How The EU Corporate Sustainability Reporting Regulation Will Impact Businesses

EU regulations mandate that large companies and listed companies (excluding micro-enterprises) must regularly publish reports on social and environmental risks they face, as well as the impact of their activities on people and the environment.

How The EU Corporate Sustainability Reporting Regulation Will Impact Businesses
How The EU Corporate Sustainability Reporting Regulation Will Impact Businesses

Why Corporate Sustainability Reporting Matters

Corporate sustainability refers to the integration of environmental, social, and governance (ESG) considerations into a company’s business operations and decision-making processes. It encompasses the company’s efforts to minimize its negative impact on the environment, promote social responsibility, and ensure long-term economic viability.

Environmental sustainability focuses on reducing the company’s ecological footprint, conserving resources, mitigating climate change, and managing waste and emissions. This includes adopting sustainable practices, implementing energy-efficient measures, using renewable resources, and incorporating environmentally friendly technologies into operations.

Social sustainability involves considering the well-being and interests of employees, communities, customers, and other stakeholders. It includes promoting diversity and inclusion, ensuring fair labor practices, supporting human rights, engaging in philanthropic initiatives, and fostering positive relationships with local communities.

Governance sustainability pertains to the company’s commitment to ethical and transparent business practices, sound corporate governance, and effective risk management. It involves establishing strong corporate values, maintaining integrity, upholding legal and regulatory compliance, and ensuring accountability and responsible decision-making.

Companies adopt corporate sustainability practices for several reasons. Firstly, it aligns with societal expectations and addresses the growing concerns about environmental degradation, social inequality, and ethical business conduct. Secondly, it helps manage risks associated with regulatory changes, reputation damage, and stakeholder activism. Additionally, sustainability can lead to operational efficiency, cost savings, innovation, and improved long-term financial performance.

To demonstrate their commitment to corporate sustainability, companies often engage in sustainability reporting, setting targets and goals, implementing sustainability strategies, and seeking certifications or memberships in sustainability-focused initiatives or organizations.

How the Corporate Sustainability Reporting Will Impact Businesses

The purpose of these regulations is to enable investors, civil society organizations, consumers, and other stakeholders to assess the sustainability performance of companies, in line with the European Green Deal.

The Corporate Sustainability Reporting Directive (CSRD):

Effective from January 5, 2023, the Corporate Sustainability Reporting Directive (CSRD) has been implemented to enhance and modernize reporting rules for companies regarding social and environmental information. The new directive expands the reporting requirements to a wider range of large companies and listed small and medium-sized enterprises (SMEs), encompassing approximately 50,000 companies in total.

These new rules aim to provide investors and stakeholders with the necessary information to evaluate investment risks associated with climate change and other sustainability issues. Furthermore, they foster a culture of transparency regarding the impact of companies on people and the environment. Harmonization of reporting information will also lead to reduced costs for companies in the medium to long term.

The CSRD mandates that companies comply with the European Sustainability Reporting Standards (ESRS). The standards, developed by the European Financial Reporting Advisory Group (EFRAG), now known as the EFRAG, incorporate the perspectives of various stakeholders. While the standards align with EU policies, they also contribute to international standardization efforts. The Commission is expected to adopt the first set of standards by mid-2023, based on the draft standards released by EFRAG in November 2022.

Under the CSRD, companies are required to undergo audits of their sustainability information, and digitalization of sustainability reporting is also emphasized.

Non-Financial Reporting Directive (NFRD)

Until companies begin adhering to the new CSRD rules, the existing requirements of the Non-Financial Reporting Directive (NFRD) remain in effect. The NFRD necessitates that large public-interest companies with over 500 employees disclose information pertaining to:

  • Environmental matters
  • Social matters and treatment of employees
  • Respect for human rights
  • Anti-corruption and bribery
  • Diversity on company boards (age, gender, educational and professional backgrounds)

These reporting rules are applicable to approximately 11,700 large companies and groups across the EU, including listed companies, banks, insurance companies, and other entities designated as public-interest entities by national authorities.

By implementing these regulations, the EU aims to enhance transparency and accountability regarding corporate sustainability, enabling stakeholders to make informed decisions and promote sustainable practices.

And that is because Corporate Sustainability Reporting plays a crucial role in promoting transparency, accountability, and stakeholder engagement. By disclosing information on a company’s environmental, social, and governance (ESG) practices and performance, reporting allows businesses to demonstrate their commitment to sustainable development and responsible business conduct. It helps investors make informed decisions, encourages dialogue with stakeholders, and drives improvements in ESG performance.

Furthermore, sustainability reporting enables companies to identify and manage risks, capitalize on opportunities, and align their strategies with global sustainability goals. Ultimately, it contributes to building trust, enhancing corporate reputation, and fostering long-term sustainable growth.