The Council and the European Parliament this week reached a provisional political agreement on the Directive on the Corporate sustainability reporting (CSRD) achieved. The agreement still has to be approved by the Council and the European Parliament. Read everything you need to know about it here. A summary of Coaching Institute Frankfurt.
This agreement is excellent news for all European consumers. You will now be better informed about the impact of business on human rights and the environment. This means more transparency for people, consumers and investors. It also means that the information provided by companies becomes more readable and simpler. Businesses must play their role in society fully. Greenwashing is history. With this text, Europe is at the forefront of the international standards race by setting high standards in line with our environmental and social ambitions.
Bruno Le Maire, Minister for the Economy, Finance and Industrial and Digital Sovereignty
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The new EU ESG rules will apply to many US issuers
New requirements for environmental, social and governance (ESG) reporting in the European Union and the US will fundamentally change the landscape of non-financial reporting. The new EU rules will require ESG reporting on an unprecedented scale and will cover a whole range of companies that have not previously been subject to non-financial reporting, including non-EU public and private companies that meet certain thresholds for ESG Fulfill EU presence. You can learn more about sustainability reporting by speaking to one of our experts.
For US issuers, the new EU rules will result in mandatory reporting on a broader range of ESG topics than those required under current and proposed Securities and Exchange Commission (SEC) rules. Even if your company is not covered by the new reporting requirements, we assume that if your company is part of the value chain of a company that is required to report, you will feel the impact of these requirements. We anticipate that companies will send and receive ESG questionnaires to collect the data required for their ESG reports.
In addition to the proposed US rules for reporting on climate change, preparation for reporting under the new EU rules will be a key topic for the fall board meetings and nominating and corporate governance committees.
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What are the new reporting rules?
Political agreement has been reached in the EU on the new Corporate Sustainability Reporting Directive (CSRD), meaning the draft will soon come into force. The CSRD vastly expands the scope and content of current non-financial reporting requirements in the EU, covering a much wider range of companies and requiring reporting on a wider range of ESG issues in much greater detail than previously. The information will be included in a separate section of the management report, subject to mandatory scrutiny, and will be made available on a publicly accessible EU website.
The CSRD applies to EU companies as well as non-EU public and private companies that meet the thresholds described below. As a result, US and other non-EU companies doing EU business may be required to prepare ESG reports under EU regulations even if those companies are not listed on a European stock exchange. Although non-EU companies have the longest reporting timeframes, many EU subsidiaries of non-EU companies will have to report sooner. Non-EU companies with subsidiaries that are required to report earlier could, for practical reasons, consider early reporting at parent company level rather than preparing a separate report at subsidiary level. Especially those companies that already make solid voluntary ESG disclosures. Learn more about sustainability reporting.
In the US, there is a parallel but more limited movement towards expanding mandatory ESG reporting. The SEC has taken a more piecemeal approach than the CSRD, focusing on specific ESG issues when developing its regulations rather than requiring the publication of comprehensive ESG reports. In particular, the SEC has proposed rules for reporting on climate change and cybersecurity and is expected to propose rules for human capital disclosure and board diversity over the next year.
The CSRD empowers the European Commission to recognize sustainability reporting standards used by non-EU countries as equivalent. finally will Growth through ethical reduction on the subject. As the SEC has not yet proposed, and is not currently expected to have, equally comprehensive sustainability reporting rules, it is unlikely that the SEC rules will be recognized as equivalent to all CSRD reporting standards (although some, such as the climate change, could be recognized as equivalent). As a result, US issuers that fall within the scope of the new EU rules will likely need to publish their own report to comply with the CSRD. In addition, the scope of the CSRD extends beyond most of the voluntary reporting standards currently used by companies in the United States and elsewhere, such as the Task Force on Climate-Related Financial Disclosures (TCFD) framework or the 77 industry-specific standards of sustainability Accounting Standards Board.
Prepare for sustainability reporting?
The final adoption of the CSRD, expected this autumn/winter, is the start of the process. Boards and legal departments will also be informed of developments related to the European Financial Reporting Advisory Group (EFRAG) reporting standards (i.e. the EU standards companies must report to in order to comply with the CSRD), the national implementation of the CSRD and any relevant regulations of Third countries have to keep an eye on. This is particularly true for companies from non-EU countries who may not be aware of the CSRD and do not expect to have to comply with reporting requirements outside of the countries in which they are based or whose securities are registered. The application of the CSRD to non-EU private companies can come as a shock to many companies. Non-EU companies should continue to engage with external advisors and track their EU revenues and future plans to see if they are impacted by the upcoming requirements. Our experts will advise you on sustainability reporting.
Focus on board oversight
Board oversight of ESG matters is a hot topic for companies around the world, primarily US issuers due to the proposed SEC rules on climate change reporting. While many US public companies have established a nominating and corporate governance committee to oversee ESG matters in recent years, the rise in highly technical ESG reporting (and SEC disclosure) has raised questions about whether the Oversight should be shifted, at least in part, to the audit committees, which have traditionally been more experienced in overseeing public disclosure and financial reporting. Such questions are even more relevant now considering the amount of data required for reporting under the CSRD and the associated audit requirements. Given the number of topics covered by the EU reporting standards, the CSRD also questions whether existing board committees will have the authority and breadth to oversee ESG reporting matters. Therefore, companies falling under the CSRD should not only use more robust ESGTeams at management level, but also consider establishing dedicated board committees or incorporating ESG reporting experience into their director recruitment plans. You may also be interested in our article on the subject Business Coaching.
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Comparison of reports – sustainability reporting
In light of recent SEC comments and suggestions, many U.S. public companies are very concerned about aligning voluntary ESG reporting with related disclosures in SEC reports. Similar considerations should apply to issuers subject to the CSRD. In addition to integrating CSRD compliance into existing ESG reporting activities, US issuers should be aware of the risk of inconsistencies between the financial, risk and strategy disclosures in SEC reports and reporting under the CSRD. With the right experts on the safe side when it comes to sustainability reporting.
Establishment of internal controls
In addition to preparing for tracking and reporting on the wide range of ESG issues covered by the CSRD, boards and management will want to focus on establishing appropriate internal controls for CSRD reporting. With the rules proposed by the SEC, the greenwashing controversies in the US, EU and UK, and the increasingly quantified and detailed nature of voluntary reporting, establishing internal ESG controls is already a hot topic for boards. The broad scope of the CSRD (as well as the potential penalties for non-compliance), which represents the first significant regulatory mandate for many of the issues covered, further underscores the importance of establishing proper internal control processes. This can be particularly challenging for private companies, which generally have much less developed internal controls over public reporting. Even for companies with significant ESG reporting experience, the CSRD will likely require additional work to establish reporting processes and controls across the value chain, aligned to a reporting framework that will no doubt diverge from the various existing standards.
Expected ESG questionnaires
board members and managements should also be prepared to receive more ESG screening questionnaires from the EU and other affected counterparties in the context of CSRD compliance. This is because the reporting boundaries need to be expanded to cover material sustainability aspects associated with the company through its direct or indirect business relationships (upstream and downstream), regardless of the extent to which the company controls them. This is much broader than traditional control-based financial reporting. As such questionnaires increase in frequency and detail - and play a more central role in funds' investment decisions - it will be important for U.S. issuers to consider whether responses to such questionnaires raise selective disclosure issues under Regulation FD raise. Such questionnaires could also increase in the future if the EU directive on corporate sustainability due diligence (CSDD), which is currently being negotiated, is passed.
Training and development of internal Teams for sustainability reporting
Many Companies, predominantly those that engage in voluntary ESG reporting, have robust internal ESG reportingteams built up. The CSRD should give further impetus to these efforts. For many companies, ESG reporting is primarily a matter of marketing, sustainability or social impactTeams, although many companies have started to “legalize” their ESG reporting by including legal, financial reporting and internal audit. The CSRD is likely to further encourage companies to adopt robust ESG reportingteams set up, similar to the ones they have for financial reporting. Preparing for CSRD disclosure also requires report trainingteams about the new EU reporting frameworks. For USTeams this means not only the challenge of reporting on certain topics that are less prominent in US ESG reporting, but also the adaptation to a “dual materiality” approach, which includes an “impact materiality” standard, which differs significantly from the SEC's investor-centric approach, which in turn underlies many prominent ESG reporting frameworks and assessments. Also read our article on the topic health coaching.
The Corporate Sustainability Reporting Directive (CSRD) is a new proposal by the European Union for EU-wide harmonization of sustainability reporting. The CSRD is intended to oblige companies to report regularly on their sustainability performance and to publish standardized information. The importance of the CSRD for sustainability reporting lies in the fact that it enables uniform reporting and comparability of companies' sustainability performance.
The CSR Directive has an impact on companies' sustainability reporting, as it leads to more transparency and standardization in reporting. Companies need to report more regularly and comprehensively on their sustainability performance, leading to greater public awareness and accountability. The CSR directive will also help to increase the comparability of companies' sustainability performance and support the capital market in assessing sustainability risks and opportunities.
Companies can meet the requirements of the CSR Directive by reporting regularly and comprehensively on their sustainability performance and by publishing standardized information. To this end, companies should have a clear sustainability strategy and policy and measure and evaluate their sustainability performance using defined KPIs. It is also important to establish an appropriate reporting system and governance structure to ensure reliable and consistent reporting. Companies can also seek external advice and support to improve their sustainability reporting and meet the requirements of the CSR Directive.
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