In a period of time where an increasing amount of people are conscious of their environmental footprint and want to understand what companies are doing to address concerns related to ESG, a new EU directive on Corporate Sustainability Reporting comes at a pivotal moment.
Through the inaugural launch of a comprehensive ESG monitor report in 2021, our group wanted to understand how exactly people around the globe perceive the performance of companies and governments on environmental, social and governance factors and to what extent they are interested in such issues. Almost 2/3 of the respondents replied that companies should promote their ESG efforts more clearly and that there should be a consistent approach for reporting. In fact, companies only got a rating of 5.5/10 on reporting in a transparent manner. To re-assess such perceptions and provide an up-to-date picture our group will unveil the results of the ESG Monitor 2022 with an online launch event on 19 October.
In spring 2021, a legislative proposal on a Corporate Sustainability Reporting Directive was published by the European Commission with the key aim of making companies more accountable and transparent about their impact on the environment and on people through the adoption of dedicated EU sustainability reporting standards. This forms part of the wider EU Green Deal which is the holistic environmental and climate ambition of the European Commission driving many of its policies. At the end of June 2022, an ambitious agreement was reached by the European Parliament and the Council (EU Member States) to require the mandatory reporting on ESG by a considerable chunk of companies (incl. Large non-EU and subsidiaries) operating on the EU market.
The Corporate Sustainability Reporting Directive with its obligatory reporting standards aims to be the solution to the perceived shortcoming illustrated by the response within our report. Progress is already being made towards the creation of a first set of standards with the European Financial Advisory Group (EFRAG) currently assessing a public consultation on these exposure drafts detailing a preliminary view. A fundamental concept within the first set will be the concept of double materiality. In simple terms, it requires the reporting entity to assess the impacts of the activities of the entity on people and the environment, and on how various sustainability matters affect the entity. This contrasts with the more restricted approach taken by the International Sustainability Standards Board which focuses on “single materiality” (enterprise value).
What are some of the key points to keep in mind within a global context?
- Large or listed subsidiaries of non-EU companies will have to report for fiscal year 2025 (report due in 2026) on the basis of European Sustainability Reporting Standards. Until 2029, the largest subsidiary will have the opportunity to “artificially” act as the parent company and publish a joint report. Technically, subsidiaries within scope could also be exempted if the non-EU parent company reports in accordance with the European standards or an equivalent standard (yet to be specified). A large company/subsidiary is one which meets two of the following criteria: (i) balance sheet total exceeding €20 million, (ii) net turnover exceeding €40 million, and (iii) average number of employees during the financial year exceeding 250).
- Large or listed subsidiaries of non-EU companies where the latter meets a net turnover threshold of EUR 150 million within the European Union for each of the last two consecutive financial years will have to draft a less comprehensive report at the consolidated level of the parent company (FY 2028 with publication in 2029). This will be additional to the first report and will follow dedicated non-EU sustainability reporting standards.
- All reports will have to be audited by the statutory auditor or, alternatively, by a different auditor or an accredited provider (upon discretion of Member States). In a first instance this will done through limited assurance and in a second instance, following review, it could be extended to reasonable assurance.
- The draft topical standards include: (1) Environment – Climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use and circular economy; (2) Social – Own workforce, Workers in the value chain, Affected communities, Consumers and end-users; (3) Governance – Governance, risk management and internal control, Business conduct.
- The reporting should account for the the activities of the value chain and adapt short-, medium- and long-term horizons.
The agreement on a Corporate Sustainability Reporting Directive with mandatory reporting on ESG is, in conjunction with international efforts, steering the world towards a higher level of awareness on where exactly companies are standing. This may, consequently, provide handy data informing the decisions by the respective management. Our report clearly shows that people want to see companies do better on how they report in relation to environment, social and governance factors. Regardless of how exactly the final standards turn out, it is clear that their voice has been heard. We advise everyone to closely follow developments on this front as the mandatory nature of sustainability reporting ushers a new era of ESG.