Starting in January 2024, substantial enterprises within the European Union will be required to disclose data regarding their environmental, social, and sustainability impacts. This new mandate comes as the Corporate Sustainability Reporting Directive (CSRD) received approval from the members of the European Parliament in November 2022 with 525 votes in favor, 60 against, and 28 abstentions.
These newly agreed-upon regulations will mandate companies to routinely make public data concerning their societal and ecological impacts. As a result, greenwashing could be minimized, the social market economy within the EU may be strengthened, and a foundation for worldwide sustainability transparency standards might be established.
The regulations will be enforced in stages from 2024 to 2028 as follows: by the beginning of 2024 for large public interest corporations (having over 500 employees) that are already subject to the Non-Financial Reporting Directive, with data publication deadline in 2025; by the start of 2025 for large corporations not yet under the Non-Financial Reporting Directive (with over 250 employees or having a turnover of €40 million or total assets of €20 million), with a deadline in 2026; and by January 1, 2026 for SMEs and other listed corporations, with a deadline in 2027. SMEs can opt-out of participation until 2028.
New EU sustainability standards
The standards rectify the weaknesses in the existing Non-Financial Reporting Directive (NFRD) legislation, considered largely inadequate. NFRD introduces stricter transparency requirements on companies’ environmental impacts, human rights, and societal standards, based on criteria aligned with EU climate targets. The first set of such standards is projected to be adopted by the Commission by June 2023.
To ensure reliability, the provided data will be independently monitored and certified, with the sustainability report being on par with the financial report. This will enable investors to have access to dependable and comparable data. Moreover, companies must guarantee digital access to this sustainability information.
With these requirements, data integrity becomes and central point of interest for companies. The ability to prove transparency and accountability in business processes will result in better economical returns as well as higher market reputation, leading to new business opportunities.
Extension of application criteria
The revised EU sustainability transparency mandates will apply to all large corporations, publicly traded or not, including non-EU corporations that have a turnover exceeding €150 million within the EU. Listed SMEs will also be included, but will have an extended time for adaptation. The new mandate increases the number of companies required to disclose sustainability information from about 11,700 to nearly 50,000.
“Europe is showing the world that it really is possible to ensure that finance, in the strict sense of the word, does not rule the entire global economy” said rapporteur Pascal Durand (Renew, FR) during the plenary debate.
Compliance creating new opportunities
These new requirements represent far more than just another obligation for companies. In fact, sustainability reports can offer an opportunity for companies to enhance their performance in areas that are not financial but have social impact, engage with new stakeholders, and create long-term value by aligning the company with a more socially and environmentally sustainable economy, with positive implications for the capital market.