Meet The Members Europe – The reality of company sustainability reporting obligations

The European Parliament and Council’s Corporate Sustainability Reporting Directive (CSRD), (which has amended Regulation (EU) 537/2014, Directive 2004/109/EC, Directive 2006/43/CE and Directive 2013/34/UE) has come into force. This means that more companies are required to report on corporate sustainability issues.

The world and the economy are changing, and the CSRD is adapting to new sustainability demands. The importance of sustainability reporting is now on par with financial reporting.

Initially, the Non-Financial Reporting Directive (NFRD, 2014/95/EU) known in Spain as the Law 11/2018 on Non-Financial Information and Diversity, introduced the obligation to report non-financial information statements for certain large companies and groups. However, the CSRD’s scope has now extended this obligation to a larger number of companies due to the update of the scope of application included in the CSRD.

In Spain, the local law mentioned above was a step forward for reporting non-financial information and, some years later, we are still noticing areas for improvement, which has been one of the catalysts behind this new directive.

It is estimated that the number of affected companies required to provide sustainability information is expected to increase fourfold, from around 11,000-12,000 to 48,000-50,000.

The CRSD not only requires companies to provide information on results, development, and financials in their management report, but also information that clarifies the impact of the company’s activities around sustainability.

Member states will have until 6 July 2024 to transpose the CSRD and it will be implemented in four phases:

1. Large companies already subject to the previous non-financial reporting directive will be required to report on sustainability in 2025 for the financial year beginning January 1st, 2024.

2. Large companies and parent companies of large groups of companies (more than 250 employees and/or a turnover of €40 million and/or €20 million of assets) not subject to the previous directive and domiciled in the European Union, will be required to report on sustainability in 2026 for the financial year beginning January 1st, 2025.

3. Small and medium-sized companies (SMEs) – excluding micro-sized companies – whose securities are admitted to trading on a regulated market in the Union or which have a public interest, and which are domiciled in the European Union, must submit in 2027 sustainability information for the financial year starting January 1st, 2026.

4. Third-country companies with a subsidiary or branch in the European Union that meet certain requirements (mainly, to have a €150 million annual net turnover in the European Union) must submit sustainability disclosures in 2029 for the financial year beginning January 1st, 2028. This measure is intended to level the playing field for companies based in the EU, irrespective of where the company is based.

“The importance of sustainability reporting is now on par with financial reporting.”

In any case, the CSRD establishes common, verifiable standards for sustainability reporting (Sustainability Reporting Standards or ESRs) that can be digitised to monitor and check them for compliance. The European Commission is expected to adopt delegated acts to establish sustainability reporting standards.

Furthermore, sustainability information will have to be verified by an auditor or by an independent service provider. In this regard, the auditor or certifier will have to ensure that the sustainability information complies with the standards that have been adopted by the EU. Although sanctions for non-compliance with the CSRD are expected to be significant, it is not known when the EU Commission will start imposing them on companies that fail to comply. The nature of the sanctions or fines will depend on the individual Member States.

In short, this directive introduces additional, more detailed obligations for companies in areas such as the environment (circular economy, use of resources and adaptation to climate change), human rights, social (equality measures, working conditions or inclusion) and governance (ethical values, control systems and risk management).

“Although sanctions for noncompliance with the CSRD are expected to be significant, it is not known when the EU Commission will start imposing them.”

This represents an important step forward in terms of establishing sustainability standards at a global level. The improved reporting driven by the CSRD will facilitate the transition to a more sustainable economy by allowing investors to better identify the activities and projects into which they should channel funds.

In any case, we will have to wait for the transposition of the CRSD Directive into each country’s legal system and the regulation imposed at a national level to ensure compliance with these regulatory obligations.

Lastly, we must consider that although the transition to implementing the CRSD Directive is set in different timeframes as established above, it is important to start working on the new features imposed by the CRSD Directive.

Why? Because companies probably will not know what is needed to comply with the new regulation, and so they must ensure that they have the means to provide all the data they need to be compliant.