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The ESG Review: Flagship EU ESG Directive Becomes Law

Quietly, and with little fuss, the European Union’s new Corporate Sustainability Reporting Directive (CSRD) became law this week.

The CSRD was adopted by the EU Parliament and approved by the European Council. This means that the directive has passed the last step in the legislative process, which began when the first proposal was published last April. The CSRD will replace the previously Nonfinancial Reporting Directive (NFRD), but applies to many more companies, perhaps four times as many.

It will apply to three types of company. Firstly, larger businesses exceeding two of these three size criteria: more than 250 employees on an annual average basis, a balance sheet in excess of €20 million or annual revenues of more than €40 million. They have to report from 2025, which in practice means collecting 2025 data and reporting in 2026, and it relates to business activity in EU countries.

Secondly, for financial years starting on or after 1 January 2024, it will apply to companies that are already subject to NFRD, with the first report expected to be produced in 2025.

And thirdly, from 2028, non-EU companies with an annual EU-wide revenue of more than €150 million.

From a corporate communications perspective, the fundamental change is that these disclosures will in future effectively have to be made as an audited management report, with a mandatory list of the factors that companies must include, rather than publishing an ESG report in which many companies could choose what went into it. And of course, the new legislation means many more companies will now have to make these disclosed, whether in the relative near-term or over the coming few years.

The reporting obligations also state that companies that will be duty-bound to report must start collecting the relevant data in the previous year to when they first make the information public. Those that have previously had to adhere to the NFRD will have to collect data from 2024, and those other large businesses - and a lot of them - from 2025.

It may seem a way off, but for companies that have not had to report in this way before, it realistically means the prospect of risk audits to understand where any gaps may be at some point next year, to then introduce the necessary data collation capabilities in 2024.

For many communications teams and ESG experts already analysing and reporting on their strategic approach, their corporate commitments and their progress towards goals, this will likely means drawing together multiple threads and sharing them externally in a different way, with the addition of the audit stipulation in the background to both impede anything that risks straying into greenwashing and do more to make the information credible.

The reports, or “statements” as the EU is calling them, will need to contain “all information necessary for an understanding of the company’s business performance, results, position and the impact of its activities”. That includes information on the business’s sustainability strategy and ESG issues.

According to HR Director this week, operational structures and gathering information across teams may represent the biggest barriers to data-gathering.

There is much for companies affected to wade through in the CSRD, and much to consider in the changes that will doubtless be needed in order to report the breadth and depth of information it will require. For communications teams, there will be a need to think about how they may impact broader ESG-driven outputs, and given this reporting is mandatory, what else they should consider communicating alongside it - or ahead of it.

The ESG News Review is written by Steve Earl, a Partner at BOLDT.

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