The new EU regulations and ESG reporting

The new EU regulations regarding ESG (Environmental, Social, and Governance) reporting mark a significant development in corporate sustainability and transparency. These regulations are designed to ensure that companies operating within the European Union (EU) provide comprehensive and reliable information about their sustainability practices and performance.

The cornerstone of the new regulations is the Corporate Sustainability Reporting Directive (CSRD). This directive expands the scope of reporting requirements and replaces the existing Non-Financial Reporting Directive (NFRD). The CSRD applies to large companies and public-interest entities operating in the EU, including both EU-based companies and non-EU companies with significant operations within the EU.

One of the key aspects of the CSRD is the adoption of European Sustainability Reporting Standards (ESRS). These standards are developed by the European Financial Reporting Advisory Group (EFRAG) and provide a common framework for reporting on ESG factors. The aim is to enhance the quality, comparability, and reliability of sustainability reporting across different companies and industries.

Under the CSRD, companies will be required to disclose information on a wide range of sustainability topics. This includes environmental factors such as greenhouse gas emissions, resource use, and biodiversity impact. Social factors such as employee health and safety, human rights, and community engagement will also be covered. Additionally, governance aspects such as board diversity, executive remuneration, and anti-corruption measures will be part of the reporting requirements.

The CSRD introduces a gradual implementation timeline. The first reporting obligations are expected to apply for financial years starting on or after January 1, 2024. This allows companies to prepare for the new requirements and align their reporting practices accordingly.

TheThe impact of these regulations extends beyond the EU borders. Companies operating outside the EU may also need to comply with the ESRS if they have significant operations within the EU. This means that multinational corporations will need to take these regulations into account when reporting on their sustainability performance.

The new EU regulations and ESG reporting reflect a growing recognition of the importance of sustainability in corporate decision-making. By mandating comprehensive and standardized reporting, the EU aims to improve transparency, facilitate better decision-making, and promote sustainable business practices. These regulations are expected to have a significant impact on corporate reporting practices, investor decision-making, and the overall transition towards a more sustainable economy.

Here are some key points about the new EU regulations and ESG reporting:

  1. CSRD: The EU Corporate Sustainability Reporting Directive (CSRD) is a policy that applies to large companies and public-interest entities operating in the EU. It aims to enhance the quality, comparability, and reliability of sustainability reporting.
  2. ESRS: Companies covered by the CSRD will have to report according to the European Sustainability Reporting Standards (ESRS). These standards provide a framework for reporting on environmental, social, and governance (ESG) factors.
  3. Disclosure Requirements: The CSRD requires companies to disclose information on a wide range of sustainability topics, including climate change, biodiversity, social issues, and governance practices. The goal is to provide stakeholders with a comprehensive view of a company’s sustainability performance.
  4. Scope: Approximately 50,000 large, medium, and small companies operating in the EU will be subject to the CSRD. This includes both EU and non-EU companies that meet certain criteria, such as having more than 250 employees and a net turnover above a certain threshold.
  5. International Impacts: The CSRD is expected to have international impacts, as companies operating outside the EU may also need to comply with the ESRS if they have significant operations within the EU.

NFRD vs. CSRD: Key differences explained

The key differences between NFRD (Non-Financial Reporting Directive) and CSRD (Corporate Sustainability Reporting Directive) are:

  1. Scope:
    • NFRD: The NFRD covers approximately 11,700 companies and groups across the EU.
    • CSRD: The CSRD applies to approximately 50,000 companies operating in the EU, including both EU-based companies and non-EU companies with significant operations within the EU.
  2. Reporting Requirements:
    • NFRD: The NFRD sets out the requirements for reporting non-financial information related to environmental, social, and governance (ESG) factors.
    • CSRD: The CSRD expands on the NFRD requirements and introduces more comprehensive reporting obligations. It broadens the reporting requirements to include environmental considerations and covers a wider range of sustainability topics, such as climate change, biodiversity, social issues, and governance practices.
  3. Reporting Standards:
    • NFRD: The NFRD does not specify a common reporting framework or standards.
    • CSRD: The CSRD introduces the European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG). These standards provide a common framework for reporting on ESG factors, aiming to enhance the quality, comparability, and reliability of sustainability reporting across different companies and industries.
  4. Implementation Timeline:
    • NFRD: The NFRD is currently in place.
    • CSRD: The CSRD was officially adopted on November 28, 2022, and came into force on December 18, 2022. The first reporting obligations under the CSRD are expected to apply for financial years starting on or after January 1, 2024.

The CSRD represents an evolution and strengthening of the existing NFRD requirements. It expands the scope of reporting, introduces common reporting standards, and aims to enhance transparency and accountability in corporate sustainability reporting.

CSRD key dates for organizations

  • By August 30, 2023: The EU Commission is expected to adopt the first set of reporting standards.
  • By the end of 2023: The Council and the European Parliament are expected to finalize the adoption of the reporting standards.
  • Fiscal Year 2024: The “first-phase” companies, which include all listed companies and large companies that exceed two-thirds of the following thresholds (balance sheet total of €20 million, net turnover of €40 million, and an average number of employees of 250), must start reporting according to the CSRD requirements.
  • 2025: The first reports from the “first-phase” companies are expected to be published.

Overall, the new EU regulations on ESG reporting represent a major step forward in advancing sustainability and transparency in the corporate sector. By requiring companies to disclose relevant ESG information, the EU aims to drive positive change and encourage businesses to integrate sustainability into their strategies and operations.
The CSRD contains a number of data-intensive disclosures. Without a solid data foundation, managing and reporting such data can be challenging. IBM Envizi ESG Suite can support an organization’s CSRD reporting requirements by providing finance-grade data within an auditable system. With Envizi, organizations can streamline the way they collect, manage and report their ESG data, allowing them to comply with the CSRD directive more efficiently.

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