The EU has recently published changes to reporting requirements as part of its package of measures to help improve the flow of money towards sustainable activities across the European Union.
But if you’re UK based – don’t stop reading just yet! There’s a good chance UK regulation may mirror parts of this, and any European-based investors you have may apply pressure to see similar disclosures. We’d encourage you to read on.
What’s going on?
The EU has published proposed amendments to the Non-Financial Reporting Directive (NFRD), expanding the scope of companies affected and adding more thorough requirements. It has been renamed as the Corporate Sustainability Reporting Directive (CSRD). The proposed amendments:
- Extend the scope to all large companies and all companies listed on regulated markets (except listed micro-enterprises)
- Require the audit (assurance) of reported sustainability information. This is starting with a ‘limited assurance’, but more rigorous audit requirements are expected in the future
- Introduces more detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards (currently being defined by EFRAG, see our blog here [link to sustainability regulation – post three in this series]
- Requires companies to digitally ‘tag’ the reported information, so it is machine-readable (using the same technology as ESEF – see our blog on that here)
The proposals still need to go through the formal process of review and amendment, but if adopted are likely to apply for fiscal years beginning on or after 1 January 2023. Since Brexit, these changes won’t apply to the UK, however, we can’t rule the UK making similar changes as it reviews its own reporting requirements.
Alongside the CSRD, we’ve learnt a bit more about the EU Taxonomy. The EU Taxonomy is a wide-reaching piece of legislation that will, among other things, introduce reporting requirements around the extent to which a company’s activities are environmentally sustainable.
The EU Taxonomy aims to create a classification system for sustainable activities by setting thresholds for activities that support the transition to a sustainable economy. Under the Taxonomy Regulation, an ‘environmentally sustainable’ activity must contribute to at least one of six stated environmental objectives and do no significant harm to the others.
On 21 April 2021, the EU Commission published the ‘technical screening criteria’ for the first two environmental objectives – climate change mitigation and climate change adaptation. These criteria establish the thresholds by which a company can claim to ‘contribute to’ and/or ‘do no significant harm to’ the topic in question.
The Taxonomy Regulation will require companies and financial institutions covered by the CSRD to report on how, and to what extent, their activities are aligned with the EU taxonomy from 1 January 2022.
Since Brexit, the UK has committed to developing its own version of the Taxonomy screening criteria, so we’ll keep you updated with developments.
What do I need to think about?
If you’re in the EU, start to familiarise yourself with the Taxonomy’s technical screening criteria to establish how your company’s activities align to the thresholds specified. As always, we’ll be on hand to bring you more detail on the Corporate Sustainability Reporting Directive once the regulations are finalised.
In the UK, we’ll let you know as soon as the UK’s version of the Taxonomy is published. And if you’re a financial services provider, it’s worth checking in with your legal team as there are certain aspects of this new bundle of EU regulations that apply if you market financial products or services into the EU.
As always, it can be a minefield navigating the landscape of changing regulation. And then comes the tricky bit – ensuring your reporting isn’t generic and tick-box but told through the bespoke lens of your company. That’s where we love to help. For more information on EU regulation or to chat about any of your reporting challenges, get in touch.