The EU is set to introduce new rules on sustainability reporting aiming at creating a level playing field between EU and non-EU companies.
The new Corporate Sustainability Reporting Directive (CSRD), which will replace the Non-Financial Reporting Directive (NFRD) from 2024 onwards, expands the pool of companies that are subject to the new, tighter sustainability reporting rules to include non-EU companies.
The European Parliament and Council reached political provisional agreement on the proposal for the CSRD on June 21, and the agreed text was released on June 30.
“Greenwashing is over,” Bruno le Maire, France’s minister of economy and finance, said in a European Council press release on June 21. He said the consumers and investors will “be better informed about the impact of business on human rights and the environment”. Greenwashing is conveying false impressions or providing misleading information about how the company is environmentally friendly.
Non-EU based companies will be under the scope of sustainability reporting obligation if they generate over €150m turnover in the EU and have a branch or subsidiary in the EU that generates over €40m. Additionally, the branch or subsidiary will have to report the social and environmental aspects of activities about the non-EU parent company, according to the EU official.
The EU is creating a “level playing field on sustainability between EU companies and non-EU based companies,” by including foreign companies doing business operation within the single market, Clara Cibrario Assereto, an associate at Cleary Gottlieb Steen & Hamilton, told fDi. In this sense, these new reporting rules will be “directly relevant to foreign companies, especially considering that other countries are moving in a similar direction” in sustainability.
More than 50,000 companies will have to submit a report on their environmental, social and governance impacts. This is even larger than 11,700 of listed companies under the NFRD. Listed small and medium-sized enterprises will need to report sustainability impact with lighter standards from 2028.
The EU sustainability reporting will be consistent with the ambition of the European Green Deal and its sustainability framework. Companies will have to publish sustainability risk and forward-looking plans to explain how their business model and strategy are compatible with the EU climate law. This includes companies’ business activities on climate impact and exposure to fossil fuels. The sustainability reporting standards will be set by the European Financial Advisory group.
“The templates of this directive are going to be very specific. So, the objective is also to make these reports comparable and uniformed, so that investors or other stakeholders can see and compare [easier],” Ms Cibrario Assereto added.
Ms Cibrario Assereto said that the new sustainability reporting rules will work as a means to hold companies accountable to their sustainability pledges.
“As companies push out sustainability reports on the CSRD, consumers and other stakeholders are going to have more chances to sue companies for greenwashing,” which is an already developed issue, Ms Cibrario Assereto noted.
This has been evident in the recent lawsuit against Dutch airline KLM, which is being sued by the environmentalist group Fossielvrij NL over allegedly promoting its sustainability initiative in adverts by “greenwashing”, according to the a statement from the group’s supporter, Client Earth, on July 6. In a similar sense, sustainability reports could lead to a larger number of litigations for using misleading information over companies’ sustainability as a result of disclosure.
The final legal text will be published in the Official Journal of the EU in a few months. Consequently, the Commission should be able to adopt the first set of reporting standards under the new legislation by the end of June 2023. Once it enters into force, EU member states will supervise companies with the help of the European Commission.