The mandatory sustainability reporting for large companies in Europe will also involve SMEs. Look at it as a ‘call for action’ for every company.
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For a number of years now, large public-interest companies with more than 500 employees have been subject to the Non-Financial Reporting Directive (NFRD). This means that they have to report on the way in which sustainability aspects affect the performance, position and development of the company and the effects that the company has on people and the environment. The most frequently recurring themes are environmental pollution, social responsibility, human rights and diversity. However, this information often proves insufficient for investors and other stakeholders, reporting is not equally transparent everywhere and in many cases the information is difficult to compare.
With the CSRD, the Corporate Sustainability Reporting Directive, the EU aims to offer a solution to these concerns. The CSRD is one of the cornerstones of the European Green Deal and the sustainable financing agenda. The European Green Deal is the EU’s roadmap towards a modern, resource-efficient and competitive economy. As of 2050, greenhouse gas emissions are to be reduced completely (‘net zero’) and an inclusive approach is proposed for all EU regions and citizens.
The CSRD represents an expansion of the above-mentioned NFRD in terms of both content and the scope of application. The group of companies involved is therefore set to be far bigger. The main aim of this directive is to help guide the intended transition, but above all to improve the quality, faithful image and transparency of the reported sustainability information.
To achieve all this, the directive calls for not only more detailed reporting requirements but also an audit (‘assurance’) of the reported information.
On 10 November 2022, the European Parliament approved the CSRD. It is important to realise that this reporting is linked to other recent European legislation, the EU Taxonomy for instance, as well as future standards such as the ESRS (European Sustainability Reporting Standards), a set of standards classified by themes including climate change, biodiversity, employees in the value chain, communities, governance, risk management and internal monitoring, etc.
The CSRD will bring about a significant increase in the number of companies that have to report, currently estimated at 50,000 companies in Europe. These include not only listed entities, but all companies that meet two of the following three criteria:
According to the current CSRD timeline, these companies need to start preparing in order to be ready in 2024 (for listed companies) or 2025 (for companies based on the above criteria) and fulfil the CSRD obligations on time. Depending on the type of company and the sector, organising this will require considerable effort. So it is crucial to start as soon as possible.
We anticipate that in practice, this directive will also involve SMEs. Many of these will want to do this based on their own conviction or in accordance with the principles of due diligence.
In addition, this group of companies will also experience other influences pushing them in the appropriate direction. These may include staff, customers and other stakeholders who will have expectations as regards sustainability. Raising external capital will be another factor to take into account. Banks, investors, private equity players, investment companies and subsidising governments will also place more emphasis on sustainability criteria when making their investment decisions or allocating funds in future. Finally, in order to prepare their sustainability reports the bigger players will request information from and put forward expectations to their customers, suppliers or other parties in the value chain and this will become a critical point when assessing new contracts. Parties that are unable to meet such expectations will therefore suffer a competitive disadvantage. Companies that do take this path in good time will obviously feel the positive effects in terms of (social) trust, reputation, resilience and lasting results. In short, it ratifies their ‘licence to operate’ and ensures long-term success.
Our advice is to become familiar with the principles of sustainability in an integrated context that includes elements such as the environment, socially responsible, transparent reporting and proper management. Companies that may fall outside the scope of application of the CSRD can get to work on a pragmatic basis, bearing in mind the size and maturity of the company. Every step, however small, is a step in the right direction and means that the company can demonstrate that sustainability is high on its agenda and that it thus contributes to the transition to and achieving of the EU goals.
A sound action plan is crucial in order to develop a targeted and effective sustainability strategy. A plan that includes the following elements:
As well as an effective approach, it is also worthwhile determining which phase the auditor can best be involved in. Whether this is an internal or an external auditor, acting in an advisory capacity or providing readiness or assurance, they can help ensure the quality and integrity of the setup, the data and the reporting on an impartial basis.
This ‘Sustainability & ESG Information page’ provides an overview of a number of important elements and also offers a few aids to embark upon the path towards sustainability and be ready on time.
Grant Thornton Belgium has developed a milestone approach known as the ‘ESG Journey’. Together with our partners CONNECTS and BECI, we help organisations to develop and implement strategies and actions to improve the impact of your organisation in respect of the environment, society and good management and to make your organisation more resistant to outside influences.
The ‘ESG Journey’ consists of a number of crucial steps, from the very beginning to the preparation of the first sustainability report. For each milestone along the ‘ESG Journey’, the CONNECTS platform will organise a webinar. We provide an interesting mix of 'theoretical’ insights, testimonials, insights from BECI, etc.
Would you like to receive more information on this subject or take part in one of our webinars? Feel free to contact Isabel Derison (Partner Sustainability & Business Risk Services) or take a look here.
