A new era in sustainability reporting

Update sustainability reporting

Large public interest entities, credit institutions and insurance companies in the EU have since 2017 been obliged to report on non-financial matters. This reporting has however shown several shortcomings. The reported information often lacks relevance, reliability and comparability - according to the criticism of investors and other stakeholders - and thus not suitable for taking sustainability-related matters into account in decision making. Last but not least, the reporting obligation affected only a relatively small group of companies.

Through the updated CSRD, the EU is now addressing this criticism and at the same time opening a new chapter in sustainability reporting. It has presented a clear roadmap for integrating sustainability matters into corporate reporting. The proposal details clear responsibilities for the preparation, monitoring and auditing of sustainability reporting. In addition, the proposal aims to make sustainability reporting requirements more consistent with the broader sustainable finance legal framework, including the SFDR and the Taxonomy Regulation, and to better tie in with the objectives of the European Green Deal.

The five most important changes

1. The scope of reporting entities has been enlarged

Under the new Directive, all large companies, and all companies listed on EU regulated markets (with the exception of micro-enterprises) will be required to apply EU sustainability reporting standards. Large banks and insurance companies will also continue to be subject to the reporting obligation, irrespective of their capital market orientation.

A company is considered to be large when, on its balance sheet date, it exceeds at least two of the three following criteria: balance sheet total: twenty million euro, net turnover: forty million euro, average number of employees during the financial year: 250. Under the new regulations, it is estimated that there will now be at least five times as many entities in scope. Consequently, the reporting obligation will now also reach family-run and private equity owned enterprises.

2. The contents of the report will be expanded

The content of the report will be comprehensively expanded. To this end, new, binding EU sustainability reporting standards will be adopted. This will create more uniformity in application,  replacing the patchwork that has applied up to now.  In addition the reporting companies must also disclose the green financial indicators according to the Taxonomy Regulation showing which activities,  according to the EU, are green. These were made concrete by the delegated act also adopted on the same day. Qualitative and non-integrated sustainability reporting will no longer be compliant with the regulation.

3. Sustainability reporting must be included in the management report and is subject to digital tagging

Sustainability reporting must now be included in the management report and cannot be issued as a separate report. This poses several challenges: companies have to bring sustainability reporting forward to the time of the publication of the management report and will have to report more sustainability information than before. In addition, companies have to prepare their reporting in a single electronic reporting format and must digitally tag the information.

4. Introduction of limited assurance

In addition, the CSRD stipulates an audit requirement for the sustainability part of reports. In order to increase the reliability of sustainability reporting, the companies within scope are required to seek limited assurance over their reported sustainability information - which may move towards a reasonable assurance requirement at a later stage.  For these companies, the provision of auditable information in the first year of their reporting obligation is a challenge - especially in view of the already ambitious schedule.

5. Management and supervisory board bear explicit responsibility

The administrative, management and supervisory bodies should actively and demonstrably bear collective responsibility for sustainability reporting. The balance sheet oath, which has so far only referred to financial reporting, is expected to be extended to the reported sustainability information. This is the first time that management shows explicitly - and in writing - to the outside world that it bears this responsibility.

Biggest transformation in corporate reporting since IFRS

With the current proposal, everything that applies to traditional financial reporting might, in a few years, also be binding for sustainability reporting. Although the implementation of the new requirements will require significant effort, the harmonisation of reporting obligations also holds an opportunity for the companies concerned.  It is worthwhile to embed the sustainability matters, which are crucial to business success, in the corporate reporting processes on an equal footing. This will make it easier to provide information to capital providers, investors and also customers while at the same time making a contribution to more trust and transparency.

The timetable for the implementation of the amendments is ambitious: The more detailed sustainability reporting standards are expected by mid 2022. By the end of 2022, the member states must transpose the CSRD requirements into national law. The reporting obligation is to apply to reports published from 1 January 2024. The changes therefore already affect the 2023 reporting period.