Sustainability reporting, CSRD

This week, the Council and the European Parliament reached a provisional political agreement on the directive on the Sustainability reporting by companies (CSRD) has been reached. 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 the Coaching Institute Frankfurt.

This agreement is excellent news for all European consumers. They will now be better informed about the impact of companies on human rights and the environment. This means more transparency for people, consumers and investors. It also means that the information provided by companies will be more readable and simpler. Companies must fully live up to their role in society. Greenwashing is history. This text puts Europe at the forefront of the international race for standards 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 EU's new ESG rules will apply to many US issuers

New environmental, social and governance (ESG) reporting requirements in the European Union and the US will fundamentally change the landscape of non-financial reporting. The new EU rules will mandate ESG reporting on an unprecedented scale and will cover a whole range of companies that were previously not subject to non-financial reporting requirements, including public and private non-EU companies that meet certain thresholds for EU presence. You can find out more about sustainability reporting by speaking to one of our experts.

For U.S. issuers, the new EU rules will result in mandatory reporting on a broader range of ESG issues than those required under current and proposed Securities and Exchange Commission (SEC) rules. Even if your company is not subject to the new reporting requirements, we anticipate that you will feel the impact of these requirements if your company is part of the value chain of a company that is required to report. We expect that companies will send and receive ESG questionnaires to collect the data required for their ESG reports.

In addition to the proposed US rules on climate change reporting, preparation for reporting under the new EU rules will be an important topic for the fall board meetings and the nomination and corporate governance committees.

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What are the new reporting requirements?

Political agreement has been reached in the EU on the new Corporate Sustainability Reporting Directive (CSRD), which means that 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 broader range of companies and requiring reporting on a wider range of ESG issues in much greater detail than previously. The information is to be included in a separate section of the management report, subject to mandatory audit, and included on a publicly accessible EU website.

The CSRD applies to EU companies as well as public and private non-EU companies that meet the thresholds described below. Consequently, US and other non-EU companies with EU business may be required to prepare ESG reports in accordance with EU regulations, even if these companies are not listed on a European stock exchange. Although non-EU companies have the longest timeframe for reporting, many EU subsidiaries of non-EU companies will have to report earlier. Non-EU companies with subsidiaries that are required to report earlier may, for practical reasons, consider early reporting at the parent company level rather than preparing a separate report at the subsidiary level. Especially those companies that already have robust voluntary ESG disclosure. Learn more about sustainability reporting.

In the US, there is a parallel but more limited move towards extending mandatory ESG reporting. The SEC has taken a more piecemeal approach than the CSRD, focusing on specific ESG issues when drafting its rules, rather than mandating the publication of comprehensive ESG reports. In particular, the SEC has proposed rules on climate change and cybersecurity reporting and is expected to propose rules on human capital disclosure and board diversity over the next year.

The CSRD authorizes the European Commission to recognize the sustainability reporting standards applied by non-EU countries as equivalent. At last Growth through ethical reduction on the topic. Because the SEC has not yet proposed equally comprehensive sustainability reporting rules and is not currently expected to do so, it is unlikely that the SEC rules will be recognized as equivalent to all CSRD reporting standards (although some, such as climate change, may be recognized as equivalent). As a result, US issuers that fall within the scope of the new EU rules will likely need to publish a separate report to comply with CSRD. In addition, the scope of the CSRD goes beyond that of most voluntary reporting standards currently used by companies in the US and elsewhere, such as the Task Force on Climate-Related Financial Disclosures (TCFD) framework or the 77 industry-specific standards of the Sustainability Accounting Standards Board.

Preparing for sustainability reporting?

The final adoption of the CSRD, which is expected this fall/winter, is the start of the process. Boards and legal departments will also need to keep an eye on developments relating to the European Financial Reporting Advisory Group (EFRAG) reporting standards (i.e. the EU standards to which companies must report in order to comply with the CSRD), national implementation of the CSRD and any relevant third country regulations. This is particularly true for non-EU companies that may not be aware of the CSRD and do not expect to have to comply with reporting requirements outside the countries in which they are domiciled or whose securities are registered. The application of the CSRD to non-EU private companies may 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 affected by the upcoming requirements. Our experts can advise you on sustainability reporting.

Concentration on supervision by the Management Board

Board oversight of ESG matters is a hot topic for companies around the world, predominantly for US issuers due to proposed SEC rules on climate change reporting. While many US listed companies have established a nominating and corporate governance committee to oversee ESG matters in recent years, the increase in highly technical ESG reporting (and SEC disclosure) has raised the question of whether oversight should be shifted, at least in part, to audit committees, which traditionally have more experience overseeing public disclosure and financial reporting. Such questions are now even more relevant given the amount of data required for reporting under CSRD and the associated audit requirements. Given the number of topics covered by the EU reporting standards, the CSRD also raises the question of whether existing board committees will have the competence and bandwidth to oversee ESG reporting matters. Therefore, companies covered by the CSRD should not only build more robust ESG teams at management level, but also consider establishing dedicated board committees or integrating ESG reporting expertise into their director recruitment plans. You may also be interested in our article on the topic Business Coaching.

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Comparison of reports - sustainability reporting

In light of recent SEC comments and proposals, many U.S. public companies are eager to align voluntary ESG reporting with the corresponding disclosure in SEC reports. Similar considerations should apply to issuers subject to CSRD. In addition to integrating CSRD compliance into existing ESG reporting activities, U.S. issuers should be mindful of the risk of inconsistencies between financial, risk and strategic disclosures in SEC reports and reporting under CSRD. Stay on the safe side of sustainability reporting with the right experts.

Establishment of internal controls

In addition to preparing to track and report on the many ESG issues covered by CSRD, boards and management will want to focus on establishing appropriate internal controls for CSRD reporting. Given the SEC's proposed rules, 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 is the first significant regulatory mandate for many of the topics covered, further emphasizes the importance of establishing appropriate internal control processes. This can be particularly challenging for private companies as they generally have much less developed internal controls for public reporting. Even for companies with significant experience in ESG reporting, CSRD will likely require additional work to establish reporting processes and controls along the entire value chain that are aligned with a reporting framework that will undoubtedly diverge from the various existing standards.

Expected ESG questionnaires

Board members and Management boards should also be prepared to receive more ESG screening questionnaires from the EU and other relevant counterparties in the context of CSRD compliance. This is because the boundaries of reporting need to be extended to cover material sustainability aspects that are linked to 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. For US issuers, as such questionnaires increase in frequency and detail - and play a more central role in funds' investment decisions - it will be important to consider whether responses to such questionnaires raise selective disclosure issues under Regulation FD. Such questionnaires may also increase in the future if the EU Corporate Sustainability Due Diligence Directive (CSDD), which is currently under negotiation, is adopted.

Training and development of internal teams for sustainability reporting

Many The company, Most companies, especially those that engage in voluntary ESG reporting, have established robust internal ESG reporting teams. The CSRD should give further impetus to these efforts. At many companies, ESG reporting is primarily the responsibility of the marketing, sustainability or social impact teams, although many companies have begun to „legalize“ their ESG reporting by involving the legal department, financial reporting and internal audit. CSRD is likely to further encourage companies to establish robust ESG reporting teams, similar to those they have in place for financial reporting. Preparing for CSRD disclosure will also require training for reporting teams on the new EU reporting frameworks. For US teams, this means not only the challenge of reporting on certain topics that are less prominent in US ESG reporting, but also adapting to a „dual materiality“ approach that includes an „impact materiality“ standard that differs significantly from the SEC's investor-focused approach, which itself underlies numerous prominent ESG reporting frameworks and assessments. Read also our article on the topic Health Coaching.

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