Within the package of corporate sustainability policies being developed by the EU are the new rules that companies must comply with. With the implementation of the new European ESG (Environmental, Social, and Governance) rules, companies face greater transparency and accountability regarding the potential negative impacts of their activities.
In our field, the application of corporate governance criteria, energy efficiency, and social aspects in investments seeks not only to strengthen the long-term sustainability of companies but also to mitigate volatility in financial markets.
By incorporating these criteria, greater predictability and stability in the companies in the portfolio are promoted. It reduces risks for investors and increases attractiveness and value at the time of the company’s exit.
- Directive 2022/2464 on Corporate Sustainability Reporting (CSDR)
The Corporate Sustainability Reporting Directive (CSRD) aims to require companies to report sustainability information and to present it alongside the annual financial report. In this way, measures are taken to determine the equivalence of this directive (sustainability information) with accounting standards (financial information).
This directive, which amends the Non-Financial Reporting Directive (NFRD) transposed into Spanish law as Law 11/2018 on Non-Financial Information and Diversity, aims to increase transparency and comparability of ESG performance information from companies. Companies must present sustainability information in a clearly identifiable specific section of the management report.
The annual financial statements and the management report duly approved by the company’s management, direction, and supervision bodies will be published in accordance with the directive’s requirements, as well as the opinion and statement issued by the legal auditor or audit firm, within the defined period.
Although the goal is to have a similar level of verification for financial information and sustainability information, there is currently no common standard for verifying sustainability information presentation. The information will be presented in a single electronic format.
EU CSRD regulation will come into force for 2024 data and 2025 reporting.
Effective Date Calendar:
CSRD requires companies, depending on their size, to present their non-financial information in accordance with common standards. In this context, the European Financial Reporting Advisory Group (EFRAG) is responsible for developing and issuing this new framework of standards: the ‘European Sustainability Reporting Standards’ (ESRS).
This initial set of ESRS comprises 12 standards and addresses various aspects related to sustainability, including environmental, social, and governance issues. Additionally, the publication of specific sectoral standards and for small and medium-sized enterprises (SMEs) listed is envisaged in the coming years.
CSRD introduces the concept of “double materiality,” which means considering both the internal and external ESG risks of the company in terms of sustainability.
Voluntary Standard for Micro-enterprises and Unlisted SMEs
Micro-enterprises and unlisted small and medium-sized enterprises are not within the scope of CSRD, and for these entities, the CSRD Directive issues a recommendation to EFRAG to work on the development of a voluntary standard regarding ‘Voluntary ESRS for non-listed Small- and Medium-Sized Enterprises’ (VSME). The voluntary standard was published in December 2023 and is designed to alleviate the burden on these companies. The standard is structured into three blocks to ensure a coherent and progressive integration of companies into sustainability reporting. A company is considered:
- micro if it does not exceed two of the following thresholds: €350,000 in total balance sheet, €700,000 in net turnover, and 10 employees.
- small if it does not exceed two of the following thresholds: €4 million in total balance sheet, €8 million in net turnover, or an average of 50 employees.
- medium-sized if it does not exceed two of the following thresholds: €20 million in total balance sheet, €40 million in net turnover, and 250 employees.
- Directive on Due Diligence in Corporate Sustainability (CSDD)
On February 23, 2022, the Commission adopted a proposal for a Directive on Due Diligence in Corporate Sustainability. This Directive will complement the current Directive on non-financial information disclosure and its proposed amendments (CSDR) by adding a material obligation for some companies to exercise due diligence to identify, prevent, mitigate, and account for external harms arising from adverse effects on human rights and the environment in the company’s own operations, its subsidiaries, and in the value chain. This Directive will establish a combination of sanctions and civil liability.
Identifying these adverse effects in value chains will be easier if more companies exercise due diligence, thus providing more data on adverse effects on human rights and the environment. For this purpose, companies must have suitable governance, management systems, and measures in place.
The directors of the companies to which this applies must take into account the consequences of their sustainability decisions in the short, medium, and long term. They are also responsible for implementing and monitoring the due diligence measures referred to in Article 4 and, in particular, the due diligence policy referred to in Article 5, duly taking into consideration the relevant contributions from stakeholders and civil society organizations. The directors will report to the board of directors in this regard.
On December 14, 2023, the Council and the European Parliament reached a provisional agreement regarding this Directive, so we must advance in the knowledge and application of this standard.
Applicable to:
- large companies in the EU, those with more than 500 employees and a global turnover exceeding €150 million.
- companies operating in specific high-impact sectors will also be subject to the Directive, provided they have more than 250 employees and a global turnover.
