On 21 June 2022, Council and EU Parliament reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD). A welcome step, as in future more information on social and environmental impact of corporate activities has to be disclosed. Sustainability reporting must become a main driver of socially-environmentally oriented governance.
On 21 April 2021, the Commission presented its Proposal for a new Corporate Sustainability Reporting Directive (CSRD), based on which the current Non-Financial Reporting Directive (NFRD) from 2014 should have been revised. It was the aim to significantly expand “non-financial reporting obligations“ for certain European companies concerning the scope of application, extent and inclusion in Corporate Governance. The great need to reform sustainability reporting was already pointed out in particular by the EU Parliament with the Initiative Report of rapporteur Pascal Durand from 2 December 2020.
Corner stones of the political agreement
In accordance with the agreement, in future, large companies with more than 250 employees and a turnover of over 40 million Euro will be obliged to report information in accordance with the CSRD. Non-European companies with at least one subsidiary or branch in the EU will be included, starting at a turnover of 150 million Euro. In accordance with a Europe-wide common set of reporting indicators (“European Sustainability Reporting Standards”), information on environment, social and governance has to be comprehensively disclosed. The revised Directive shall provide more transparency for employees, consumers and investors and tackle “greenwashing”.
In future, sustainability reports have to be assessed by independent audits. Pascal Durand, rapporteur of the EU Parliament, pointed out that based on the CSRD, "(t)he European extra-financial audit market will be standardised, much more rigorous and transparent. Parliament succeeded in securing an opening of the audit market by member states in order to make room for new certified players to become major players and not just leave it in the hands of the financial auditors, notably the big four [Deloitte, Ernst & Young, KPMG and PwC]” At the same time, high-quality audits by third parties are an important link to the Directive on Corporate Sustainability Due Diligence, which is currently also being negotiated at European level.
AK: Sustainability reporting as an effective lever for labour representatives
Already at the start of the negotiations, AK had generally welcomed the EU Commission’s ambitious draft directive and called for further improvement of the draft, for example with regard to comprehensive Social and Governance Reporting with the explicit inclusion of trade unions and other co-determination actors, such as works councils, to be consulted. The present agreement is now granting labour representatives the right to be informed by management “at the appropriate level” and that any relevant information has to be discussed with them. Furthermore, the relevant administration, management or supervisory bodies should be informed of their opinion. From AK’s point of view, it is also important that companies are provided with precise requirements as to how reporting on the working conditions of employees should look like; this also applies to awarding sub-contracts and to suppliers.
In practice to date in Austria, the too narrowly defined scope of the NFRD, which in Austria only includes around 80 to 90 companies, also poses a problem. Due to the CSRD, the Directive’s scope might result in a 20-fold increase in Austria. New contents of reporting, for example along the supply chain, and that reporting is now part of the management report of the respective company and no longer a separate report must also be regarded as positive.
An important step for labour representatives, also in supervisory boards, in the coming months and years will be to progress proactively and to raise strategic questions on “sustainability governance” in companies, for example to advocate the establishment and development of sustainability reporting as well as the inclusion of the sustainability strategy (targets, evaluation).
Next steps in respect of CSRD
Following the agreement on the Provisional Agreement in the Committee of Permanent Representatives on 29 June 2022, the Directive must now be formally adopted by the EU Parliament. Afterwards, Member States have 18 months to implement the Directive at national level. From 1 January 2024, the Directive shall apply to companies that were already subject to the NFRD; from 1 January 2025 to large companies and from 1 January 2026 to further companies, including listed SMEs, whereby for the latter an opt-out option has been provided for until 2028. An important role will be played by the European Financial Reporting Advisory Group (EFRAG), which is responsible for determining European standards and is currently intensively working on a standard set. AK is taking part in the consultation of the first draft on European Sustainability Reporting Standards (ESRS), which ends on 8 August 2022.