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Fighting against greenwashing: 7 things about CSRD
2017: Half of the investors reported that they have been misled by companies making false or misleading claims about their environmental performance and sustainability initiatives (survey conducted by KPMG international).
2018: One-third of companies listed on EU stock exchanges were found to have made false or misleading claims about their environmental performance and sustainability initiatives.
2019: Volkswagen was fined USD 1 billion for having greenwashed the information presented in their non-financial information report.
To seek more transparency and to fight against greenwashing, the European Commission approved on 28 November 2022 the Corporate Sustainability Reporting Directive (CSRD). This new legal framework will replace the former Non-Financial Reporting Directive (NFRD). For the first time, Europe imposes a common reporting framework, for 50,000 companies in Europe, allowing economic players access to transparent, accurate and comparable information.
1) GREENWASHING ISSUES UNDER THE NFRD
Main reasons greenwashing persists under NFRD:
- No specific guidelines on how companies should report their environmental performance. No guidance on what information should be included or how it should be presented.
- Definitions of sustainability might differ significantly from one company to another depending on where they operate from.
- Relatively low fines are imposed on those found guilty of breaching these rules.
- No independent third-party verification reports requirement.
2) CSRD: WHAT ARE WE TALKING ABOUT?
The revision of the NFRD would, in general …
- Simplify the reporting process and impose common European quality standards. In this way, the information produced is both relevant and reliable since based on solid criteria.
- Establish common criteria for all companies to allow the comparison of data provided by firms established in different EU countries.
- Encourage financial players to adopt a sustainable development approach, and help all stakeholders recognise companies that perform well in this respect.
and more specifically …
- Expands the scope of the companies concerned.
- Requires an audit of published information.
- Introduces more detailed reporting requirements, and the obligation to report in accordance with mandatory European sustainability reporting standards.
- Requires companies to digitally record their disclosures so that they are readable and comparable, to assist the EU in its Capital Markets Action Plan.
- Introduce the double materiality principle: the information, which would be presented in the management report of the companies, must make it possible to understand both the impacts of the company on its environment and the environment on the company.
- The information should be quantitative and qualitative, retrospective, forward-looking, and above all comprehensible to the general public.
3) WHAT INFORMATION SHOULD BE PROVIDED?
The information required by the CSRD concerns the following points and must take into account the short-medium and long-time horizon
- Information related to the company’s business: related to strategy, targets, incentives, governance, policies, impact, due diligence, risk and reporting scope.
- Information related to the value chain.
- Information related to sustainability: environmental, social and governance.
For more details, please refer to Table 2 “Coverage of CSRD requirements by ESRS Exposure Drafts” in the Part II appendix of the “draft European sustainability reporting standards” November 2022 by EFRAG.
4) ARE YOU CONCERNED?
The scope of companies required to produce a non-financial report is broadened to 49,000 companies, compared to 11,700 today. Companies that would have to present this standardised non-financial report for accounting periods are:
- Large companies whether or not listed on a regulated market in the EU that exceed at least two of the following three thresholds:
- A total balance sheet of EUR 20 million
- Turnover of EUR 40 million
- 250 employees
- SMEs listed on a regulated market in the EU that exceed two of the following three thresholds:
- Balance sheet total of EUR 4 million
- Turnover of EUR 8 million
- 50 employees
Group reporting will still excuse subsidiaries from reporting on their own if they refer to the group report. Large capital market-oriented subsidiaries are exempt.
5) WHAT IS THE TIMELINE?
- For companies already subject to the NFRD: The application begins on 1 January 2024, with reporting in 2025.
- For large companies not currently subject to the NFRD: Data collection from 1 January 2025 with reporting in 2026.
- For listed SMEs, small non-complex credit institutions and captive insurance companies: Data collection from 2026, for reporting in 2027.
6) Should YOU get a head start?
It is advisable to get a head start on CSRD compliance. Collecting and auditing the data will be a laborious task. Advice:
- Check if your company is affected by the new directive.
- If so, conduct a due diligence analysis to see what information will be required and if it is available. If not, it is prudent to take immediate action in order not to be penalized.
- The sooner your company gets ready to meet the new directive requirements, the simpler it will be for it to comply with future rules.
7) AND WHAT IF YOU DECIDED TO forego compliance?
- Penalties for infringements will be defined by each Member State. The text specifies that the measures provided must be “effective, proportionate and dissuasive”.
- Not complying with CSRD obligations means giving up its many benefits: competitiveness, talent retention, financial savings on non-renewable resources…
- Anticipating the European directive is about making a strategic choice.
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