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ESG reporting is evolving rapidly with the release of major proposals in the European Union, the United States and globally by the International Sustainability Standards Board. These proposals have the potential to affect companies worldwide, but perhaps the most immediate concern is the EU’s Corporate Sustainability Reporting Directive (CSRD), which went into effect in January 2023. The directive is aimed at driving change in the business behavior of companies that operate in the EU, which includes US companies with EU subsidiaries that meet certain criteria. Given the complexity of the directive, your company should act now to avoid scrambling to comply.
Your company will need to consider applicability at multiple levels within its organization to ensure all reporting obligations are identified. The directive will generally apply to three types of companies:
In addition to reporting based on the above criteria, consolidated sustainability reporting will be required for non-EU headquartered companies at a global level if a company generates a certain amount of revenue in the EU and has at least one EU subsidiary or branch that meets certain criteria. The directive outlines exemptions that depend on how your company consolidates its sustainability reporting.
The CSRD will require comprehensive and granular disclosures covering the entire spectrum of sustainability topics. These disclosure requirements are detailed in 12 new European Sustainability Reporting Standards (ESRS) that have been drafted by the European Financial Reporting Advisory Group (EFRAG). The draft standards span environmental, social, and governance topics and are intended to provide insight into a company’s sustainability impacts, risks and opportunities, including its sustainability strategy, targets and progress, products and services, business relationships, and incentive programs.
The information reported may not be limited to a company’s own operations, but would extend to direct and indirect business relationships across the value chain. These disclosures are expected to be some of the most challenging areas of reporting, given the scope and the reliance on information from parties not controlled by the company.
The CSRD also embraces “double materiality,” which requires that companies report information necessary to understand how sustainability matters affect their business development and performance and the impact they have on a range of sustainability matters. In addition, the directive introduces a mandatory assurance obligation for all reported sustainability information. (That stands in contrast to the assurance requirement outlined in the US Securities and Exchange Commission’s proposed climate disclosure rule.) While the CFO and the CSO will play leading roles in sustainability reporting, given CSRD’s complexity we recommend companies also include their legal counsel in their reporting process.
EU Member States have until early July 2024 to incorporate the CSRD’s provisions into national law. Member States cannot reduce the requirements during this process, but they can add additional provisions. It will be critical that companies operating across Europe be aware of developments in the jurisdictions in which they operate.
Required reporting for some companies will begin as early as fiscal year 2024 so it’s imperative that your company begin preparing to meet reporting obligations now. Evaluating scope, the applicable effective dates, alternatives for reporting at different levels within the organization (if any) and what compliance with the disclosure requirements will entail (including which sustainability matters are material and consideration of the EU taxonomy) will set the stage for successful implementation.
Although the ESRS have yet to be finalized, obtaining an understanding now of the wide-ranging disclosure requirements as well as the expected effort to obtain information and develop and implement reporting systems is an important first step in creating an implementation plan. In addition, this understanding may provide insights that support decisions about the level at which to prepare this reporting when multiple entities within the organization are impacted.