The European Commission (an organ of the European Union) issued a proposal a few weeks ago–the “Corporate Sustainability Reporting Directive”–that would increase ESG reporting requirements for companies operating in the EU. Although the proposed regulations have not yet been promulgated, this proposal reflects the increasing focus by developed economies on incorporating the issue of climate change into financial regulations. In other words, the recent impetus by the U.S. Securities & Exchange Commission to issue regulations concerning climate-focused disclosures is being echoed by other significant regulatory organizations in key economies.
Further, it is highly likely that these disclosure regimes in the United States and Europe will inform one another as this new regulatory environment takes shape. Corporations should not only be aware of EU regulation for their potential direct impact on company operations, but for the indirect effect such regulations may exert as an example for U.S. regulators.
A new EU proposal would significantly expand the scope of ESG reporting by companies operating in Europe.
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The following are key points about the proposed CSRD, which would amend an existing EU Directive and take effect in 2023. US companies with operations in the EU should take care to understand the effect of the proposed disclosures and related assurance requirements.
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Extended coverage. The current rules scope in ‘large’ public interest entities. The amendments would extend coverage to all ‘large’ (see new definition below) companies and all companies (other than micro-companies) with securities listed on EU-regulated markets; a three-year deferral would apply to small and medium-sized listed companies. These changes would extend the scope from under 12,000 to nearly 50,000 companies.
Extended ESG reporting For companies reporting on ESG matters for the first time, the disclosures would be extensive, covering the environmental, social and governance categories of ESG. For companies already in the scope of the current rules (Non-Financial Reporting Directive), new disclosures would include information that is material for stakeholders other than investors, as well as disclosures about social, human and intellectual capital.
New assurance The CSRD would introduce mandatory limited assurance over the ESG reporting (including the processes followed in preparing it). The scope may be extended to full assurance after three years.