If the EU Commission gets its way, many companies in the EU will have to adapt to stricter requirements for their sustainability reporting. The Commission has launched a proposal to amend the CSR Directive (Corporate Sustainability Reporting Directive), extending the scope and enforcing stricter rules. One of the main changes would be that the so-called external assurance, an audit by an independent third party, becomes mandatory. We have summarized the main changes for you below.
Why was a revision of the Non-Financial Reporting Directive (NFRD) necessary?
The Non-Financial Reporting Directive introduced important rules for listed companies with more than 500 employees to report on their sustainability policies and practices. However, the Commission believes that the current guidelines are not sufficient: reporting is often incomplete, there is a lack of comparability and information on risks is often insufficient. As a result, investors lack a reliable overview of sustainability-related risks to which companies are exposed. High-quality and reliable public reporting by companies will help create a culture of greater public accountability.
In the future, companies with fewer than 500 employees will also be required to report
The new regulation will bring more companies under the obligation to report on sustainability. The new proposal extends the scope to all large companies – regardless of whether they are listed on the stock exchange and without the previous threshold of 500 employees. This change means that in the future all large companies will have to account to the public for their social and environmental footprint. The Commission also proposes to extend the scope of reporting requirements to listed small and medium-sized enterprises, with the exception of listed micro-enterprises, but with simplified standards. To this end, the Commission proposes to develop a set of uniform standards for small and medium-sized enterprises to improve their transparency and reduce costs.
EU reporting standards in an international context
EU sustainability reporting standards should be consistent with the objectives and regulations of the European Green Deal and the existing legal framework. Moreover, they should cover not only the risks of companies, but also the impact of their actions on society and the environment. In this regard, the Commission supports the efforts of the G20, the Financial Stability Board and other international organizations to develop a baseline of sustainable reporting standards and build on the work of the Task Force on Climate Disclosures.
External audits to become mandatory
Under the proposal, all covered companies will be required to commission an external audit to verify the reliability of the sustainability information they report. Such an external audit is now already used by many companies to ensure the credibility of their reporting and reduce the likelihood of errors. So far, however, external assurance has been optional – if the draft is adopted in this form, external assurance would be mandatory.
What’s the next step?
The next step is for the European Parliament and the member states in the Council to negotiate a final legislative text based on the Commission’s proposal. At the same time, EFRAG will also start work on a draft standard on sustainability reporting and complete it by around mid-2022.
The Commission’s timetable will depend on how negotiations with the Parliament and Council proceed. If they reach an agreement in 2022, the Commission should be able to adopt the first of the reporting standards by the end of 2022.
How DQS helps you
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