This text is a proposal for a Directive, if adopted, it will become a binding legislative act that sets out a goal that all EU countries must achieve. Member States will have a defined period of time to transpose the Directive into their own laws, meaning to define how they will reach these goals. However, this initiative is still at the proposal state, none of the elements mentioned in the article are agreed on yet.
Overview
What is CSRD?
The Corporate Sustainability Reporting Directive (CSRD) standardizes requirements for sustainability reporting. Companies will have to report both on how sustainability issues affect their performance as well as their impact on people and the environment.
This Directive builds on the existing Non-Financial Reporting Directive* (NFRD) which introduced the sustainability reporting requirements in the EU but proved to be insufficient. Even though the Commission published reporting guidelines for companies in line with the NFRD, the quality of the reports remained quite poor.
As a result, the EU Green Deal proposes a revision of the NFRD. The CSRD will apply to a larger group of organizations and will improve the quality of the reporting. The reports must be audited and will have to be comparable and usable for stakeholders such as investors.
* Non-Financial Reporting Directive (NFRD): It was adopted in 2014 and was first applied for the 2017 fiscal year. The NFRD introduced the concept of ‘double materiality’.
Who is impacted?
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All companies listed on the EU regulated markets (except for micro-companies).
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Large companies* that are either EU companies of EU subsidiaries of non-EU companies.
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Insurance companies and credit institutions regardless of their legal form.
* Entities that meet two of the following three criteria : Net turnover > €40M, balance sheet assets > €20M, > 250 employees.
What are the critical dates to remember?
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The proposal was published on April 21st 2021
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If the proposal is adopted by the EU chambers (parliament and council), Member States will have until December 1, 2022 to transpose the directive into national law. It will then enter into force in all the EU.
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If adopted, the Directive will apply to financial years starting on or after January 1st 2023 (2026 for listed SMEs).
Requirements
Content of the Sustainability Report
All companies concerned by this proposal will have to include a sustainability report in their management report which needs to cover:
Business Model and Strategy: How sustainability matters are taken into account in the business model and strategy, both from a risk and opportunity perspective. How the business model is compatible with the 1.5°C Paris Agreement global warming limit. How the strategy has been implemented with regard to sustainability matters.
Targets: Sustainability-related targets set by the company including the progress made towards those.
Governance: Role of the administrative, management and supervisory bodies related to sustainability matters.
Policies: Description of the policies in relation to sustainability matters.
Due diligence: Description of the due diligence process implemented, the actual or potential adverse impacts in the value chain and the actions taken to mitigate those risks.
Risks: Report on the risks and dependencies of the company related to sustainability matters, and how they are mitigated.
Structure & Perspective
The Commission will specify in more detail how the information shall be reported by October 2023, but the proposal for a Directive already states the following:
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The report shall include indicators relevant to inform on the above topics. Both qualitative and quantitative information must be included.
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The report must take both a retrospective and a forward-looking perspective.
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When appropriate, the report shall contain information about the companies’ value chain, including its business relationships.
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The information shall be understandable, relevant, verifiable, and comparable.
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Companies concerned by this proposal for a Directive shall prepare their financial statements and their management report in a digital, machine-readable format.
Scope of sustainability matters to be included
Environmental factors:
- Climate change mitigation and adaptation
- Water and marine resources
- Resource use and circular economy
- Pollution
- Biodiversity
Social factors:
- Diversity and equal opportunities for all
- Working conditions
- Respect for the human rights
- Fundamental freedoms
Governance factors:
- Role of the administrative, management and supervisory bodies of the company
- Business ethics and corporate culture
- Anti-corruption policies
- Quality of relationships with business partners
- Payment practices
- Internal control
- Risk management systems
If adopted, the Directive will apply to financial years starting on or after January 1st 2023
Publication & Audit
Member States shall ensure that the administrative, management and supervisory bodies are collectively responsible for the publication of the sustainability report in accordance with the requirements. They must also require statutory auditors* and audit firms to conduct the assurance of the report. Finally, Member States shall ensure that companies publish their report within 1 year after the balance sheet date, together with a statement by the auditors.
Any subsidiaries of a parent company shall be exempted of the publication requirement if the sustainability report of the parent company includes information about it.
* A statutory auditor is a person or entity with an auditing role, whose appointment is mandated by the terms of a statute.
Consequences
Member States must provide effective and proportionate penalties applicable to infringements of this Delegation including the following sanctions:
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Companies will have to publicly disclose a statement about the infringement detailing the nature of the infringement and the person or entity responsible for it.
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An order will be issued requiring the person or entity to cease and prevent any repetition of the infringement
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Companies will face administrative financial sanctions.
When determining the penalties and sanctions, Member States must consider the gravity and duration of the breach, but also the degree of liability, the financial strength, the interests, and the level of cooperation of the person or entity responsible for the breach.
Risk Mitigation
This European Directive is requiring companies to build a comprehensive overview of their social and environmental impact. For fashion companies (and for a wide range of companies), most of the impact lies in the value chain. Even though sustainability reporting requires more than traceability, implementing traceability is a necessary step for the brand to understand and disclose its impact. Without specific knowledge on where the suppliers are established, their manufacturing processes and the materials and chemicals used in the products, most of the impact analysis will be unfounded.
How TrusTrace can help?
TrusTrace can support brands in their journey towards traceability with its different solutions by gathering data at company-, product- or material level. Implementing TrusTrace Traceability enables brands to take this step of knowing their supply chain which is a clear pre-requisite for all social and environmental impact assessments. Interested? Book a consultation with one of our experts to see which products can accelerate your brand’s traceability journey.
Please note: At TrusTrace, we want to keep you informed on laws and regulations, but this information should not be considered or used as legal advice.
