Sustainability reporting: common standards for businesses

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The EU’s governance has started intensive efforts to force corporate entities to implement sustainability and fulfill their obligations under the “green deal”. Present corporate sustainability reporting seems inefficient with gaps tarnishing public “green accountability”. The Commission has adopted common standards for companies to manage sustainability performance and make it more efficient with a better access to investment. The reporting requirements will be phased out for different companies during 2024-26.  

    There has been recently a very significant increase in demand for corporate information on implementing sustainability requirements, particularly in view of the EU-wide SDG obligations and increasing potentials for investment. Besides, increasing demand is also driven by the changing nature of risks to undertakings and growing investor awareness of the financial implications of those risks, which is particularly vital in cases involving climate-related financial risks. There are ample evidences that the sustainability information that companies currently report are not effective: firms often omit information that investors and other stakeholders think important, reported information is often hard to compare and users are often suspicious of its validity.
There is also growing awareness of the risks and opportunities for undertakings and for investments resulting from other environmental issues, such as biodiversity loss, health and social issues, including employment conditions (i.e. child and forced labour).

    The increase in demand for sustainability information is also driven by the growth in investment products that explicitly seek to meet certain sustainability standards or achieve certain sustainability objectives of certain international deals; e.g. Paris Agreement and the UN Framework Convention on Climate Change (the “Paris Agreement in December 2015), the UN Sustainable goals, the UN Convention on Biological Diversity and the EU policies. Part of the latter is previously adopted legislation: i.e. Regulations 2019/2088 and 2020/852 adopted due to fast-changing citizen awareness, consumer preferences and market practices. Recent pandemic has further accelerated the increase in users’ information needs, in particular as it has exposed the vulnerabilities of workers and undertakings’ value chains. Information on environmental impacts is also relevant in the context of mitigating future crises, human’s disturbance of ecosystems and environmental quality.
Source: https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en#legislation

Corporate sustainability: new reporting and standards
The newly adopted directive on the corporate sustainability reporting and standards (originated in December 2022) are going to be applied to the EU-27 companies in the coming years; these efforts mark a vital transitional step towards EU-wide sustainable development. Besides, new common standards were aimed at assisting all kind of companies in reducing reporting costs by avoiding the use of multiple voluntary standards.
The standards cover the full range of environmental, social and governance issues, including climate change, biodiversity and human rights: they provide information for investors to understand the sustainability impact of the companies in which they intend to invest.
They also take account the opinion of the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) aimed at ensuring a high degree of interoperability between the EU and global standards, as well as preventing unnecessary double corporate reporting.
For example, from the financial side, the standards serve as important tools underpinning the EU’s sustainable finance agenda by providing a right balance between limiting the burden on reporting companies and enabling companies to show the efforts made to meet the green deal agenda.
The Corporate Sustainability Reporting Directive, CSRD outlines the obligation for companies to use standards to fulfill their legal sustainability reporting obligations; it will help companies to communicate and manage their sustainability performance more efficiently.
The accounting directive includes a “double materiality” perspective: i.e. it obliges companies to report both on their impacts on people and the environment and on whether social and environmental issues create financial risks and opportunities for the company.
Source: https://ec.europa.eu/commission/presscorner/detail/en/QANDA_23_4043

Sustainability reporting: tasks for business
As soon as undertakings carry out sufficient sustainability reporting, the ultimate beneficiaries would be individual citizens and savers, including trade unions and workers’ representatives who would be adequately informed and therefore able to better engage in social dialogue. Savers who want to invest sustainably will have better opportunities while citizens would benefit from a stable, sustainable and inclusive economic system.
To realise such benefits, disclosed sustainability information in corporate annual reports would reach two primary groups of users: the first group of users consists of investors, including asset managers, who want to better understand the risks and opportunities that sustainability issues pose for their investments and the impacts of those investments on people and the environment. The second group of users consists of civil society actors, including non-governmental organisations and social partners, which wish to better hold undertakings to account for their impacts on people and the environment. Other stakeholders might also make use of sustainability information disclosed in annual reports, in particular to foster comparability across and within market sectors.
Listed SMEs are not required to report sustainability information until financial year 2026, with the possibility of an additional two-year opt-out; in addition, listed SMEs may report according to separate, proportionate and lass demanding standards.
The business partners of undertakings, including customers, might rely on sustainability information to understand and acknowledge their sustainability risks and impacts throughout their own value chains. Policy makers and environmental agencies can use such information, in particular on an aggregate basis, to monitor environmental and social trends, to contribute to environmental accounts, and to inform public policy.
Few individual citizens and consumers directly consult undertakings’ annual reports, but they might use sustainability information indirectly, for example, when considering the advice or opinions of financial advisers or non-governmental organisations.
Many investors and asset managers purchase sustainability information from third-party data providers, who collect information from various sources, including public corporate reports.
More in the Directive: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2464

Corporate SDG-accountancy
Small and medium-sized undertakings (SMEs) whose securities are admitted to trading on a regulated market in the EU should, in addition, be given sufficient time to prepare for the application of the provisions requiring sustainability reporting, due to their smaller size and more limited resources, and taking account of the difficult economic circumstances among the EU 27 states.
Therefore, the provisions on corporate sustainability reporting as regards SMEs (except micro undertakings, whose securities are admitted to trading on a regulated market in the EU) should apply for financial years starting on or after 1 January 2026. Following that date, for a transitional period of two years, SMEs whose securities are admitted to trading on a regulated market in the EU would have the possibility of opting-out from the sustainability reporting requirements laid down in the present Directive, provided they briefly state in their management report why the sustainability information has not been provided.
Sustainability reporting standards should also take account of internationally recognised accounting principles and frameworks on responsible business conduct, corporate social responsibility and sustainable development, including the SDGs, the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises, the OECD Due Diligence Guidance for Responsible Business Conduct, as well as some other related sectoral guidelines, such as the Global Compact, the International Labour Organization’s Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, the ISO 26000 standard on social responsibility, and the UN Principles for Responsible Investment.
Information reported by undertakings in accordance with the sustainability reporting standards has to meet the needs of users and not placing disproportionate burden in terms of effort and cost on the reporting undertakings and those that are indirectly affected as part of the value chain of those undertakings.
The sustainability reporting standards should therefore specify the information that undertakings are to disclose on all major environmental factors, including their impacts and dependencies on climate, air, land, water and biodiversity; hence the EU Regulation 2020/852 provides a classification of the EU-wide environmental objectives.

Disclosing governance factors
Undertakings have to disclose about the following governance factors:
= the role of the undertaking’s administrative, management and supervisory bodies with regard to sustainability matters, and their composition, as well as their expertise and skills in relation to fulfilling that role or the access such bodies have to such expertise and skills;
= main features of the undertaking’s internal control and risk management systems, in relation to the sustainability reporting and decision-making process;
= business ethics and corporate culture, including anti-corruption and anti-bribery, the protection of whistleblowers and animal welfare;
= activities and commitments of the undertaking related to exerting its political influence, including its lobbying activities;
= management and quality of relationships with customers, suppliers and communities affected by the activities of the undertaking, including payment practices, especially with regard to late payment to small and medium-sized undertakings.

     Non-EU companies that generate over €150 million per year in the EU and having in EU either a branch with a turnover exceeding €40 million or a subsidiary (in the form of a large company or a listed SME) will have to report on the sustainability impacts at the group level of that non-EU company as from financial year 2028, with first sustainability statement published in 2029 (separate standards will be adopted specifically for this case).

     EU member states shall bring into force the laws, regulations and administrative provisions necessary to comply with Articles 1-3 of the Directive starting from July 2024 and shall communicate the text of those measures to the Commission. The later shall, at least once a year, consult the European Parliament, and consult jointly the Expert Group on Sustainable Finance (art. 24 of Regulation 2020/852) and the Accounting Regulatory Committee (art. 6 of Regulation 1606/2002) regarding the development of sustainability reporting standards.

 

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