will occur no later than 3 years after the entry into application of this Directive |
What kind of format should companies report with? | Online or PDF document | XHTML format in accordance with the European Single Electronic Format Regulation (ESEF) |
In order to be able to comply with the public reporting requirements, Finch & Beak has the following tips to ensure an active response to the NFRD’s successor:
This is the required stepping-stone towards building a sustainability strategy that fully considers all stakeholders. With the double materiality principle, companies will have to converge the “inside-out” perspective of their business impact on the environment and society with the “outside-in”, impact of environment and society on their business models. Assessing the interconnectivity of the most material impacts will foster engagement with stakeholder groups and increase the credibility of sustainability reports.
As the double-materiality concept also considers the business impact that sustainability topics could have on the companies’ values, firms should comprehensively address risk factors in sustainability. This will better align efforts to sustainability, their business value, and the long-term implications where risk management is key in companies’ strategies and ambitions. Collaborating with the risk department at an early stage will further engagement within an organization, and this is an aspect that should be embedded across other business functions (HR, marketing, sales, etc.), as having cross-functional involvement will ensure a greater alignment towards companies’ visions and goals.
As companies will have to publish the sustainability information within the management report, incorporating the guidelines of the Integrated Reporting Framework is highly recommendable. With the focus on intangibles, companies should start preparing to measure these factors and to be able to effectively communicate on them.
Apply requirements on a voluntary basis (even if your firm falls out of scope), as the expectation is that this will become a universal tool, beyond listed companies and fitting to all shapes and sizes. Although the requirements will only come to play in 2024, companies are advised to start as soon as possible to adapt and incorporate changes in advance.
If you are looking to get prepared for new and further upcoming regulations, get in touch with Johana Schlotter at johana@finchandbeak.com or call +31 6 28 02 18 80 for a frank conversation and to hear about how Finch & Beak can support you in meeting your ambitions.
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