ESG reporting is set to become mandatory in the UK and EU. With EFRAG due to release the standards, it's important to understand the requirements, and what future obligations might look like in order to prepare. Here, we give an overview to help you better understand future ESG issues in terms of reporting.
No sooner has ESEF been implemented than ESG data is dominating the news. It can be difficult to navigate the various players responsible for the future modalities of this extra-financial reporting in electronic format. With that in mind, here is an overview to help you better understand the future ESG reporting challenges.
What are the current ESG obligations?
Each reporting obligation at European level comes under a European directive, which is then transposed into national law. Currently, the directive that sets out the reporting obligations for environmental, social and governance (ESG) criteria is the Non-Financial Reporting Directive (NFRD).
This 2014 directive, which came into force in 2017, introduces the obligation for listed companies with more than 500 employees - and a balance sheet of more than €20m or a turnover of more than €40m - to disclose information on the social and environmental impact of their activities. This obligation does not require electronic tagging.
The NFRD covers about 12,000 companies and about 150 indicators. These indicators are so far non-standardised, i. e., each company has the freedom to choose the information and calculation methods they use to report these indicators.
In response to the current challenges and following the various global and European initiatives on ESG issues (Paris Agreement, COP, Green Deal), the European Union has decided to review the NFRD in order to establish standardised, more detailed reporting obligations covering a wider range of companies. This directive goes by the name of the Corporate Sustainability Reporting Directive or CSRD.
So, what are the future ESG obligations? What is CSRD?
The CSRD, proposed in April 2021, sets new standards and obligations. Its aim is to ensure that more detailed and uniform criteria are published in electronic format, thus ensuring better comparability of reports, and therefore of companies.
In particular, it will introduce the obligation for companies to produce a carbon footprint report and allow the monitoring of their ESG impact. The core of this extra-financial reporting is a dual materiality approach, which means studying the impact of the environment on the company, and the company on its environment.
The detailed development of the ESG standards has been taken over by EFRAG (European Financial Reporting Advisory Group). A first version is expected by mid-2022. Once these standards come into force, they will be transposed within 18 months at national level.
The directive also aims to broaden the scope of companies subject to ESG reporting.
The scope of companies covered is initially very ambitious, in that it includes all listed companies and all companies exceeding at least two of the following three criteria: 20 million euros on the balance sheet, 40 million euros in turnover or 250 employees. The European Council, the Commission and the Parliament are currently in discussion and hope to reach a compromise by the end of June 2022 to refine the range of businesses affected by the CSRD, and within this framework, to distinguish the businesses that will have to tag this data in electronic format. The Parliament's most recent proposals suggest excluding listed SMEs from the CSRD, and only requiring electronic tagging from listed companies covered by the directive.
Originally set for 1 January 2024 (for a 2023 data filing), the new ESG reporting requirement will also be postponed by one year in order to give future filers a more comfortable transition. Therefore, the requirement should apply to documents published in 2025 on data as of 1 January 2024, and staggering according to company typologies is being studied.
Note that non-listed SMEs may also follow this directive on a voluntary basis, and that rules will apply to European subsidiaries of non-EU companies and to non-EU companies meeting the mentioned eligibility criteria and operating on the European market.
How to prepare for CSRD - ESG reporting
In the near future, listed companies (excluding SMEs) will have to report their ESG data via electronic tagging, in a similar manner to ESEF reporting. With our experience in ESEF reporting, and in order to keep up with the latest developments and requirements in terms of narrative electronic reporting, the Invoke ESEF solution will make it possible to carry out the electronic tagging required by CSRD reporting.
