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EU Sustainability Directive Introduces New Reporting Challenges

Sept. 20, 2023
The new EU directive modernizes and strengthens the rules concerning the social and environmental information that companies must report.

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The European Commission’s new Corporate Sustainability Reporting Directive (CSRD) went into effect earlier this year, at which point companies were required to report more social and environmental information about their operations. The new rules also impacted a broader set of what the EC considers “large companies” as well as certain, listed smaller organizations.

The rules require a certain set of companies to publish regular reports on the social and environmental risks they face, as well as on how their activities impact people and the environment. The information that has to be reported includes—but isn’t limited to—the potential risks and opportunities arising from social and environmental issues. Companies also have to report on the impact of their activities on people and the environment.

“This helps investors, civil society organizations, consumers and other stakeholders to evaluate the sustainability performance of companies, as part of the European green deal,” the EC says.

The first companies will have to apply the new rules for the first time for the 2024 financial year (for reports published in 2025).

New Sustainability Reporting Standards

Any companies that are subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS), which were developed by an independent body. According to PwC, the ESRS are the sustainability reporting standards that underpin the CSRD. After a four-week public feedback period, the EC adopted the ESRS as a delegated regulation.

GreenBiz says the CSRD replaced the Non-Financial Reporting Directive (NFRD), the latter of which only covered the disclosure requirements for about 11,000 EU companies. The rules introduced by the NFRD will remain in force until companies have to apply the new rules of the CSRD. Under the NFRD, large companies have to publish information related to environmental matters; social matters and treatment of employees; respect for human rights; anti-corruption and bribery; and diversity on company boards.

By contrast, the CSRD will require nearly 50,000 companies to enhance their reporting around sustainability. “This number includes about 10,000 companies outside the EU, and it doesn’t just include the largest of the large companies,” GreenBiz adds.

The new rules cover both public and private business that satisfy two of the following criteria:

  • Have more than 250 employees
  •  Have net turnover of more than $44.51 million
  • Have a balance sheet of more than $22.25 million

The fact that NFRD was never mandatory represents another major shift when comparing it to the new CSRD rules. GreenBiz says investors, regulators and civil society groups were often frustrated with the lack of sustainability-related information from companies and the lack of data comparability.

The purpose of the CSRD is to provide investors and businesses with more information about the sustainability of companies operating in the EU, that is timely, consistent and comparable,” GreenBiz continues. “In essence, the CSRD is becoming the de facto sustainability disclosure regulation for large global companies; as companies with significant business in Europe will have to adhere to the rules Europe sets down.”

Challenges are Emerging

At least one global manufacturer is already speaking up about the difficulties it’s facing as it works to comply with the new CSRD reporting requirements. According to Reuters, sportswear brand Puma’s head of sustainability talked about the issue at a recent industry conference in London.

“We are nowhere near being able to fulfill the requirements of CSRD,” Stefan Seidel said, despite the fact that Puma has been reporting on sustainability for 20 years. “So I think it’s maybe a bit over the top.”

Puma collects data from its tier one and two suppliers on emissions, energy, water consumption and waste creation, as well as social data like staff turnover and wages. The company cut its emissions by 9% between 2017 and 2022 while at the same time doubling its business, Reuters reports.

Financial Times has also been reporting on the issue and says many European business leaders see the new reporting rules as being “impossible” to comply with.

“Finance directors of companies including BMW, Telefónica and BP have urged the European Commission to improve guidance and delay the implementation of the EU’s sustainable investment rules, known as ‘the taxonomy,’” the publication reports, “describing them as unclear, burdensome and of little value to investors.”

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About the Author

Bridget McCrea | Contributing Writer | Supply Chain Connect

Bridget McCrea is a freelance writer who covers business and technology for various publications.