EU agrees on new social and environmental reporting rules for large companies
June 22nd, 2022
On 21 June 2022, trilogue negotiations between the European Commission, Parliament and Council concluded with an agreement on new social and environmental reporting rules.

The reform clarifies transparency obligations for large companies operating in the EU on their sustainability impacts, risks and opportunities — including their decarbonisation plans and performance — and mandates the development and adoption of environmental, social, and governance (ESG) reporting standards.

This reform is the bedrock of the European sustainable finance agenda, the EU Green Deal and the REPowerEU plan. Relevant and comparable sustainability data is a prerequisite to direct finance flows in support of the transition to a net-zero economy. It is also essential to ensure financial market participants fulfil their own obligations; monitor progress on climate, biodiversity and human rights; and cut down the EU’s dependency on fossil fuels, and in turn, Russia.

Key changes and missed opportunities in the new Corporate Sustainability Reporting Directive (CSRD)

The scope of the legislation is expanded to all large listed and non-listed companies with more than 250 employees. According to EU Commission estimates, this includes approximately 50.000 companies, leaving out over 99% of companies in the EU. Listed SMEs were included in the initial proposal with simplified standards from 2026. The final text allows them to opt-out until 2028, which will have major implications for SMEs’ readiness to leverage sustainable finance flows and their relationship with banks, public procurement opportunities or requests from business partners. The European Parliament as well as investors, civil society and academic studies had recommended to define high-risk sectors and expand the scope to cover SMEs in those industries.

Companies’ reporting obligations have been specified, including:

  • Transition plans to reach climate neutrality by 2050, including actions, investment plans and exposure to fossil fuels;
  • Time-bound targets related to sustainability issues and companies’ progress to achieve them (including GHG emission reduction targets);
  • Sustainability due diligence information, i.e. transparency on the process and adverse impacts identified in the company’s value chain, and actions taken to address such impacts.

The key is the development and adoption of mandatory ESG standards based on double materiality: the disclosure of companies’ impacts on the planet and people, as well as risks and opportunities to the company arising from sustainability matters. This will include quantitative and qualitative data, and cover both retrospective and forward-looking information.

The agreement reached by co-legislators proposes a delayed application to 2024 for those companies already covered by existing legislation (the EU Non-Financial Reporting Directive) and 2025 for other large listed and non-listed companies (above 250 employees). While the initial proposal was set to be integrated in national law by the end of 2023, the deal now includes an 18-month transposition period.

An assessment of the implementation of the Directive and adoption of standards by SMEs is requested of the European Commission before 2028, which is far too late considering that voluntary measures have proven to not be effective and a large portion of companies in highly polluting sectors are not covered by the new rules.

In reaction to the deal, Susanna Arus, Communications and EU Public Affairs Manager at ECCJ member Frank Bold says:

“It is imperative that Member States provide clarity to companies by making the necessary changes in national law before January 2024 and ensure that all large companies (not only those already covered by the EU Non-Financial Reporting Directive) are required and able to report for the financial year of 2024.  A gradual implementation would risk creating a two-speed Europe that would put some countries and companies at a disadvantage to access sustainable finance flows.”

See NGO recommendations on the reform here.