Disclosure of CSR information: an extension of the Directive on disclosure of non-financial information
At the end of April this year, the European Commission (hereinafter: ‘Commission’) announced its intention to extend the Directive 2014/95/EU regarding the publication of non-financial information (the Non-financial Reporting Directive, hereinafter: ‘NFRD’). In the future, corporate social responsibility (CSR) disclosure should also be taken into account. This intention stems from the European Green Deal which aims to contribute to a climate-neutral Europe in 2050 by means of new legislation and regulations. The replacement directive, the Corporate Sustainability Reporting Directive (CSRD), is expected to be published in mid-2022 and must be implemented by the Member States by the end of that year. It is expected that companies will have to comply with the new obligations from the start of calendar year 2024, which means that they will already be relevant for reporting in the 2023 financial year. This tight timeline for the creation of the CSRD does not detract from the scope of the proposed changes. In this article we explain what can be expected from this new Directive.
Content expansion of reporting
Extending the application of the NFRD to CSR reporting obviously extends the level of disclosure. Instead of reporting on non-financial information, companies must report on sustainability information. This implies that companies have to deal with sustainability reporting and issues. This includes the ‘sustainability factors’ as shown in the Regulation for Sustainability Disclosures in the Financial Sector (Regulation (EU) 2019/2088). These are “environmental, social and employment issues, respect for human rights, and the fight against corruption and bribery”. In addition, under the CSRD, governance aspects such as diversity must be addressed.
Double materiality must be included in this CSR reporting. This means that companies no longer only report on the impact of sustainability factors within the company itself, but also on the impact on society and the environment. In addition, this reporting is not limited to the results achieved in a financial year, but a company must look more ahead with long-term objectives and their progress. Furthermore, companies should, among other things, include in their strategy the risks and opportunities in the area of sustainability, the climate objectives and the stakeholders involved in the company. Information must also be provided on intangible matters such as social capital. In addition, the European Financial Reporting Advisory Group (EFRAG) is developing a mandatory standard for this reporting.
Wider scope of application
In addition to the expansion of the substantive reporting requirements, more companies than with the original NFRD will have to take CSR reporting into account. The current scope of the NFRD only covers large, listed companies with more than 500 employees. The new Directive will apply to all listed companies, with the exception of micro-enterprises, and to large companies to which at least two of the following criteria apply:
- more than 250 employees;
- more than €40 million in net sales;
- more than €20 million on the balance sheet.
Small and medium-sized listed companies will have three extra years to comply with the new obligations. Parent companies of large group companies are also covered by these obligations. This extension of the scope ensures that more than four times as many companies are bound by the obligations of the Directive. An exception applies to subsidiaries if the consolidated report of the management board of the parent company is published with an explicit reference to the subsidiary exemption in the subsidiary’s own management report.
The information from the CSR report should be included in the management report instead of in a separate report. This means that CSR reporting is published at the same time as financial reporting, making the management board and the supervisory board responsible for this reporting as well. This ensures integration between financial and CSR reporting. CSR reporting will become more accessible to the public because it will have to be delivered machine-readable and will also become available in the future European Single Access Point (ESAP).
To prevent companies from presenting themselves as greener than they actually are (greenwashing), it is important that the information is verified. The current guideline refers to the inclusion of CSR reporting in regular accountancy (as required by the Audit Directive (2006/34/EC). The auditor should assess for material misstatements on the basis of the applicable reporting standard (limited assurance). This must also include compliance with the Taxonomy Regulation (Regulation (EU) 2020/852). This assurance obligation may be extended over time to include more substantive testing and procedures for this purpose (reasonable assurance). Finally, under the new Directive it is also possible to have an independent assurance service provider provide assurance, which may enhance the independence of the assurance of the reporting.
The future CSRD shows that CSR can no longer be seen as a financial risk or as part of the reputation. It forms an important and broad responsibility for almost every company. CSR reporting is no longer optional, but a full part of non-financial reporting for which management also bears its responsibilities. With audited and accessible information, in accordance with the Directive, a wide range of companies can provide insight into their commitment to CSR, both within the company and beyond. Do you still have questions about the CSRD and its impact on your company? Then please contact Law & More. Our lawyers are specialised in the field of CSR and will be happy to help you!