Corporate sustainability reporting – it’s essential for responsible investing and the past year has seen a whirlwind of policy promises and action on the subject.
For example, the International Sustainability Standards Board (ISSB) has consulted on draft standards providing a global benchmark for sustainability-related financial reporting; the US Securities and Exchange Commission consulted on mandatory climate reporting; and the Financial Services Agency of Japan recommended including sustainability information in annual statutory financial reports.
The EU joins this global surge, with its Corporate Sustainability Reporting Directive (CSRD) reaching a tentative political agreement on June 21.
Corporate sustainability reports that provide consistent and comparable data are key to building a sustainable financial system and supporting responsible investors, as outlined in our policy toolkit. So the question is whether CSRD will help investors access the data they need and what can PRI signatories do to ensure this?
What does CSRD mean for investors?
CSRD is revising the Non-Financial Reporting Directive (NFRD) and Accounting Directive, with the aim of ensuring that sustainability data is comparable, relevant and reliable.
It obliges companies of a certain size operating in the EU to disclose sustainability information which, for the first time, will be specified through the European Sustainability Reporting Standards (ESRS). These standards aim to illustrate the impacts of companies on sustainability issues (impact materiality) and how sustainability issues affect the development, performance and position of companies (financial materiality).
The CSRD determines which companies must report, on what topics, where and when – providing useful information to investors and other providers of capital, civil society actors, business partners and other stakeholders. The ESRS – which we will discuss later in this article – will clarify what information to disclose for each sustainability issue and how it should be reported.
The PRI welcomes the agreed CSRD – it will create a significant change in corporate sustainability reporting that will be hugely beneficial to investors.
It addresses several points that we raised in our statement of support for investors and our position paper – on scope, location and insurance – in responding to the European Commission’s proposal last year:
The range of companies required to report under the CSRD will be considerably wider than under the NFRD, which was limited to large European listed companies with more than 500 employees. CSRD will impose reporting obligations on large listed and unlisted European companies; Listed European SMEs; and non-EU companies with at least one EU subsidiary/branch.
Unlike the NFRD, the CSRD specifies that companies’ sustainability information must be clearly identifiable in a dedicated section of their management reports, in a digital and machine-readable format.
For the first time, it will be mandatory for companies to have their sustainability information verified by qualified third parties, in line with soon-to-be-adopted European Commission standards. This will initially be limited, focusing on ESRS compliance and how information is identified and presented. By 1 October 2028 at the latest, subject to the results of an impact study, the Commission may adopt assurance standards which would involve a more in-depth assessment.
That said, investors will not have immediate access to this sustainability data, so implementing the Sustainable Financial Disclosure Regulation (SFDR) and EU taxonomic disclosures remains difficult in the near term. .
As shown in the timeline below, large companies in the EU not yet subject to the NFRD will only need to start reporting in 2026. Small and medium-sized companies in the EU or those headquartered located elsewhere will only have to start reporting in 2029.
Investors can mitigate these disclosure issues, as outlined in our report, Implementing the EU Taxonomy.
Figure 1: Timeline of EU sustainability reporting regulations when they came into force.
Now let’s look at European standards for sustainability reporting.
How will the ESRS project support investors?
The European Financial Reporting Advisory Group (EFRAG) is responsible for providing draft ESRS and related technical advice to the European Commission before it adopts the finalized standards.
In August 2022, EFRAG concluded its consultation on the first set of draft standards. These contain requirements applicable to all sustainability issues and requirements specific to each issue (see our dedicated information note).
The reports would capture forward-looking and retrospective information – qualitative and quantitative – over short, medium and long-term time horizons. Reporting scopes would include the upstream/downstream value chain as needed to capture important sustainability issues.
In the response to the consultation submitted last month, we welcomed the draft standards as an important step towards providing investors with the sustainability information needed to make decisions on a necessary range of sustainability issues.
We also made several recommendations, including that EFRAG:
- provides additional guidance and requirements on how to assess the materiality of sustainability risks, opportunities and impacts and improve the connectivity of reporting on these;
- reviews the information investors need to fulfill their reporting obligations, such as the SFDR and EU taxonomy, as the ESRS is developed;
- improves technical alignment between draft ESRS and ISSB standards (to reflect their content similarities) and includes a TCFD-aligned presentation option for sustainability reports; and
- improves reporting on physical risk exposure, compliance with the UN Guiding Principles on Business and Human Rights, and political engagement/lobbying/advocacy.
What’s next and how can investors guarantee the best outcome?
Although the CSRD is now finalized, the ESRS are still under development. EFRAG is assessing the comments from the consultation before submitting the revised ESRS to the European Commission in November this year.
The Commission will then take over by holding another consultation before adopting the first set of ESRS into legislation by June 2023. It aims to adopt a second set, which will include sector-specific and SME-specific standards, to by June 2024.
The PRI will continue to engage EFRAG, the European Commission and other relevant stakeholders on the ESRS, and keep signatories informed of developments related to the ESRS.
We also encourage investors to engage and provide feedback on the draft standards, as this will help ensure that the information provided under CSRD meets the requirements arising from their investment strategies and own regulatory obligations.
This blog is written by PRI staff members and guest contributors. Our aim is to contribute to the wider debate around topical issues and help showcase some of our research and other work we undertake to support our signatories. Please note that while you can expect to find articles here that broadly reflect the official views of the PRI, the blog authors write in their individual capacity and there is no ‘inside view’. The views and opinions expressed on this blog also do not constitute financial or other professional advice. If you have any questions, please contact us at[email protected]