We are now seeing rapid development of new legislation in the area of sustainability within the framework of the European Green Deal. In a longer-term perspective, we are seeing a shift from requirements for data collection and reporting to strict sustainability requirements that, directly or indirectly, affect all companies and industries. But major changes are now also taking place in the short term. The EU's new Directive containing requirements for sustainability reporting – CSRD – enters into force on 1 January 2024 and this summer, for the first time, the European Commission adopted resolutions on standards for sustainability reporting. The decision means that the method for preparing sustainability reports has now been specified. In this short note, Lindahl's experts summarise the most important take aways for companies' preparations in advance of future sustainability reports.
The EU has introduced a large number of new legislative initiatives within the framework of the Green Deal in recent years. One of the aims of the new EU regulations is to steer financing towards sustainable investments and impose stricter requirements for companies to ensure that the entire value chain is both socially and environmentally sustainable. The recently-adopted CSRD Directive is one key element in bringing this about. The Directive makes existing rules on sustainability reporting significantly stricter. The aim of the stricter requirements for companies' sustainability reporting is to increase transparency and comparability between companies and help accelerate the green transition.
For example, environmental sustainability will be classified according to the EU's green taxonomy, which means, among other things, that in order to be classified as environmentally sustainable, reporting companies (i) must contribute significantly to one or more of the taxonomy's six established environmental objectives, (ii) must not cause damage to any of the other objectives and (iii) must meet certain minimum sustainability requirements from the OECD and the UN.
The CSRD Directive does not go into any detail on the method for preparing the sustainability report. This will instead be determined by the overall standards adopted by the European Commission through delegated acts. On 31 July 2023, the Commission adopted the first European Sustainability Reporting Standards ("ESRS").
The 2024 financial year will be the first year for which sustainability reports must be designed according to the CSRD (with the first reports in 2025) and this will include large companies of public interest that have had an average of at least 500 employees during the financial year. For other companies that are currently subject to the requirement under the Annual Accounts Act to prepare a sustainability report, 2025 (with the first reporting in 2026) is the first financial year for which reports mush be submitted in accordance with the CSRD. Other listed companies and certain credit institutions and insurance companies must report for the 2026 financial year (with the first reporting in 2027).
EU Standards For Sustainability Reporting
The document, which has now been published, consists of a total of 12 standards that include reporting requirements for qualitative and quantitative data relating to approximately 1,100 data points. The published document refers to so-called sector-agnostic standards and is divided into general standards and subject-specific standards. Work is ongoing on more standards which are planned for publication in autumn 2023, such as sector-specific standards, standards for small and medium-sized enterprises and standards for companies outside the EU.
The general standards apply to all sustainability aspects and consist of general requirements and general information. The general requirements consist of general principles on value chains, time perspectives and materiality analyses. The general information contains requirements on how companies must define and describe measures and goals and describe and report policies. Compliance with these standards is mandatory.
The subject-specific standards define the information requirements for specific sustainability matters in the areas of environment, social responsibility and governance (i.e. the areas often abbreviated as "ESG").
It may be highlighted in particular that the reporting for each subject-specific standard must be associated with a so-called double materiality assessment. A double materiality assessment is mandatory. A double materiality assessment means that, in their assessment of the standards to be applied for their sustainability reporting, companies must take into consideration the company's impact on people and the environment in combination with the impact that the sustainability issue may have on the company's financial position. A sustainability issue is considered to be material when it meets the criteria for material impact and material financial impact.
Material impact refers, for example, to the company's substantial actual or potential positive or negative impact on people or the environment in the short, medium or long term. A subject is of material financial impact when it triggers or may reasonably be expected to cause substantial economic impact on the company's performance, financial position, financial results, cash flows, access to finance or cost of capital in the short, medium or long term. Even if a company considers that information or a subject is not substantial and therefore omits an information standard, that conclusion may, to put it simply, need to be explained.
The reporting requirements will be introduced gradually. Some information can therefore be omitted in the first year. For example, companies with fewer than 750 employees may omit information on emissions and total greenhouse gases or the workforce in the value chain. If a company with a maximum of 750 employees omits information that is required in accordance with the subject-specific standards and this includes information on material sustainability aspects, additional information may be required. More detailed requirements and specific exemptions can be found in the various reporting requirements. Reporting of some information will also be voluntary during the transition period, though reporting is encouraged.
How Can I Prepare?
Regardless of whether the requirements for sustainability reporting affect your company directly or indirectly, we recommend that you start preparing your business for the future requirements now. Even if your company is not directly subject to the new reporting requirements, equivalent information requirements will be imposed from the companies in your value chain that are required to report to enable them to fulfil their own reporting obligations under the CSRD.
One first step is to survey your business' value chain now. "Value chain" refers to all business relationships – both upstream and downstream. This is not limited to just direct contractual relationships but also includes subcontractors of your subcontractors, etc. As a first step, you should therefore ensure that all subcontractor and customer agreements contain sufficient reporting requirements, and that these are sufficiently flexible, to enable you to fulfil your reporting obligations vis-à-vis larger customers and suppliers.
What Happens Now?
A final decision is required by the EU Council of Ministers and the European Parliament to enable the standard to be adopted. According to the current timetable from the EU, this is expected to take place in mid-October at the earliest. The ESRS will then enter into force three days after publication in the Official Journal of the European Union.
Lindahl monitors the progress of establishment of overall EU standards for reporting of environmental, social and governance-related data. You are very welcome to contact us if you have any questions about the reporting standard and what your business can do now.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
