The European Commission has recently adopted a proposal which would see a Corporate Sustainability Reporting Directive (CSRD) amend the existing reporting requirements of the Non-Financial Reporting Directive (NFRD).

This proposal aims to create a set of rules that will — over time — bring sustainability reporting on par with financial reporting. Through this change, all large and all listed companies are required to report on sustainability, representing an increase from 11,000 companies to 50,000 companies which will now have to follow the EU sustainability reporting standards.

We welcome the European Commission’s initiative to establish a new framework in order to increase fund flow into sustainable businesses.

The key information regarding this proposal is as follows:

• There will be new reporting standards created for the CFRD. The European Financial Reporting Advisory Group (EFRAG) will be responsible for drafting these new standards. These sustainability standards will be consistent with the European Green Deal and with Europe’s existing legal framework, namely the SFDR and the Taxonomy Regulation.
• EFRAG will be looking to work closely with the IFRS Foundation in order to utilise the expertise of existing reporting standards such as GRI, IIRC, SASB and several others. The Commission expects that these new standards will provide companies with a single solution that meets all the information needs of investors and other stakeholders.
• Small companies will not have to adhere to these new requirements, except for SMEs with listed securities on regulated markets. These SMEs will be reporting according to simpler reporting standards than those which will apply for larger companies. These requirements will not apply to SMEs on growth markets or MTFs. The new standards will only become mandatory 3 years after they become mandatory for larger companies.
• The proposal would also require companies to prepare their financial statements and their management reports in XHTML format in accordance with the ESEF Regulation. The companies would also have to ‘tag’ their reported sustainability information according to a yet-specified digital categorisation system.
• The proposal would for the first time introduce a general EU-wide audit (assurance) requirement for reported sustainability information. The Commission is proposing to start with a ‘limited’ assurance requirement.
• The Commission’s proposal will allow Member States to open up the market for sustainability assurance services to so-called ‘independent assurance services providers’. This means that Member States can chose to allow firms other than the usual auditors of financial information to assure sustainability information.
• The Commission’s proposal aims to reduce reporting costs for companies over the medium to long term. Although the proposed CSRD would imply additional costs in the short term for companies subject to its requirements.
• Should the EU Parliament and Council agree on legislative text in the first half of 2022, then 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.

Our thoughts

We are glad to see that the European Commission is increasingly promoting sustainability reporting as a way to disclose non-financial information and thereby better communicate with their stakeholders.

Although these changes will likely increase costs in the short-term, better reporting standards and a global reporting framework should streamline the sustainability reporting process and thereby ensure that companies will not be unprepared for future legislature regarding sustainability disclosure.

We are similarly very glad to see that the Commission is aware of the benefits of digitalisation, requiring non-financial disclosure to be prepared in XHTML format alongside XBRL tagging. We look forward to seeing the new digital categorisation system for non-financial data.

We look forward to being able to help our clients meet these new requirements to the highest of standards.

You can find more information on this proposal at the following link:

https://ec.europa.eu/commission/presscorner/detail/en/ip_21_1804

Further information on the CSRD can be found here:

https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_1806