As expected, the European Commission presented on Wednesday 21 April its proposal for a Corporate Sustainability Reporting Directive (CSRD), which revises the Non-Financial Reporting Directive (NFRD).
The aim is to create a set of rules that will eventually bring sustainability reporting to the same level as financial reporting.
“We focus today on financial information—cold, hard figures—but the world knows that those financial, cold, hard figures do not tell the full story of a company’s performance in terms of its impact on the outside world or indeed how climate and those long term issues will eventually impact on their balance sheet”, European Commissioner for Financial Services Mairead McGuinness told a press conference.
Currently, the NFRD requires large public interest companies with more than 500 employees to include a non-financial statement in their annual report containing information on the environmental impact of their activities.
The major change brought about by the revision is the considerable extension of the scope of the current reporting requirements to all large companies within the meaning of the Accounting Directive reporting to all large companies within the meaning of the Accounting Directive, i.e., those that meet two of the following three criteria: – have more than 250 employees; – a balance sheet exceeding €20 million; – and/or a sales revenue of more than €40 million.
The rules will also apply to all companies listed on regulated markets in the EU, with the exception of micro-enterprises. European subsidiaries of non-European companies and any non-European entity whose securities are listed on a regulated market in the EU will also be subject to its reporting obligations.
In total, the Commission estimates that 50,000 companies would now be covered by these rules, compared to the 11,000 that currently fall under the NFRD, said Executive Vice-President of the Commission Valdis Dombrovskis.
In practical terms, this means that companies will have to disclose—in accordance with European standards to be developed by the European Financial Reporting Advisory Group (EFRAG) and adopted by delegated acts by the European Commission—information on the impact of sustainability issues on them and on the impact of their activities on people and the environment.
The main change from a draft of the text obtained by EUROPE in early April (EUROPE 12694/10) is that the Commission now proposes “separate, proportionate standards” be developed for SMEs listed on EU regulated markets, which unlisted SMEs—excluded from the scope—could choose to apply on a voluntary basis.
In addition, listed SMEs will only have to apply these requirements 3 years after the requirements for other companies, to take account of the economic difficulties they have faced during the Covid-19 pandemic.
The proposal also introduces for the first time a general EU-wide audit requirement for sustainability information.
Initial mixed reactions from companies
In a statement, SMEunited, the organisation that represents SMEs in Europe, stressed the need for the directive to really ensure simplified standards for SMEs.
The organisation’s main concerns are the possible knock-on effects of the directive. It wants more guarantees that SMEs will be allowed by their B2B customers to report according to the voluntary SME standards.
It also calls for support, accompanying measures and adapted tools so that SMEs can comply with this directive.
The Association of Chartered Certified Accountants (ACCA) welcomed the extension of the scope, but stressed that the implications for reporting of the supply chain of large entities, which may have an impact on SMEs.
A possible agreement in 2022
On Tuesday, ahead of the official presentation of the text, Pascal Durand MEP (Renew Europe, France), told the press that the Commission was “on the right track”. The MEP is the author of a European Parliament report on sustainable corporate governance (see EUROPE 12625/24) and hopes to be rapporteur on the directive as well.
According to him, the proposal is in line with what Parliament had proposed on a number of issues and should, without too much difficulty, obtain a majority.
On the scope, he anticipates a debate with the traditional advocates of not extending the rules to SMEs, namely a large part of the EPP, the ECR and Identity and Democracy groups, as well as part of his own group, Renew Europe.
The scope of the audit, the role of stakeholders in this process, as well as the sanctions for non-compliance with these standards will also certainly be part of the debate in Parliament, he said.
According to Mr Durand, Parliament and the EU Council may be able to open—and perhaps even conclude—interinstitutional negotiations on this text under the French Presidency of the EU Council, which will start in January 2022 and which has already indicated that this will be one of its top priorities.
If this were the case, the Commission believes that the first non-financial reporting standards could then be adopted by the end of 2022, which would mean that companies could apply these standards for the first time to reports published in 2024, covering the 2023 financial year.
See the proposal for the directive: https://bit.ly/32z7UXT (Original version in French by Marion Fontana)