At a glance
The European Commission (EC) has proposed a directive intended to ensure adequate publicly available information about the risks that sustainability issues present for companies. The directive is intended to bring sustainability reporting on par with financial reporting, including being subject to third-party assurance. The new rules may impose disclosure requirements on European subsidiaries of US companies.
On April 21, the European Commission (EC) published a proposal for a Corporate Sustainability Reporting Directive (CSRD)
. The objective is to improve and harmonize the disclosure of sustainability information by companies, which will provide companies, investors, and broader stakeholders with comparable and reliable sustainability information. It aims to create a set of rules that will bring sustainability reporting on par with financial reporting. An EC directive requires Member States to achieve a particular result, but does not specify the means of achieving that result. Member States have some flexibility on the exact rules to be adopted. In this case, the draft reporting standards would be developed by the European Financial Reporting Advisory Group (EFRAG), which is a private association established with the encouragement of the European Commission to serve the public interest. EFRAG’s stated mission is, in part, “to serve the European public interest by developing and promoting European views in the field of financial reporting.” It currently advises the EC regarding whether the European Union should endorse new IFRS standards.
Why is this important?
The directive calls for mandatory reporting for all listed companies on European Union (EU) regulated markets (except for listed micro-enterprises, but including non-EU issuers) and for all large companies that meet at least two of the following three criteria: total assets > 20 million euros; net revenue > 40 million euros; average number of employees > 250. The proposal also includes proportional requirements applicable to some small and medium sized enterprises.
The scope includes EU subsidiaries of third-country parent companies, meaning that as proposed, the rules may impact European subsidiaries of US companies that meet the criteria. A subsidiary may be able to meet this requirement through its inclusion in its parent company reporting in the US, if that reporting is “equivalent” to the EU sustainability reporting standards. However, it is unclear how equivalency will be determined.
As proposed, the directive would result in a requirement to disclose information necessary to understand the company’s impact on sustainability matters and information necessary to understand how sustainability matters affect the company's development, performance, and position. Specifically, this would include:
- a description of the company's business model and strategy;
- targets related to sustainability matters set by the company and of the progress towards achieving them;
- the role of the administrative, management, and supervisory bodies with regard to sustainability matters;
- the group’s policies in relation to sustainability matters;
- the due diligence process implemented with regard to sustainability matters;
- the principal actual or potential adverse impacts connected with the company’s value chain, including its own operations, its products and services, its business relationships, and its supply chain;
- actions taken, and the result of such actions, to prevent, mitigate, or remediate actual or potential adverse impacts;
- the principal risks to the group related to sustainability matters, including the group’s principal dependencies on such factors, and how the group manages those risks; and
- indicators relevant to the disclosures referred to in points above.
The disclosures would also need to include information on intangibles, including information on intellectual, human, and social and relationship capital. It would need to describe the process carried out to identify the information included in the report.
The proposal also introduces a requirement for limited third-party assurance on reported sustainability information. Under the EC’s proposal, Member States could choose to allow firms other than the auditors of financial information to provide assurance on sustainability information.
The European Parliament and the Member States in the Council will negotiate final legislative text on the basis of the EC's proposal. In parallel, EFRAG will start work on a first set of draft sustainability reporting standards that would be ready for consideration by the EC once the Parliament and Council agree to the legislative text. EFRAG aims to have the first set of draft standards ready by mid-2022.
The final timetable will depend on how the Parliament and Council progress in their negotiations. If they reach agreement in the first half of 2022, the Commission should be able to adopt the first set of reporting standards under the new legislation by the end of 2022. That would mean that companies would apply the standards for the first time to reports published in 2024, covering financial year 2023.
For further information on the EC’s proposal, refer to the Q&A
issued by the EC as well as the full text of the directive
. See our In the loop
for information on the SEC’s renewed focus on climate-related disclosures and our podcast
regarding the SEC’s most recent request for input on the topic.