European Union - A Carbon Neutral Continent

EU's Green Deal and Mandatory Reporting

As many of you have been reading, the European Union has passed legislation that requires companies to report their environmental, social, governance (ESG) practices beginning in 2024. This directive is called the European Union Corporate Social Responsibility Directive (CSRD) and it is part of the EU Green Deal.

The objective of the Green Deal is to use policies, directives, and regulations that will enable Europe to become the world's first climate-neutral continent. In order to do this, Europe must switch to a greener economy that encompasses both public and private capital as means of funding sustainable business.

As a way to shift existing businesses to a greener economy, EU Taxonomy and EU CSRD were created. EU Taxonomy provides criteria for business activities that qualify as "sustainable" and CSRD creates a framework for reporting requirements. CSRD is an expansion of the previously used Non-Financial Reporting Directive (NFRD). The NFRD was used previously to provide transparency on social and environmental issues.

CSRD and 50,000 Companies

There are 50,000 companies in the EU that are not required to report on environmental, social, governance (ESG) activities under the NFRD. That will change with the implementation of the CSRD. Companies that were once not in scope, will soon be in scope for ESG reporting.

The European Union plans to enforce reporting requirements starting in July 2024 with a phase-in period. This period will be based on company characteristics such as size and revenue. By 2028, it is expected all companies operating in the European Union above 250 employees or 40 million in revenue will be expected to report.

For example, a large company operating in the EU that has 20 million euros in assets, 40 million euros in revenues, and/or over 250 employees will be required to report. If the company has a subsidiary or legal entity that has over 150 million euros revenue in two consecutive years, that entity will need to report. We expect stricter criteria and scope to be defined over the next 4 years.

This could be a complicated and complex situation for many companies. Many legal entities are configured in a way to offer tax advantages as part of their legal structure. Companies will need to meet with legal counsel to better understand if those advantages still apply and whether or not they fall in scope of the CSRD reporting requirements.

Framework for Reporting

As with any new regulation, it's important to understand what activities need to be tracked, monitored, and measured. It's critical to know what data needs to be collected and which key performance indicators need to be reported. In order for all companies to do that in a similar fashion, a standard needs to be created and adhered to for uniformity in reporting.

As such, a new standard was created by the European Financial Reporting Advisory Group (EFRAG) to establish sustainability standards for reporting in Europe. These standards are called the European Sustainability Reporting Standards (ESRS). This standard provides the framework for assessing topics such as general requirements and disclosures, climate change, pollution, water and marine resources, biodiversity, circular economy, workers, and consumers.

As of August 1, 2023, the final text for the first twelve standards were released. Companies will need to become familiar with both the new standards and the term double materiality. This term means impacts are measured from both the financial and impact perspectives.

The first release of ESRS will be used to provide governance and strategy for material sustainability topics, as well as assessing the impact of risks and opportunities. In future blogs, we will dive deeper into the standards and discuss the key features of each.

If you are wondering how the new standard works with other CSR/ESG standards, this new framework has been interoperability tested with both the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) for better alignment.

First Steps

As with any compliance project, the first thing a company needs to ask is if this applies to their company. If EU CSRD applies, then the next step is to determine your phase-in timetable and when your company must file a report.

One of the best things you can do is check-in with your customers and get a better understanding of the types of requirements they face and the type of data they will need from your company.

Not sure if you need to report EU CSRD? Talk with our ESG experts!

Getting the Help You Need

ESG is here to stay. We see more regulations coming into force around the world. Business is being forced to change. With change, comes challenge. Pushing change too quickly can break the things that already work. Not changing fast enough, can put our businesses in peril.

Our plan is to help you navigate these intense times. As a translator of regulations, a teacher of compliance and ESG skills, a program builder, a data collection tool, and a report builder, we are are here to help.

Keep checking back to read our latest blogs. We plan to continue adding compliance and ESG information that's important to your business. Look for our upcoming series on EU CSRD called "Preparing for the European CSRD " where we break down all the key components to building the programs that are necessary to protecting your sales in Europe.

Links

EU Corporate Sustainability Reporting

Adopting the European Sustainability Reporting Standard

Harvard Law EU Corporate Sustainability Reporting Directive

Harvard Law EU Adopts Long-Awaited Mandatory ESG Reporting Standards

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