On June 30th, the same day that France ended their EU presidency, the final version of the Directive that will inexorably change sustainability reporting in Europe was published at long last.

The new Directive’s goals are radically different from its predecessor’s, as is the information to be provided, which will inevitably bring about a new ESG (Environment, Social, and Governance) reporting paradigm. As is always the case with this type of legislation, which applies both to European companies and non-European companies with a significant turnover in Europe, borders will hardly keep the new obligations from making their way to countries outside Europe. Given the fact that there are many non-European companies doing business in the EU, such obligations are likely to have a “spill-over” effect, increasing over time (like the GDPR had!).

The CSRD (Corporate Sustainability Reporting Directive), does much more than replace the soon-to-be-dead NFRD (Non-Financial Reporting Directive). By establishing that one of the new reporting obligations’ key goals is to put ESG information on equal footing with financial information (including in terms of certification/auditing), it will make Europe the ESG reporting front runner.

As is well known, and albeit with a more sensible timetable than originally foreseen, all companies other than SMEs will be subject to the CSRD (listed SMEs will also be covered). This Directive requires such companies to report on a very wide and demanding range of ESG issues – a description of the resilience of the company's business model and strategy to risks related to sustainability matters; the plans of the company (including investment plans) to ensure that its business model and strategy are compatible with the limiting of global warming to 1.5 °C in line with the Paris Agreement and the objective of achieving climate neutrality by 2050; a description of the main sustainability risks; sustainability policy and goals, with the indication of the progress made; a description of the role of the administrative, management and supervisory bodies with regard to sustainability matters, and of their expertise and skills to fulfill this role; the due diligence process put in place for the most relevant adverse impacts of the company's business, indicating the actions taken to prevent, mitigate or remedy them, etc.

And, once the CSRD becomes applicable, all the very demanding reporting duties set out in the Disclosures Delegated Act (one of the Delegated Acts of the European Taxonomy) will also apply to all large companies and listed SMEs.

The final version of the CSRD was long in the making – despite France pushing for it to be finalized during the French presidency – because a political agreement could only be reached after long and intense discussions between the Commission, the Council, and the European Parliament on some controversial issues. One of them was the imposition of the new rules on non-EU companies. The final agreement was that such non-European companies will only be subject to the new ESG reporting rules if their net turnover in the EU is at least EUR 150 million and if they have a subsidiary or a branch in the European Union.

Also controversial was the application of the new Directive to listed PMEs, namely due to the concern that the such application might be disproportionate. The agreement was that these companies will be subject to less demanding reporting standards and they can “opt out” of the new ESG reporting standards until 2028.

Lastly, it was decided that an entity other than the entity certifying the financial information can certify the ESG information – the concern was that the reverse option could lead to an unacceptable “market concentration”.

The Directive’s application will be phased in, in 4 different stages: (i) 2024 for entities already subject to the NFRD (and thus already familiar with reporting duties on “non-financial” information), (ii) 2025 for companies other than PMEs, (iii) 2026 for listed PMEs (that have an opt-out option until 2028), and (iv) 2028 for non-European companies subject to the CSRD.

More than a compliance issue (which it also is), Portuguese companies need to (i) understand that the new reporting obligations are more of an opportunity than a threat, (ii) accept that only those that are able to behave in a responsible manner, creating value not only for shareholders but also for other stakeholders and conducting their business in a sustainable manner, will be truly prosperous in the long run, and (iii) realize that "just looking like they’re doing something”, without really being engaged is increasingly a zero-sum game.

It is then paramount that the Portuguese “business ecosystem” assimilates every opportunity afforded by these new ESG reporting challenges so that no opportunity is lost to the tyranny of compliance nor the futility of “beauty contests”!

Have a great and impactful week!

Margarida Couto
President of GRACE - Empresas Responsáveis, representing VdA - Vieira de Almeida & Associados

This article refers to edition #149 of the "Have a Great and Impactful Week" Newsletter and covers SDG 16. 
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