European Commission Leaps Forward in Sustainability Reporting Requirements

The European Commission (EC) on April 21 took a leap forward in strengthening sustainability reporting for companies through the adoption of a proposal for a Corporate Sustainability Reporting Directive (CSRD). The proposal confirms the pending introduction of European Sustainability Reporting Standards and comes as part of a broad package of measures on sustainable finance.

The CSRD is the successor to the European Non-Financial Reporting Directive (NFRD), which since 2018 has required large public interest companies with over 500 employees – as well as banks and insurance companies – to disclose information on the way they operate and manage social and environmental challenges. Under the existing directive, concerned companies have had to disclose information on environmental matters; social matters and treatment of employees; respect for human rights; anti-corruption and bribery; and diversity on company boards. The EC in 2017 and 2019 provided guidance on how to disclose such information, giving companies the flexibility to use international, European, or national guidelines, and leading to a plethora of reporting methods.

According to the EC, the information that companies report is often insufficient, lacking in quality, and difficult to compare from company to company. With the CSRD, the commission therefore proposes to strengthen sustainability reporting requirements, adding new areas of disclosure as well mandatory EU reporting standards. These requirements would be extended to all large undertakings and all undertakings with securities listed on EU regulated markets, including non-EU companies (excepting micro-undertakings). European subsidiaries of foreign companies would be exempted only if the parent company is reporting sustainability information in accordance with the requirements of this directive or in an equivalent manner.

The new rules are intended to provide the reporting structure for a series of related rules designed to ensure that financial market players do not “greenwash” their portfolio information and direct investment flows to sustainable activities. The CSRD also seeks to embed environmental, social, and governance objectives into companies’ practices ahead of new rules on sustainable corporate governance with mandatory human rights and environmental due diligence obligations.  

The proposal foresees the development of a first set of European sustainability reporting standards by October 2022, aiming to ensure understandability, verifiability, and comparability and to identify material topics for disclosure. A second set of standards to come in October 2023 would indicate the sector-specific information that companies must disclose.

The proposal now enters the EU negotiation process through the European Parliament and European Council. If adopted by early 2022, the standards would follow, and companies would start to report using the new standards in 2024 for the year 2023.

The commission has emphasized that European standards will build on international standard-setting developments, and it has reiterated its support for initiatives by international fora, such as the G20 and the G7, to develop a baseline for global sustainability reporting standards. In that context, the proposals of the International Financial Reporting Standards (IFRS) Foundation as well as other initiatives are relevant.

IPC will continue to track and advocate for a reporting environment that is workable for electronics manufacturers. Please let us know if you have any questions or suggestions.