The European Commission recently published its proposed revision of the non-financial reporting directive (NFRD), which is part of Ursula von der Leyen’s green transition presidency.
In its new guise, it will be known as the corporate sustainability reporting directive (CSRD). Whatever they call it, there are three big changes – Commission Vice-President Dombrovskis has said that he expects “sharing information on sustainability will increasingly become a fact of business life”…but not for a while yet*.
Here are the three big changes:
1. Increased scope
The Commission has increased the number of companies that fall under the directive. Dramatically. From 11,000 to 50,000 companies. That means all large companies and all but a handful of listed companies. The exceptions are listed SMEs, which get a three-year grace period to take account of the burdens they’ve faced from covid-19. Listed micro-enterprises are exempt.
CSRD does not apply to all companies the same way: the Commission will adopt what it calls separate and proportionate standards for SMEs. Non-listed SMEs can use the sustainability reporting standard voluntarily, and member states have been invited – gently – to help them to do so.
2. Binding sustainability reporting standards
Following feedback from stakeholders who want reporting to be more uniform, the CSRD outlines the need for binding sustainability reporting standards. The Commission believes that the non-binding NFRD reporting guidelines undermined company disclosures. It says that mandatory common reporting standards are necessary for both audit and digitisation purposes.
The standards are being developed by the European Financial Reporting Advisory Group – EFRAG – and there is an interesting suggestion that they could eventually gain currency outside the EU. The Socialists and Democrats Group in the European Parliament tweeted that CSRD can “boost EU leadership on global sustainability goals”.
3. There will be an EU-wide audit requirement
The consultation on the outgoing NFRD highlighted a desire for more stringent audit requirements. The CSRD proposal introduces a general EU-wide audit for sustainability information to ensure that it is “accurate and reliable”.
For the Commission, the objective is for non-financial, sustainability reporting to reach the standards of company financial audit. For the time being, the Commission proposes a limited assurance requirement. Renew MEP Paul Durand emphasised the importance of assurance when he said: “for corporate sustainability reporting to work and be reliable, environmental, social and corporate governance data and forward-looking strategies must be scrutinised by an independent and objective audit”.
*Whether or not you’ve felt the last two years fly by like I have, the CSRD proposal has to go through the legislative bodies, meaning the Council of the European Union and the Parliament. The Parliament’s mandate will be formed by the Committee on Legal Affairs – JURI, who will be provided with opinions from three further Committees. Meanwhile, the final reporting standards are not expected before the end of 2022. If on schedule, the standards will apply in 2024, covering the 2023 financial year.
That’s as far in the future as you make it. In the short-term, the Commission has launched a consultation on the CSRD proposal. The deadline is 19 July.