ESG, CSR and sustainability have become far more than mere buzzwords. In the past, it may have been easy to see these as issues only relevant for the marketing or supply chain departments. However, in 2022, new EU legislation will mean it is time to rethink and turn these topics into core HR and labour law processes.
The adoption of the Corporate Sustainability Reporting Directive (CSRD) is planned for the second quarter of 2022. With effect from the 2023 financial year, it will entail far-reaching reporting obligations for all ‘large’ companies operating in the EU, including subsidiaries of multinational companies (unless comparable reporting has already been introduced at the level of the parent company).
The CSRD will apply directly to all large public interest entities with more than 500 employees, that is, all listed companies as well as banks and insurance companies.
It also applies to all non-listed large companies that meet at least two out of three of the following criteria, regardless of falling into the category of public interest entity:
From 2026, there is also a reporting obligation on sustainability for small and medium-sized public interest entities (excluding micro-enterprises). These are companies that meet at least two out of three of the following criteria:
In groups, subsidiaries can refer to the group report and do not have to submit a separate report. However, this only applies (and this is where a problem may arise for international groups) if the depth of reporting is comparable at the level of the group parent.
As part of CSRD reporting, companies are required to report on a variety of sustainability-related metrics to the extent necessary to understand the company’s business performance, results, position and the impact of its operations. In addition to a variety of other topics (such as environmental and climate protection), the CSRD provides for reporting on:
Reporting is required on all matters that are material either to business performance or from an environmental or social perspective (so-called double materiality), which significantly expands the scope of matters for report.
It is likely that the EU will adopt the directive in the first half of 2022. By mid-2022, the European Financial Reporting Advisory Group (EFRAG) should publish the first proposal for accounting standards, which the Commission will then adopt in the third to fourth quarter of 2022. The directive must be transposed into national law by December 2022 at the latest. A second set of accounting standards (sector-specific and for small and medium-sized listed companies) is expected to be released in 2023.
Subject to further requirements through national implementing legislation, some general guidance is set out below.
Check where you still have gaps with regard to the reporting requirements and include these topics on your agenda.
Be clear about what you can regulate at which level (directive/instruction, contract amendment, company agreement, collective agreement) in order to find the most effective implementation mechanism.
Respect mandatory co-determination, for example when introducing ethics and conduct standards and monitoring compliance with these standards: If you have a works council, take into particular account the lead time required to implement the above through works agreements.
Ensure that your ESG efforts are adequately integrated into the overall framework if your industry is regulated, for example in relation to remuneration in the banking and financial services sector.
The Directive provides for three levels of sanctions:
Companies that have so far remained ‘under the radar’ as far as ESG issues are concerned should ensure that these governance issues are appropriately dealt with in internal policies and processes as soon as possible. This is not just to avoid financial penalties, but also serious reputational damage.
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