On the 22nd February 2022 the European Council finalised its position proposal for a corporate sustainability reporting directive (CSRD), representing another decisive step in the development of a European regulatory framework for sustainable finance.
This article outlines the main areas/headings for reporting and the updated timelines for implementation.
Ultimately, companies (undertakings) with more than 250 employees or listed companies will have to translate their environmental, social and governance (ESG) policy into standardised, justified and certified information documents.
Undertakings will be required to dislcose in their Management Reports information under four headings:
Business Model a brief description of the undertaking’s business model and strategy, including:
- the resilience of the undertaking’s business model and strategy to risks related to ESG matters (environmental, social, employee matters, human rights, anti corruption and bribery).
- the opportunities for the undertaking related ESG.
- the plans of the undertaking to ensure that its business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the Paris Agreement;
- how the undertaking’s business model and strategy take account of the interests of the undertaking’s stakeholders and of the impacts of their operations on ESG matters.
- how the undertaking’s strategy has been implemented with regard to ESG matters.
Policies and policy outcomes, a desciption of ESG/sustainability policies, including a description of:
- the due diligence process implemented by the undertaking to identify relevant and material ESG matters on which they will report.
- the principal actual or potential adverse impacts connected with the undertaking’s value chain, including its own operations, its products and services, its business relationships and its supply chain;
- any actions taken by the undertaking, including the outcomes of such actions, to prevent, mitigate or remediate actual or potential adverse ESG impacts from their operations.
Risk and Risk Management, a description of the principal risks to the undertaking related to ESG matters, including the undertaking’s principal dependencies on such matters, and how the undertaking manages those risks.
Key performance indicators, indicators relevant to the stated objectives and targets in the above referenced three areas will be required. Undertakings will be required to report on the process carried out to identify the information that they have included in the management report, and shall take account of short, medium and long-term horizons.
Requirement for SMEs will be less stringent and proportionate, reflecting their limited resources and capacity to manage the compliance burden.
The Commission will adapt Reporting Standards, specifying information that undertakings are to report including:
- Information required by investors and financial market partcipants.
- Complementary information required to provide context to management reports.
- Information specific to the sector in which the undertakings operate.
- Adoption of standards by the Commission: 31 October 2022 for the adoption of general standards and 31 October 2023 for the adoption of sector-specific standards and standards for SMEs.
- Implementation by undertakings:
- 1 January 2024 for undertakings already subject to the NFRD (reporting in 2025 on 2024 data);
- 1 January 2025 for large undertakings not currently subject to the NFRD (reporting in 2026 on 2025 data).
- 1 January 2026 for listed SMEs, as well as for small and non-complex credit institutions and for captive insurance undertakings (reporting in 2027 on 2026 data).
- Make someone in your organisation responsible for Sustainability. This should be a senior person with the authority to work with other departments i.e. Finance, HR, Procurement, Quality etc.
- Consider the implementation of existing SASB and or GRI reporting standards. Both GRI and the Value Reporting Foundation (SASB) are working with EFRAG and other key organisations to design the final standards. A significant level of alignment is expected, building in work already done and facilitating the expediation of implementation.
- The collection of ESG (Environmental, Social, Governance) data will be essential. At a minimum companies should start collecting and monitoring their environmental data on energy, water and waste as soon as possible. This is likely to require investment in new processes, training and technology solutions.
- Carry out a sustainability due diligence on your supply-chain.
- Using the data/information gathered from 2 & 3, carry out a ‘materiality assessment’ to establish sustainability issues affecting your company and how your activities and operations impact on the environment and society.
- And finally, stay informed.