Leading economic minds are highlighting climate change as one of the most threatening factors to today’s relative economic prosperity. Although environmental policies have been in place for a long time, they appear to have had little impact in practice. The lack of clear definition and specific rules in the field may be an important factor, as this has been a cause of much concern and given raise to questionable practices, including the growing phenomenon of greenwashing – a deceptive method of marketing in which a product, good, or service is presented to appear to follow environmental protection principles intended to gain a competitive market advantage.
To combat this issue, back in 2014, the EU adopted the Non-financial Reporting Directive (“NFRD”) which led to greater business transparency and accountability on social and environmental issues. The NFRD mandates large corporations to provide information about their environmental and social responsibility activities; however, with no rules for how information should be disclosed. This is why on April 21, 2021, the European Commission (“Commission”) adopted a legislative proposal for a Corporate Sustainability Reporting Directive (“CSRD Proposal”). The CSRD Proposal is meant to serve as a major update to the current NFRD and it envisages the adoption of EU Sustainability Reporting Standards (“ESRS”) for companies.
A year later, on April 29, 2022, the European Financial Reporting Advisory Group (“EFRAG”) announced the release of its series of ESRS exposure drafts defining rules and requirements for companies to report on sustainability-related impacts, opportunities and risks under the CSRD Proposal. According to EFRAG, companies subject to CSRD are required to provide a strategic business model, assessment of sustainability impacts, and sustainability reports on policies, goals, action plans and performances.
First of all, there is a double materiality concept, which obliges companies to disclose their sustainability impacts more broadly, so that they would contain environmental effects next to financial performance. Is there any other? Consideration of value chain sustainability factors, as another important feature, refers to substantial new disclosures, including indirect greenhouse gas emissions from suppliers, transportation, and, in some situations, financial investments. The latter element shall be used not only for a company but the entire value chain.
All the above will introduce significant changes for companies, increasing the number of businesses obliged to provide sustainability disclosures from roughly 12,000 to over 50,000, imposing more stringent reporting requirements, and requiring audited assurance of the information reported.
After a 100-day public consultation ending on August 8, 2022, the Commission will have a final draft to be adopted in November 2022.
Numerous questions have already arisen. Some doubt whether the ESRS are sustainably applicable, or whether their complexity could undermine their effectiveness. The answers are to be seen and we remain hopeful for the positive effects of these novelties.
Authors: Milica Novaković, Vasilije Bošković, Nikola Ivković
