How will upcoming EU legislation on sustainability reporting benefit your business?

Companies around the world are faced with an increasing importance of complete and transparent sustainability reporting.

Internal and external drivers for sustainability reporting.

The COVID-19 pandemic forced the global corporate community to react to the unforeseen. Also other challenges, such as global warming and extreme weather events have been pushing companies to prepare for risks other than only those of a purely financial nature. An integrated approach and sufficient focus is therefore key.

For investors, the relevance and importance of environmental, social and governance (ESG) factors has never been more pressing. The 2020 EY global investment study revealed that no less than 98% of investors conduct a formal or informal review of non-financial disclosures, compared to only 64% in 2013. The extent to which businesses are prepared for ESG risks, plays a central role in an investor’s decision-making and long-term investment management.

The need for more complete and transparent reporting

Over the last years, mostly large and listed Belgian companies have improved their sustainability reporting. The non-financial information is of higher quality, more quantitative targets are set and stakeholders are increasingly included in the process. According to the 2021 EY Climate Risk Disclosure Barometer, organizations are continuing to improve the quality and coverage of specifically climate reporting.

However, there is still room for improvement with regard to the completeness of the reports, the balance between strong and weak points and the accuracy and reliability of data. In addition, it is important that also non-listed and smaller companies provide sustainability information of sufficiently high quality. A growing between the ‘good students’ and the ‘backbenchers’ would be dangerous.

New EU regulation coming up

An answer to this concern might be the EU legislation linked to the EU Green Deal, more specifically the CSRD (Corporate Sustainability Reporting Directive) , the EU Taxonomy and the SFDR (Sustainable Finance Directive Regulation).

The CSRD is the renewed version of the current NFDR (Non-Financial Reporting Directive). The European Commission extended the type of companies in scope from large and listed companies to large or listed companies on regulated markets (except listed micro-enterprises). 

The topics that require disclosure will remain unchanged, namely social, personnel, environment, human rights, anti-corruption and anti-bribery. The introduction of the CSRD will be accompanied by the launch of a new sustainability reporting standard to further streamline reporting, foreseen in October 2022. Information in the annual report will become subject of a required limited assurance, improving the credibility of the information for investors.

The EU Taxonomy is a classification system that applies to specific economic activities.

With the use of the Taxonomy, investors can more easily distinguish truly sustainable activities from greenwashing. The scope of affected companies is identical to the one for the CSRD.

Lastly, the SFDR requires financial market participants and financial advisers to report on the integration of sustainability risks and impacts in their processes and the provision of sustainability‐related information with respect to financial products.

How to take advantage of the new legislation?

Be ahead, not behind! Timing and a proper preparation can make you a frontrunner. The drafting of your sustainability report provides the possibility to rethink your sustainability strategy, carefully set and monitor targets, consult the supply chain and highlight your value for the stakeholders. Like the saying goes: ‘Always try to be in the first group; there is less competition.’

Sustainability reporting is a tool to increase transparency and communicate sincerely about what you stand for. Be open in what you achieved so far but also think about what should be better in the future. Stakeholders want to know your company, including reliable results and remaining risks.