What new EU directives on corporate sustainability reporting mean for firms

Recent European directives have placed further responsibilities on organisations when it comes to corporate sustainability reporting, but what impacts will these changes have on Irish companies?

What is corporate reporting?

“Corporate sustainability reporting is reporting by companies about how social and environmental issues affect their business (the ‘outside-in’ perspective) and about how their activities impact society and the environment (the ‘inside-out’ perspective),” says Lorena Dunne, partner in William Fry’s asset management and investment funds practice and co-head of the ESG & sustainability practice group.

“Reporting on environmental issues can cover a range of matters from climate change and resource depletion to environmental degradation, and social issues reported on can include employee matters, respect for human rights, anti-corruption and bribery.”

Currently, sustainability reporting requirements for Irish and other EU companies are principally set out in a piece of EU legislation called the Non-Financial Reporting Directive (NFRD) – “non-financial” being an alternative reference to sustainability, she says. “The NFRD was adopted in 2014 with companies first required to report in 2018.

“The objective of the NFRD was to increase companies’ focus on risks to their business from social and environmental factors whilst improving the availability of public information on companies’ impacts on society and the environment. This dual focus of the NFRD (or the ‘double materiality perspective’) is considered key to meeting EU sustainability targets and objectives.”

What are the new directives?

"In April 2021, the European Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD), which seeks to amend the current NFRD, introduce more detailed reporting requirements and expand the scope of companies within the sustainability reporting regime," explains Garret Farrelly, partner and head of energy, natural resources and utilities, and chairman of Matheson's ESG advisory group.

”The CSRD was introduced in response to calls for greater consistency and transparency in corporate sustainability reporting and to address perceived gaps in the operation of the NFRD.

“The CSRD is significant as, for the first time, SMEs will be subject to non-financial reporting obligations.” He notes that SMEs will have an additional three years to comply with obligations imposed by the CSRD.

How will the new directives impact corporations?

The CSRD proposals significantly enhance the scope of the existing sustainability reporting requirements to cover all large undertakings as well as all those listed on EU regulated markets, with the exception of micro-entities, says Conor Holland, director of ESG Assurance at KPMG in Ireland.

“Moreover, the CRSD sets out in far greater detail the non-financial information that entities will be required to report. The CSRD also introduces mandatory EU sustainability standards, which will be subject to assurance by an independent third party.”

As its principal objective is for a broader spectrum of companies to provide more detailed, harmonised sustainability reporting, the first and obvious impact of CSRD will be on companies’ reporting processes and procedures, says Nessa Joyce, knowledge lawyer and senior associate specialising in asset management and investment funds at William Fry, and member of the firm’s ESG & sustainability group.

“In particular, given the much-publicised dearth of accurate and reliable sustainability data, companies will likely need to establish new data sourcing, accumulation and monitoring processes in order to comply with the enhanced reporting rules.

“As with many EU sustainability initiatives, however, CSRD is also likely to drive more fundamental change by reporting entities aware of the myriad risks associated with disclosing sustainability risk exposures and/or a negative impact on the environment and social factors.”

When will the directives come into effect?

CSRD is currently being debated by EU legislators, says Dunne. “As such, the timetable for sustainability reporting under the new regime depends on when CSRD is finalised. If it is finalised in the first half of this year, then detailed reporting standards are expected to issue by October 2022, which would require large companies to apply those standards for the first time to reports published in 2024, covering financial year 2023.”

What companies have to comply?

Only large, listed companies, banks and insurers with more than 500 employees are obliged to report sustainability information under the NFRD, says Joyce. “It is estimated that 11,700 companies across the EU meet the threshold for mandatory reporting under the NFRD. This relatively high scope threshold coupled with concerns around the quality and comparability of sustainability reporting to date, has resulted in an EU proposal to overhaul the regime.”

Dunne says the finalisation of CSRD will also have an impact on the scope of companies required to report under the EU Taxonomy Regulation, being the EU classification system for environmentally sustainable activities.

'This is the most profound development in corporate reporting since the introduction of international financial reporting standards – entities need to start preparing'

Currently, the Taxonomy requires companies in scope of the NFRD to report on the extent to which their activities are environmentally sustainable using the Taxonomy’s classification system. Once CSRD is finalised, all companies in scope of the CSRD will automatically be mandated to report on the environmental sustainability of their activities under the Taxonomy.

Similarly, the Sustainable Finance Disclosure Regulation (SFDR) imposes mandatory obligations on specific types of companies and financial entities, says Farrelly. “The SFDR applies to ‘financial market participants’, which includes investment firms providing portfolio management and alternative investment fund managers (AIFMs), as well as ‘financial advisers’, which includes investment firms or credit institutions providing investment advice. A significant part of the SFDR will apply to all asset managers, whether or not they have an express ESG or sustainability focus.”

“This is the most profound development in corporate reporting since the introduction of international financial reporting standards – entities need to start preparing now,” says Holland.

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