NewsLocalHow the EU’s new sustainability directive will be a game changer

How the EU’s new sustainability directive will be a game changer

*By Nicoleta Genagritou, Senior Manager in the Audit and Assurance at EY Cyprus

With COP26 in progress, momentum is growing for a global baseline climate disclosure standard.

On 21 April 2021, the European Commission published a proposal for a Corporate Sustainability Reporting Directive (CSRD), which will amend the existing Non-Financial Reporting Directive (NFRD).

The revised directive will support the European Green Deal, a set of policy measures intended to combat the climate crisis by transforming the EU into a modern, resource-efficient and competitive economy, with no net emissions of greenhouse gases by 2050.

Scope of the proposed directive

The scope of the proposed directive will be extended to apply to more entities:

  • First, it will apply to all companies listed on the EU regulated markets, except for micro companies. Although listed SMEs will fall within the scope, they will have until 1 January 2026 to comply with the reporting requirements.
  • Second, it will apply to a “large undertaking” that is either an EU company or an EU subsidiary of a non-EU company. A “large undertaking” means an entity that meets two of the following three criteria: a net turnover of more than €40 million; balance sheet assets greater than €20 million; more than 250 employees.
  • As a third category, the CSRD will apply to insurance undertakings and credit institutions regardless of their legal form.

There are also exemptions to the application of the CSRD. Most notably, a subsidiary will be exempt if the parent company includes the subsidiary in its report that complies with the CSRD. As mentioned above, listed micro companies and non-listed SMEs fall outside of the scope but can apply the provisions on a voluntary basis.

Timescales

The 27 EU Member States will be expected to transpose the new directive into national law by 31 December 2022. As a result, companies that fall within the scope of the directive will need to comply with the amended rules for fiscal years beginning on or after 1 January 2023.

For SMEs, they will not need to start reporting in line with the directive until three years after its application, which is from 1 January 2026.

Objectives

The CSRD marks a step change in reporting and in the assurance of nonfinancial information.

The objectives of the directive include:

  • Requiring reported information to be comparable and consistent with the EU regulations
  • Aiming to reduce unnecessary costs and enable companies to meet the growing demand for sustainability reporting in a cost-efficient manner

Implications and Expectations

The CSRD marks a major step change in corporate reporting with far-reaching implications for businesses on an individual basis, as well as for the future of sustainability reporting, both in Europe and globally. Companies, regulators and auditors will all need to devote significant time and resources to prepare for the implementation of the directive — within a short timescale of less than two years. There will be certain expectations from businesses such as:

  • Disclosing more sustainability-related information than before about their business models and strategy
  • Providing information that investors can compare with peers
  • Transforming how businesses approach their own decision-making processes and how they share their stories with their stakeholders

Preparing for an efficient implementation

Given the significance of the directive and the time required, it is imperative that companies start preparing for its implementation from the beginning of 2022 when the draft standards will be made available for public consultation.

Companies will need to consider how they identify and gather sustainability-related information, manage environmental, social and governance (ESG) risks, draw up policies, and set targets and KPIs with an opportunity to reassess their relevance.  Companies should also remain abreast of any outcomes, interpretation and communications during the standard-setting process to get early visibility of how the standards are likely to look.

What companies will need to do in practice

Companies that fall within the scope of the proposed CSRD will need to make some significant changes to how they prepare and disclose sustainability information.

Management will need to:

  • Provide additional disclosures – all sustainability information disclosed should apply a forward-looking and retrospective view and should be qualitative and quantitative. It should also consider short-, medium- and long-term horizons and consider the company’s whole value chain
  • Report in accordance with new sustainability reporting standards – companies will need to disclose information as part of their management report, thereby giving users an integrated view of their impact and performance
  • Use digital tagging – in order to make their sustainability information easier for users to search and machines to read, companies will be required to prepare both their financial statements and their management report in a single XHTML format and mark up sustainability information, tagged in accordance with a digital taxonomy

The role of audit committees and auditors

Audit committees and auditors will need to oversee new reporting processes and monitor effectiveness of systems and controls setup.

Audit committees will have enhanced responsibilities under the new directive, including monitoring the company’s sustainability reporting process and submitting recommendations to ensure the integrity of the sustainability information provided by the company.

Statutory auditors will need to provide limited assurance around a company’s reported sustainability information.

 

In conclusion, the CSRD will contribute to a fully sustainable economic and financial system, leading to far-reaching changes that will strengthen the nature of corporate performance and financial reporting and assigning enhanced responsibilities to management teams, audit committees and statutory auditors.

Genagritou Nicoleta
Genagritou Nicoleta

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