EU to finally require businesses’ transparency on their harmful environmental impacts

The European Parliament’s Legal Affairs Committee (JURI) voted this week for a strong Corporate Sustainability Reporting Directive (CSRD), which would require companies to commit to science-based sustainability targets and tangible plans to reduce their greenhouse gas emissions. These elements significantly improve on the Commission’s proposal for this directive, which is designed to make it mandatory for businesses to report their impact on people and the planet while giving investors and the public access to comparable, reliable and easily accessible information on sustainability.

“When it comes to holding businesses accountable for harmful practices, knowledge is power. This new agreement is an essential step toward improving EU businesses’ transparency. Citizens and financial institutions will be able to track and compare reliable data on companies’ transition plans, how they impact biodiversity and ecosystems and if they make profits from fossil fuels. However, it should be applied to SMEs in high-risk sectors and without delay by Member State,” said Julia Linares Sabater, Senior Sustainable Finance Policy Officer at WWF European Policy Office. 

This vote endorses the provisional agreement reached by the EU Parliament, the Commission and the Council on 21 June 2022. Compared to the Commission proposal, the final text contains more detailed reporting requirements (1). Notably, companies will now be required to publish short, medium and long-term science-based sustainability targets, submit a plan to lower greenhouse gas emissions and achieve climate neutrality by 2050.  In addition, the Directive mandates the development and adoption of mandatory corporate sustainability reporting standards, making the EU a front runner on how to report on sustainability impacts. WWF believes that if properly implemented and transposed, this Directive will improve the quality of information companies disclose on sustainability. 

The Directive will apply to all large companies and also to small and medium-sized enterprises (SMEs) that are listed on the stock exchange. However, due to an opt-out clause, those SMEs will report on sustainability issues voluntarily until 2028. Worryingly, however, the Directive leaves out all non-listed SMEs, including those in high-risk sectors, despite their severe impacts on the planet. SMEs account for 99% of EU companies, and most of them are not listed on the stock exchange. It has been proven that voluntary disclosures are not effective. This means that there is little hope for SMEs to be more transparent about their damage to the environment until 2028 (2). 

When will the Directive enter into force? The agreement reached by co-legislators proposes a delayed application in 2024 for the companies already covered by the current EU Non-Financial Reporting Directive. The other large companies will get until 2025 to comply.   

While the initial proposal was set to be integrated into national law by the end of 2023, the new deal now includes an 18-month transposition period. WWF calls on Member States to urgently implement it for all large companies. The information that will be disclosed as a result of the implementation of the Directive is crucial, both for citizens and financial institutions to make informed decisions and for the application of other EU sustainable finance legislations.

The Council adopted the agreement on Wednesday, 29 June and in the Parliament, the final vote will take place in the plenary session in autumn. 

The more detailed reaction of the Alliance for Corporate Transparency, of which WWF is a member, is available here. 

Notes:

1. Other important improvements include mandatory reporting of transition plans, any income generated from fossil fuels, detailed time-bound sustainability targets based on science, including emission reduction targets of scope 1, 2, and, where relevant, 3, nature-related impacts and risks for biodiversity and ecosystems in sectors particularly relying on natural resources, sustainability due diligence data, among others. The Directive mandates the development and adoption of mandatory corporate sustainability reporting standards based on the double-materiality concept. This means that companies will report on sustainability risks posed to the company and the ones that the company posed to the environment and society. The EU would be a front-runner on this matter. 
2. The Directive has a review clause that can be triggered before 2028 and includes all SMEs.

Source: WWF