Managing Partner at Kreston Romania
Carmen Cojocaru is a highly qualified professional with extensive experience in the fields of accounting, audit, tax, and business process outsourcing. Additionally, Carmen’s involvement with the ESG committee and Kreston Global highlights her commitment to promoting ethical business practices and fostering sustainable growth within the industry.
ESG Reporting in the EU
April 13, 2023
Carmen Cojcaru from our ESG committee looks at the progress of ESG reporting requirements in the EU (European Union), and explores the implications of new legislation on businesses operating in the region.
ESG in the EU
Sustainability reporting enables companies to convey their progress toward goals on various sustainability parameters, including ESG (environmental, social, and governance) metrics and risks and impacts. This non-financial reporting helps companies communicate both positive and negative implications of their actions on the environment, society, and economy and accordingly set priorities. With the new EU CSRD-Corporate Sustainability Reporting Directive, corporates must adopt new rules and include new regulatory frameworks into their business strategies. This decision will make the EU the world leader in sustainability reporting standards and will impact around 50,000 companies across the EU (up from 11,700 currently), so the potential is enormous.
What exactly does the news refer to?
It implies and affects: strategy and policies, non-financial KPIs, governance on sustainability issues, double materiality, risk assessment and management, and taxonomy; therefore, it impacts the reporting standards. In short, CSRD requires organizations to focus on the objectives related to sustainability issues and to report on progress, including both prospective and retrospective information in achieving them. The new sustainability reporting rules will apply gradually, starting in 2024. The biggest challenge regarding the matter is the vague information.
What do we know so far about ESG in the EU?
Reporting must be aligned with the EU Sustainability Reporting Standards (ESRS) developed by the European Financial Reporting Advisory Group (EFRAG), the Commission’s technical advisor on sustainability reporting.
More details about the standards will be known in June 2023, when the first set of ESRS adopted by the European Commission is expected, followed by the second set in June 2024.
To whom do these new sustainability reporting rules apply?
The reporting requirements will apply to all large companies, all listed companies (except listed micro-enterprises) and non-EU companies with branches or subsidiaries in the EU above certain size thresholds.
Listed SMEs will have the option to use simpler, proportionate standards and the option to not apply the directive for 2 years after entry into force. The CSRD also specifies reporting requirements for listed SMEs.
Reporting timeline of ESG in the EU:
- Public-interest entities with more than 500 employees from 1 January 2024 (the first report will be published in 2025);
- Large companies (that exceed 2 of the size criteria: over 250 employees and/or EUR 40 million turnover and/or EUR 20 million total assets) from 1 January 2025 ( the first report being published in 2026) ;
- Listed SMEs from 1 January 2026 (first reports in 2027, deferral to 2029 possible);
- Non-EU companies with branches/subsidiaries in the EU from 1 January 2028 (first reports in 2029).
Reports will have to be subject to independent assurance, provided by auditors or other assurance service providers, initially it will be limited assurance.
The International Sustainability Standards Board (ISSB) is a new standard-setting board created by the IFRS foundation trustees to assist investors and other capital market participants with useful information about companies’ risks associated with their activities from the ESG perspective.
In 2023 they are expected to finalize the two exposure drafts published by ISSB; one setting out general sustainability disclosure requirements and the other on climate-related disclosure requirements.
You will find more about ISSB here.
“The CSRD requires the company’s statutory auditor, another auditor (according to Member State’s option) or an independent assurance services provider (IASP) (Member State’s option), to provide limited assurance on a company’s reported sustainability information. Member States should set out equivalent requirements for IASPs around quality, independence, and oversight in line with the Audit Directive.”
The International Audit and Assurance Standards Board (IAASB) is developing a standard for sustainability reporting assurance, which you can learn more about here.
In addition, the International Ethics Standards Board for Accountants (IESBA) is developing suitable globally-applicable ethics, and independence standards in support of transparent, relevant, and trustworthy sustainability reporting. Learn more about it here.
NFRD is still in force
Just a reminder that the rules introduced by the Non-Financial Reporting Directive ( NRFD), (applicable to large public-interest companies with more than 500 employees), are still in force until companies have to apply the new rules of the CSRD.