Yesterday evening, 21 June 2022, MEPs and EU governments sealed a deal on mandatory corporate sustainability reporting. The new rules, revising the Non-Financial Reporting Directive[1] currently in force, will require large EU and non-EU companies[2], as well as SMEs with securities listed on the EU Regulated Markets, to publicly disclose information on the sustainability risks and opportunities they face, as well as the impacts their business has on the environment and society. Disclosures will also cover governance-related matters.
Companies in scope will need to report against mandatory European sustainability reporting standards which are being developed by the European Financial Reporting Advisory Group (EFRAG) and currently open for public consultation. The standards will later be considered and adopted by the European Commission in the form of delegated acts, subject to scrutiny by the European Parliament and the Council of the EU.
New rules will apply as of 2024 (with first reports expected in 2025) following a staggered approach, with a one-year delay for companies that will report sustainability information for the first time, a two-year delay for SMEs which, we understand, can be further prolonged by another two years (up to 2028), and with non-EU companies’ reporting as of 2028. A review of the rules is foreseen by 2028 and every three years thereafter.
Finance Watch welcomes the agreement as a major step forward to improve corporate sustainability reporting and enable application of other sustainable finance rules. In particular, Finance Watch applauds EU policy makers for ensuring that the EU corporate sustainability reporting will be based on a double materiality principle, obliging companies to report not only on sustainability risks they face, but also on the impacts of their business on the people and the planet.
On the scope of mandatory reporting, while Finance Watch wanted ideally to see mid-sized companies from high-risk sectors included, having listed SMEs and non-EU companies under certain conditions in the scope of the rules is great news, especially given political circumstances and challenging negotiations.
Regarding more detailed disclosures, Finance Watch is disappointed with regards to GHG emissions’ disclosures whereby it understands the scope 3 GHG emissions’ disclosures are required only “where relevant”. Such wording creates flexibility that can easily be exploited by companies to circumvent the rules. Meanwhile, scope 3 GHG emissions are a must, especially for certain sectors, including the financial sector, and are essential for reliable corporate climate transition plans and net-zero targets. Finance Watch urges EFRAG to ensure that the necessary clarity and safeguards are provided through the EU sustainability reporting standards.
Aleksandra Palinska, Senior Research and Advocacy Officer at Finance Watch, said:
“Finance Watch welcomes that listed SMEs are in the scope of mandatory reporting, even if subject to a phased-in approach. Sustainability risks may have a widespread and profound financial impact on companies and their operations. Neglecting sustainability risks may have knock-on effects that can lead to economic disruption and financial instability.
However, limiting disclosure of scope 3 GHG emissions’ to “where relevant” is a real concern. Unless future EU standards provide clarity on this provision, including specifying sectors for which scope 3 GHG emissions are always relevant, this could undermine the reliability of corporate and financial institutions’ transition plans and net-zero targets. By extension, this could jeopardise Europe’s transition towards sustainability.”
Julia Symon, Head of Research and Advocacy at Finance Watch, said:
“A lack of reliable and comparable standardised ESG data continues to be one of the major obstacles for supervisors and regulators to act on sustainability (in particular climate) risks. Hence we very much welcome the finalisation of CSRD to help progress with this agenda. From the perspective of financial institutions, scope 3 emissions’ disclosures, as well as disclosures by a wider range of companies, including SMEs, are crucial to enable management of their own ESG risks”.
Further analysis from Finance Watch will be available after the text agreed is made available.
Finance Watch has raised the need for action around corporate sustainability reporting in a joint statement and a multi-stakeholder letter sent to the European Parliament in March 2022, and a statement on the European Commission sustainable finance package in April 2021.
To arrange an interview with Aleksandra Palinska, Senior Research and Advocacy Officer at Finance Watch or Julia Symon, Head of Research and Advocacy at Finance Watch, please contact Alison at alison.burns@finance-watch.org or call on +32 (0)471577233
