Europe is set to become climate neutral by 2025. The transformation that the European Union, its Member States and, by extension, businesses will undergo will be unprecedented.
A year ago, the Directive of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU as regards corporate sustainability reporting (hereinafter “CSRD”) was published in the Official Journal of the EU, and is one of the drivers of these changes. Indeed, a climate-neutral circular economy without diffuse pollution cannot be achieved without the full mobilisation of all sectors. Therefore, new sustainability requirements will be introduced and companies will need to include environmental and social issues as well as human rights and corporate governance in their reporting.
Demanding requirements for non-financial reporting
The CSRD, which amends Directive 2013/34/EU, primarily introduces much more demanding requirements for non-financial reporting, and is an attempt to establish comparability of sustainability-related data and even to put this type of reporting on an equal footing with financial reporting.
The rationale for the introduction of the Directive has been that:
- Undertakings subject to the reporting requirements can benefit from high quality reporting
- An increased number of investment products are expected which aim to pursue sustainability objectives, and quality sustainability reporting can improve an undertaking’s access to financial capital
- Non-financial reporting can help undertakings to identify and manage their own sustainability risks and opportunities
- Standardised reporting can improve dialogue and communication between parties and even elevate their reputation
- A consistent, standardised basis for reporting is expected to lead to relevant and sufficient information being provided, thus reducing the need to provide information on an ad hoc basis
It is estimated that the reporting obligation will eventually cover 3,500 Polish companies. At EU level, this will be up to 50,000 companies. The reporting obligation will also apply to undertakings from outside the European Union that operate within its borders.
The CSRD’s predecessor, the NFRD, already applies to more than 11,000 large public-interest entities operating in Europe. The CSRD is designed to phase in reporting requirements between 2024 and 2029.
The timetable is broadly as follows:
- For 2024, entities required to report are those currently subject to the NFRD (public-interest entities operating in the broader financial and insurance market or listed companies meeting 2 of the following 3 criteria:
- Average number of employees during the financial year – 500
- Average balance sheet total – PLN 85 million
- Net sales revenue – PLN 170 million
- For 2025, the reporting obligation will be extended to remaining large entities and to parent entities of large groups not previously subject to the NFRD and which meet 2 of the following 3 criteria:
- Average number of employees in the financial year – more than 250
- Balance sheet total – PLN 85 million
- Net revenue – PLN 170 million, or
- Parent undertakings of large groups meeting 2 of the 3 categories on a consolidated basis:
- Average number of employees in the financial year – 250
- Balance sheet total – PLN 102 million
- Net sales revenue – PLN 204 million
- For 2026, small and medium-sized listed companies with more than 10 employees that are not micro-enterprises will need to report
The CSRD must now be transposed into national law and Member States have 18 months to do so, until 6 July 2024.
European Sustainability Reporting Standards
The European Commission has also adopted a delegated regulation supplementing Directive 2013/34/EU of the European Parliament and of the Council, which constitutes the first set of ESRS, or European Sustainability Reporting Standards.
The twelve standards provide a roadmap for companies. Two of them define sustainability reporting principles and overarching disclosure requirements with sector-specific ESRS also planned.
There is no doubt that companies that implement innovative and sustainable solutions can gain a competitive advantage and attract new customers. Today, however, this is not an opportunity but a necessity, driven by the changes introduced by the CSRD.
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