In the year 2000, the UN Global Compact (UNGC) was launched with the aim of setting principles-based policy and a practical framework for companies committed to sustainability and responsible business practices. The principles covered human rights, labour, the environment and anti-corruption. This was followed by the UN Principles for Responsible Investment (UNPRI), in 2006, which included the incorporation of ESG issues into investment analysis and decision-making processes as well as into ownership policies and practices with the establishment of appropriate disclosure on ESG issues by entities. Thereafter, the number of laws and standards comprising ESG principle and criteria increased thereby pushing ESG to the top of the financial services industry agenda. In 2015, the UN General Assembly established the Sustainable Development Goals (SDGs), and a Financial Stability Board was formed to develop a set of voluntary climate-related financial risk disclosures which can be adopted by companies.
EU Regulation
In 2014, the EU adopted the Non-Financial Reporting Directive 2014 (2014/95/EU) (NFRD), required companies to include non-financial statements in their annual reports from 2018 onwards, including information on environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards. This Directive applied to public-interest companies with more than 500 employees in the EU.
In 2019, the Sustainable Finance Disclosure Regulation (SFDR) was adopted with the aim of promoting strong ESG values and mandates fund managers to actively disclose whether ESG factors with respect to their funds. This led to investors actively seeking more transparency and ESG prioritization in a more socially responsible investing environment. Also, using ESG criteria in the management of risk has been seen as a benefit as investors can avoid companies that might pose a significant corporate and performance risk due to environmental, social and corporate governance issues. Investors need to have clear and transparent information about what they are investing and ensure there is no ‘greenwashing’ which will reduce investor and the public’s confidence in sustainable investment products.
In 2021, following the impetus of ‘European Green Deal’, the EU adopted a sustainable finance package of measures that included, inter alia:
- The EU Taxonomy Regulation which is a framework to classify ‘green’ or ‘sustainable’ economic activities executed in the EU and defining when a company is operating sustainably or environmentally friendly thereby standing out more positively and thus benefiting from higher investments. The aim is to reward and promote environmentally friendly business practices.
- A proposal for a Corporate Sustainability Reporting Directive (CSRD), which would amend the existing requirements of the NFRD by extending its scope to all listed companies including SMEs and introduces mandatory EU sustainability reporting standards for ESG aspects.
The EU Corporate Sustainability Reporting Directive (CSRD)
On the 10th November 2022, the European Parliament in plenary session adopted the new Corporate Sustainability Reporting Directive (CSRD), whereby the new EU sustainability reporting requirements will apply to all large undertakings, whether listed or not, and, as of 1st January 2026 also to small and medium sized undertakings (SMEs). Non-EU companies with substantial activity in the EU (a turnover over €150 million euro in the EU) will also have to comply.
This means that nearly 50,000 companies in the EU will be collecting and sharing sustainability information compared to the 11,700 companies under the NFRD rules.
What information will need to be reported?
In terms of the new Article 19b of the proposed CSRD, the sustainability reporting standards shall, taking into account the subject matter of a particular standard:
(a) specify the information that undertakings are to disclose about environmental factors, including information about:
(i) climate change mitigation;
(ii) climate change adaptation;
(iii) water and marine resources;
(iv) resource use and circular economy;
(v) pollution;
(vi) biodiversity and ecosystems;
(b) specify the information that undertakings are to disclose about social factors, including information about:
(i) equal opportunities for all, including gender equality and equal pay for equal work, training and skills development, and employment and inclusion of people with disabilities;
(ii) working conditions, including secure and adaptable employment, wages, social dialogue, collective bargaining and the involvement of workers, work-life balance, and a healthy, safe and well-adapted work environment;
(iii) respect for the human rights, fundamental freedoms, democratic principles and standards established in the International Bill of Human Rights and other core UN human rights conventions, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work and the ILO fundamental conventions and the Charter of Fundamental Rights of the European Union.
(c) specify the information that undertakings are to disclose about governance factors, including information about:
(i) the role of the undertaking’s administrative, management and supervisory bodies, including with regard to sustainability matters, and their composition;
(ii) business ethics and corporate culture, including anti-corruption and anti-bribery;
(iii) political engagements of the undertaking, including its lobbying activities;
(iv) the management and quality of relationships with business partners, including payment practices;
(v) the undertaking’s internal control and risk management systems, including in relation to the undertaking’s reporting process.
Timeframes
The European Council is expected to adopt the proposal on 28 November 2022, after which it will be signed and published in the EU Official Journal.
The directive will enter into force 20 days after publication.
The rules will start applying between 2024 and 2028:
- From 1 January 2024 for large public-interest companies (with over 500 employees) already subject to the non-financial reporting directive, with reports due in 2025;
- From 1 January 2025 for large companies that are not presently subject to the non-financial reporting directive (with more than 250 employees and/or €40 million in turnover and/or €20 million in total assets), with reports due in 2026;
- From 1 January 2026 for listed SMEs and other undertakings, with reports due in 2027. SMEs can opt-out until 2028.
Conclusion
The preamble of the CSRD provides that “the ultimate beneficiaries of better sustainability reporting by undertakings are individual citizens and savers. Savers who want to invest sustainably will have the opportunity to do so, while all citizens should benefit from a stable, sustainable and inclusive economic system.”
The CSRD is seen as one of the keystones of the European Green Deal for a just and sustainable EU economy that respects human rights and reduces our impact on the planet.
For more information on ESG & Corporate Sustainable Reporting, please contact Dr. Sarah Galea or any other member of IURIS.