Will EU plans to transform ESG reporting bring an end to greenwashing?
With sustainability now a critical consideration for governments and businesses worldwide, the European Union recently announced plans for the Corporate Sustainability Reporting Directive (CSRD), a piece of legislation with the potential to redefine the landscape of environmental, social and corporate governance (ESG) reporting.
The move comes in response to a rise in greenwashing accusations being levelled at businesses who have failed to report the environmental impact of their products and operations accurately.
The Guardian captured the mood with an article last month which asserted that ‘the greenwashing era is over’ for advertisers. The publication cited vacuous claims from businesses lacking the evidence to support them as the reason for the crackdown spearheaded by bodies such as the Advertising Standards Authority.
As eco-consciousness becomes ever more crucial, so too does the role of regulatory bodies in putting forward guidelines that promote transparency and encourage decisive action across industries.
Marking a concerted effort by the EU to do so, the newly announced CSRD will replace a previous initiative, the Non-Financial Reporting Directive (NFRD). The CRSD looks set to have a global impact on ESG dialogue between governments and corporations by expanding reporting requirements and setting a higher disclosure bar.
Let’s take a closer look at the announcement and see what it means both for the world of business and our planet’s health.
The EU has long been at the forefront of developing policies and regulations that promote ESG practices. The CSRD is another example of this, as authorities aim to steer economic and investment activities toward more sustainable outcomes
The most notable way in which the CSRD goes beyond its predecessor is by expanding the number of companies subject to sustainability reporting – up from approximately 11,000 to nearly 50,000 across the continent.
This includes not only EU companies, but also around 10,000 companies from outside the EU, which has potentially massive implications for large global entities with a strong European presence.
It’s interesting to note that the US Securities & Exchange Commission also recently proposed rule changes for ESG reporting. Perhaps a two-pronged drive for sustainability on either side of the Atlantic can encourage worldwide business to become truly eco-friendly.
CSRD implementation and reporting requirements
The CSRD was actually adopted by the EU Council back in November 2022, and requires companies to begin compliance by 2024 if they were already subject to the NFRD. Companies that are new to sustainability reporting, including those outside the EU, have until 2025 to comply.
The CSRD intends to provide investors and businesses with timely, consistent and comparable information about the sustainability practices of companies operating in the EU. The move comes at a pivotal point in time as we look to hold those accountable who have taken advantage of vague phrasing and unclear regulations to provide dishonest ESG reports to date.
The CSRD will cover both public and private businesses that meet specific criteria, such as having more than 250 employees, a net turnover exceeding $44.51 million or a balance sheet of over $22.25 million.
This seems to be a positive move, as the biggest players in the world will now be forced to adhere to sustainability regulations that they might only have paid lip service to in the past.
Under the CSRD, companies will need to disclose information on a number of sustainability-related points, including environmental protections, greenhouse gas emission targets, social responsibility, human rights, anti-corruption and bribery measures, diversity on company boards and the company’s wider impact on society and the planet. The CSRD also introduces the concept of ‘double materiality,’ where companies must assess how sustainability risks may affect their performance.
Importance of third-party assurance
Unlike the NFRD, the CSRD requires third-party assurances, with auditors integrating sustainability reporting into their statements. Initially, “limited” assurances are acceptable, but, by 2028, companies must provide “reasonable” assurances regarding the accuracy of reported sustainability information.
This is an important and necessary component of the directive, one which reveals that it is no mere façade. The CRSD looks set to become the new standard for ESG reporting for large entities with global reach, and regulators will be hoping that this causes a knock-on effect in non-European markets that will have to improve their disclosure standards to keep up.
The CSRD offers an opportunity for businesses to align with sustainable practices and demonstrate their commitment to ESG. By fostering transparency and accountability, it will contribute to a more sustainable future, enabling investors, stakeholders and consumers to make informed decisions based on reliable information.
It may well be that these regulations have a significant impact on ESG reporting, with EU authorities some of the few capable of challenging and holding accountable those enterprise-level corporations that dictate so much of the volume and severity of environmental damage.
Overall, the introduction of the CSRD could mark the beginning of a more sustainably driven business landscape, one that works to help our planet in the long term.