The European Parliament and EU Council secured provisional agreement on landmark sustainability reporting rules for large companies late on Tuesday.
The new rules aim to end greenwashing and lay the groundwork for a common set of sustainability reporting standards at a global level, the European Parliament said.
Pascal Durand MEP (Renew Europe, France), who led the negotiations for the parliament, said: “Today, information on a company’s impact on the environment, human rights and work ethics is patchy, unreliable and easily abused. Some companies do not report. Others report on what they want. Investors, consumers and shareholders are at loss. From now on, having a clean human rights record will be just as important as having a clean balance sheet.”
The new EU sustainability reporting requirements will apply to all large (public and private) companies with more than 250 employees and a €40m turnover. Non-EU companies with substantial activity in the EU market (€150m in annual turnover in the EU) will have to follow equivalent reporting rules.
Michael Izza, Chief Executive, ICAEW, said: “This directive is a milestone for the European professional services sector and the EU’s greening efforts, and paves the way for a corporate reporting system that encompasses both financial and sustainability reporting.”
The Corporate Sustainability Reporting Directive (CSRD), which amends the 2014 Non-Financial Reporting Directive (NFRD), will introduce detailed sustainability reporting disclosures for large companies, prepared according to European Sustainability Reporting Standards (ESRSs) currently being developed by EFRAG. The CSRD will also introduce mandatory sustainability assurance.
Izza said: “Its implementation will require a significant number of European businesses to produce detailed sustainability disclosures for the first time. It will also provide a legal framework for the adoption of European Sustainability Reporting Standards, which are currently under consultation. We encourage close alignment between the European standards and those being developed by the ISSB.”
“The directive will also mandate the sustainability assurance in Europe, a move that will require updates to the education and development of the profession. Chartered accountants need to be ready to help make a success of the new rules, which will require significant efforts across the board.”
The new reporting rules will make businesses more accountable by requiring them to disclose their impact on people and the planet, including the environment, human rights, social standards and work ethics.
Dr Nigel Sleigh-Johnson, Director, Audit and Corporate Reporting, ICAEW, said: “The EU has this week taken an important step towards the creation of a corporate reporting framework which encompasses both financial and sustainability reporting. Implementation of the CSRD will lead to publication of information on sustainability-related issues by a wide range of businesses, accompanied by appropriate assurance. The directive also provides the legal framework for European sustainability reporting standards, currently under consultation. Looking ahead, it will be very important to ensure global alignment on sustainability reporting, in the interests of comparability and reporting efficiency.”
Dr Susanna Di Feliciantonio, Head of European Policy, ICAEW, said: “Once the profession has digested the detail, it will be important to focus on effective and successful implementation of the new rules – a process that will be key to helping the EU achieve its overall ambition to transition to a more sustainable and resilient economy.”
The agreement also requires companies to have the information on their impact on the climate or human rights to be independently audited and certified, allowing investors to finally have access to reliable, transparent and comparable data.
Durand said: “The European extra-financial audit market will be standardised, much more rigorous and transparent. Parliament succeeded in securing an opening of the audit market by member states in order to make room for new certified players to become major players and not just leave it in the hands of the financial auditors, notably the Big Four.”
The rules will apply from 1 January 2024 for companies already subject to the NFRD. From 1 January 2025 for companies that are not presently subject to the NFRD and from 1 January 2026 for listed SMEs, small and non-complex credit institutions and captive insurance undertakings.
The EU Commission welcomed the political agreement reached on Tuesday on the new Directive, which it said was an integral part of the EU’s sustainable finance agenda and the European Green Deal.
Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union, said: “This is a landmark in the development of company reporting, a significant step forward in the area of disclosures, covering many sectors of the economy. Sustainability reporting will now be on an equal footing with financial reporting.
“The Corporate Sustainability Reporting Directive will help drive the transition to a sustainable economic system built on innovation and investment opportunities. It will enable companies to communicate and manage their sustainability performance more efficiently. Citizens will be able to measure the success of companies not just in financial terms but also in terms of how they impact people and the environment.”
The EU Parliament and Council now has to formally approve the agreement before it is published in the EU Official Journal. It will be effective 20 days after publication and member states will have to integrate its provisions into national laws after 18 months.