A new era in sustainable reporting

As the 2024 deadline for the EC’s new corporate sustainability reporting legislation approaches, companies need a clear strategy and action plan.

Just as house buyers check the EPC of a property before making a purchasing decision, so too stakeholders and investors are increasingly checking a company’s ESG (environmental, social, corporate governance) rating before making an investment decision. In a bid to streamline reporting on these sustainability issues, the EC is introducing three new legislative frameworks for corporations, set to come into force in early 2024.Therefore it is never too soon to start looking at strategy, policy and real concrete action to stay ahead of the competition and create added value for investors and other interested parties.

The new playbook

Europe’s Green Deal is a reality. In partial response to the 2030 Sustainable Development Goals, the European Commission has produced its own legislative sustainability reporting framework for companies, consisting of three parts: CSRD, EU Taxonomy, and SFDR.

A new improved version of the Non-Financial Reporting Directive (NFRD), the Corporate Sustainability Reporting Directive (CSRD), is wider in scope and more transparent, and will come into force in January 2024. This deadline applies to companies listed on the European stock exchange (excluding micro-enterprises) that meet two of the following three criteria: 250 employees, more than €40m turnover, and/or more than €20m on the balance sheet.

The second framework, EU Taxonomy, is a classification system designed to stamp out ‘greenwashing’ and give investors and other stakeholders a clearer idea of a company’s environmental credentials. Green business activities will have to contribute significantly to at least one of the following six environmental goals:

• less impact on climate change
• adaptation to the changing climate
• sustainable use and protection of water and marine resources
• transition to circular economy, waste prevention and recycling;
• emissions prevention and control;
• protecting healthy ecosystems.

Any activity the company chooses to focus on should not have a negative effect on the other five. Businesses must also indicate what percentage of their turnover, capex and opex is spent on these environmental activities.

The last of the frameworks is SFDR, which requires the financial market and financial advisory bodies to report on the integration of sustainability risks and impact into their processes, and the provision of sustainability-related information related to financial products.

Staying ahead of the curve

The 2021 EY Global Institutional Investor Survey revealed that 98% of investors assessed a company’s non-financial transparency before considering investment. The Covid-19 pandemic has been a clear influencer in this trend. It therefore makes sense for companies to respond with some urgency and prepare for these new mandatory sustainable reporting standards sooner rather than later.

Although some companies have made a start, others often have difficulty knowing where to start. EY is well positioned to look at a company as a whole and help identify the priorities and define a strategy. By looking for trends and seeing how the sector and similar companies are performing, a company can begin to outline a clear action plan.

The clock is ticking

A clear sign of the growing pressure from stakeholders and the increasing importance of transparency in sustainability reporting, is the fact that it is often the CEO and CFO of a company that is in dialogue with EY. They are keen to better understand the expectations of their shareholders and learn best practices with a view to gaining the competitive advantage for their business.

January 2024 might seem a long way off and SMEs have an extra three years to get their house in order. But the message is clear. Sustainability reporting is set to impact all companies, and taxonomy will become the benchmark for investors. So, the time to prepare and increase the ESG score is now.