EU Policymakers Strengthen Rules For Companies’ Sustainability Disclosures With Mandatory ESG Standards, But Delay Its Implementation

Energy
Thursday, June 23rd, 2022 9:57 pm EDT

The reformed rules will tackle major problems on the quality, consistency and comparability of sustainability information disclosed by companies under existing EU legislation, as evidenced in the studies published by the Alliance for Corporate Transparency.

The CSRD clarifies transparency obligations for large companies operating in the EU on their sustainability impacts, risks and opportunities — including their decarbonization plans and performance — and mandates the development and adoption of mandatory ESG corporate sustainability reporting standards.

This reform is the bedrock to ensure the success of the European sustainable finance agenda, the EU Green Deal and the REPowerEU plan: relevant and comparable sustainability data is a prerequisite to direct finance flows in support of the transition to an EU net-zero economy. It is also essential to ensure financial market participants fulfil their own obligations as well as monitor progression to achieve EU objectives and commitments on climate, biodiversity and human rights, and cut down the EU’s dependency on fossil fuels, and thus Russia (for which we need data on companies’ energy consumption and production, production of renewable energy etc).

5 key changes & missed opportunities:

  1. The scope of the legislation is expanded to all large listed and non-listed companies with more than 250 employees. According to EU Commission estimates, this includes approximately 50.000 companies, leaving out over 99% of companies in the EU. Listed SMEs were included in the initial proposal to report in a mandatory way as of 2026 following simplified standards (recommended by multiple studies and research including those of the EU Commission). The final text allows them to opt-out until 2028, which will have major implications for SMEs’ readiness to leverage sustainable finance flows and their relationship with banks, public procurement opportunities or requests from business partners. The European Parliament as well as investors, civil society and  academic studies had recommended an approach to define high-risk sectors and expand the scope to cover SMEs in those industries.
  2. Companies’ reporting obligations have been specified, namely for the disclosure of:
    • Transition plans to reach climate neutrality by 2050, including actions, investment plans and exposure to fossil fuels;
    • Time-bound targets related to sustainability issues and companies’ progress to achieve them (including GHG emission reduction targets);
    • Sustainability due diligence information, i.e. transparency on the process and adverse impacts identified in the company’s value chain, and actions taken to address such impacts.
  3. The key measure of the CSRD is the development and adoption of mandatory ESG standards based on double materiality (i.e. the disclosure of companies’ impacts on the planet and people as well as risks and opportunities to the company arising from sustainability matters).
    • Following CSRD guidance, this will include quantitative and qualitative data, and cover both retrospective and forward-looking information;
    • Draft EU standards (sector agnostic) have been published and are open for public consultation until August. These have been designed by a multi-stakeholder expert group to be feasible, flexible and implementable by companies. The expert group, part of the EFRAG new Sustainability Reporting Pillar, will now continue with technical proposals for sector-specific standards.
  4. In terms of timeline, the agreement reached by co-legislators proposes a delayed application to 2024 for those companies already covered by existing legislation (the EU Non-Financial Reporting Directive) and 2025 for other large listed and non-listed companies (above 250 employees).While the initial proposal was set to be integrated in national law by the end of 2023, the deal now includes an 18-month transposition period. It is imperative that Member States provide clarity to companies by making the necessary changes before January 2024.
  5. An assessment of the implementation of the Directive and adoption of standards by SMEs is requested of the European Commission before 2028, which is far too late considering that voluntary measures have proven to not be effective and a major portion of companies in highly polluting sectors are not covered by the CSRD.

The organizations of the Alliance for Corporate Transparency welcome the above developments, in line with NGO policy recommendations, and regret the missed opportunities.

Susanna Arus, Communications and EU Public Affairs Manager at Frank Bold states:

“It is imperative that Member States provide clarity to companies by making the necessary changes in national law before January 2024 and ensure that all large companies (not only those already covered by the EU Non-Financial Reporting Directive) are required and able to report for the financial year of 2024.  A gradual implementation would risk creating a two-speed Europe that would put some countries and companies at a disadvantage to access sustainable finance flows.”

Giorgia Ranzato, Sustainable Finance Officer at T&E, member of the EFRAG expert group and the Platform for Sustainable Finance states:

“Despite the exclusion of SMEs and the delayed entry into force, with today’s agreement the EU establishes itself as the world leader in sustainability reporting. But the devil is in the details: all the specific disclosure requirements are still to be defined. We have seen it with the Taxonomy Regulation: ambitious level one legislation and then weak criteria that nullify all the work. Hopefully the Commission and Council won’t ruin this file too.”

Mirjam Wolfrum, Director Policy Engagement, CDP Europe said:

“The CSRD is a landmark achievement for bold corporate disclosure rules that will drive companies to set emissions and nature targets in line with science. Companies disclosing through CDP are well prepared for the new requirements. We have always evolved and adapted our questionnaires in light of emerging new standards, priorities and regulations, and will continue to do so.”

In reaction to the deal, Elisa Peter, Director of Publish What You Say, said:

“We welcome the attention given to high risk sectors by the legislators. A just transition will not be possible without full transparency from oil, gas and mining companies on their extraction projects. The sustainability disclosure rules that will now be developed to implement yesterday’s deal are of vital importance to people, the climate, the environment and good governance in the countries where the oil, gas and minerals are extracted.”

On the outcome of the CSRD trilogue negotiations, Isabella Ritter, EU Policy Officer at ShareAction, comments:

“The introduction of mandatory and EU-wide sustainability reporting standards will finally give investors comparable and qualitative sustainability data to better consider the impacts of their investments. With the standards covering the full ESG spectrum and following a double materiality approach, investors will be able to reorient capital flows towards more sustainable activities. In particular, companies’ disclosures on transition plans, including GHG emission reduction targets, will provide investors with much-awaited information about the climate ambitions of their investee companies.”

 

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