Professor Marco Mongiello, Pro Vice-Chancellor at The University of Law Business School, sheds light on EU rules concerning Corporate Sustainability Reporting
The decades-long plea from investors and other stakeholders for clearer information and data about companies’ impact on the social and ecological environments has finally been met by the Corporate Sustainability Reporting Directive (CSRD), whose implementation started in January 2023.
CSRD brings the corporate regulatory environment
Under the Corporate Sustainability Reporting Directive, the number of European companies that will have to report on Social and Environmental impact will grow five-fold, from approximately 11,600 to an estimated 49,000 companies (European Commission, 2021, C).
To put this in context, investors will be able to evaluate more effectively the social and environmental impact of companies that produce approximately 75% of all limited companies’ turnover in Europe. Until now, this was true for a mere 47% of the total turnover (European Commission, 2021, C).
In simple terms, the CSRD introduces the standardisation that investors and other stakeholders have been longing for over many years. It is well known that investors and other stakeholders thrive when corporate information is comparable, relevant and reliable. It allows them to reduce the cost of acquiring, verifying and confirming information to evaluate investments or otherwise. This is equally true for financial as well as non-financial information. However, whereas financial information has been successfully standardised across Europe, non-financial information still has some way to go.
CSRD brings the corporate regulatory environment a step closer to the ideal of efficiency and full transparency in financial markets, whereby investors and other stakeholders can choose more effectively where to invest or disinvest funds and how to advise their clients about companies’ overall standing.
European financial reporting approach
True to the established European financial reporting approach, the Corporate Sustainability Reporting Directive aims to strike a balance between principle-based guidance and practical regulatory rules. Therefore, we may expect ESG reporting practice to evolve in the next few years, gradually converging towards common best practices. This method has been successfully tested many times with accounting and reporting standards. It should result in investors and other stakeholders being able to access information in the format, structure and detail that are most useful to them. Therefore, we may expect a further organic outcome of companies taking account of their external impacts under the pressure of investors, advisors, consumer groups, and other stakeholders rather than the tough enforcement of CSRD.
To facilitate this process, the Corporate Sustainability Reporting Directive includes the principle of double-materiality, whereby reportable information is considered relevant not just if it is material concerning the company’s current finances but also if it has the potential to affect the external environment, both positively as well as negatively (European Reporting Lab, 2021, § 14). But there’s more to it than a smooth implementation. The shift in mentality that CSRD is both promoting and sanctioning is that companies’ external impact is no longer confined to the definition of ‘externality’. Now, the severity of negative impact, the scale, scope and likelihood of positive impact and their urgency become part and parcel of the overall outcomes of a company’s operations – a mark of their performance.
With companies’ external impact becoming more open to scrutiny by investors and other stakeholders (Stehl, K., Ng, L., Freehily, M, Austin, S., 2022), we can expect the current debate on corporate accountability for climate change and other environmental impacts to become more purposeful (Tabone, M.C and Cardwell, M., 2022). The loud noise of the battle between alarmists and negationists will hopefully be replaced by more constructive dialogues based on comparable data
and verifiable evidence.
The Corporate Sustainability Reporting Directive over the next few years
Moreover, the transparency and availability of information will democratise the influence of many stakeholders. We can all play an essential role in this development. The next few years will be crucial for the good practice envisaged by CSRD to gain shape and robustness. We all become empowered by whatever category of stakeholders we belong to, whether we are consumers or investors, employees or employers, managers or politicians. We have the knowledge and power to make our opinion known by entering into direct dialogue with companies or indirectly by purchasing or shunning their products. But also, we can take well-informed managerial decisions and promote or support better-informed public policies.
Our concerted and collective contribution will help companies find their route towards truly successful ESG performance for everyone’s benefit – including that of our children and their children.
References
1. European Commission (2021) Impact assessment on Proposal for a Revision of the Non-Financial Reporting Directive. EUR-Lex – 52021SC0151 – EN – EUR- Lex (europa.eu). Available online https://eur-lex.europa.eu/legal-content/EN/TXT/uri=CELEX:52021SC0151
2. European Reporting Lab (2021) Proposals for a relevant and dynamic EU Sustainability report standard setting. Available online https://finance.ec.europa.eu/system/files/2021-03/210308-report-efrag-sustainability-reporting-standard-setting_en.pdf
3. Stehl, K., Ng, L., Freehily, M, Austin, S. (2022) EU Corporate Sustainability Reporting Directive—What Do Companies Need to Know. Available online https://corpgov.law.harvard.edu/2022/08/23/eu-corporate-sustainability-reporting-directive-what-do-companies-need-to-know
4. Tabone, M.C and Cardwell, M. (2022) ESG and net zero laying the foundations. The Institute of Chartered Accountants in England and Wales.
